Entrepreneur Jay Goltz opines:

“If there is an aspect of running a small business that doesn’t get enough attention, I think it’s pricing.”

But it is hard and your salespeople can lead you astray:

“From my experience, many business owners do not do an analysis to calculate the effect a price increase might have on their bottom lines — again, for good reason. It is very difficult if not impossible to do. It’s more like guessing, perhaps an educated guess. I cannot tell you how to do it, but I can tell you what not to do. Do not rely on just your salespeople! Most will tell you that the sky will fall if you raise prices. They will tell you that customers are already complaining.”

Is it worth raising prices?  The key variables are elasticty of demand and cost f production:

“Here’s the math: if you sell 100 widgets a week at $100 apiece and they cost you $65 apiece, you have a gross profit of $35 a widget or $3,500 a week. But because your fixed expenses have been rising and these are really good widgets, you decide you can charge $102 and still provide a good value to your customer. If you now sell only 95 widgets a week, you will have a gross profit of 95 x $37, or $3,515. But if you manage to sell 98, you will make $3,626. The point is that sales have to fall quite a bit for you not to come out ahead.”

He does not quite come out and say it but implicitly Goltz is comparing marginal revenue and marginal cost. In his examples, MR<MC so it makes sense to reduce output and increase prices.

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