Imagine this: You’re a business owner and you’re looking for ways to increase your company’s revenue. Somebody suggests that you start price hiking, but that’s not necessarily a smart business move. Why not?
You have to consider the impact price has on your sales. When prices increase, customers generally tend to reduce the number of your goods that they buy1. While price increases guarantee higher revenue per unit sold, you’re likely to see a decrease in sales. Should you be price hiking?
Price Hiking for commonly acquired goods:
the percentage fall in sales from a price increase can be so great that they drive revenues into the ground. These goods tend to have a lot more alternatives such that when you increase your prices, customers can easily switch away from your products. Consider the gazillion options you have for buying a white plain T-shirt.
Price Hiking for uncommon goods:
the fall in sales from a price increase is minimal. Such goods tend to be the ones with zero or few alternatives. Think about anti-snake venom. How many alternatives are out there that can allow you to shop for three hours comparing prices? Not that many, and most people in the market don’t have the time luxury to shop around either.
Why should we care about all this when all we want to do by hiking prices is to increase revenue?
Because revenue is equal to price times the quantity of goods you sold (Price x Quantity Sold = Gross Revenue). When you increase your prices, your sales may reduce meaning you cannot be sure that an increase in prices will automatically result in higher revenue for your business.
Before you begin price hiking, think about how you expect your customers to respond to your prices. If the fall-out in sales will be high, then it may not be a good idea to hike. If the fall-out will be minimal, then what are you waiting for? Hike away and make more money!
As an Agribusiness major at Iowa Wesleyan University, you will learn the Economics of Pricing, Supply, Demand, and Business Environments through courses such as Microeconomics (ECN 101) and Business Survey (BA 100). You will also learn how to differentiate your products and increase your business’s competitive advantage through courses such as Principles of Marketing (BA 320), Agricultural Marketing (BA 375), and Entrepreneurship in Agriculture (BA 401).
Checkout our Agribusiness page https://www.iw.edu/business-administration-agribusiness/
Sources
- Krugman. P & Wells.R, 2018. Microeconomics 5th Edition. Worth Publishers, New York.
Author
Agness Mzyece, Ph.D
Agribusiness Assistant Professor at Iowa Wesleyan University
Email: [email protected]
Phone: 319 385 6340