Price increases were the norm throughout 2007 and 2008, yet we’re starting to see companies having a much more difficult time executing one now due to the state of the economy. The reason is quite simple: far too many companies have justified their price increase on the rising costs they’re incurring and thus, the logic is to merely pass these increases along to the next person. The problem with this is that when prices are falling like they currently are for commodities, etc., the entire basis for the price increase is totally wiped out. Therefore, the key is to not base a price increase on the rising cost of materials, labor, energy, or whatever. Instead, base it on the increased value of what the customer is receiving from buying from you. When you base it on the value / benefit rather than the cost of goods / production, you insulate yourself against the problem of a softening economy. By focusing on the value / benefit equation, you also engage the customer more in your business. Determining the value / benefit equation requires you to find out exactly why the customer buys from you and how they benefit from it. Consider this example: If I’m buying a battery to put into a toy, I really won’t care what type I buy. However, if I’m buying one for a smoke-alarm, then I’m going to be far more concerned about the quality and as a result, I will more likely to pay more for the same item.
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