Just Raise Prices - Part 1

Big Deal Small Business, Issue #104

Just Raise Prices - Part 1

Big Deal Small Business, Issue #104

While searching, everyone knows how to improve a small business — JUST RAISE PRICES.

More often than not, you actually can raise prices, which is a potent growth lever to pull in your small business journey.

If it’s not obvious, the best part of price-driven growth is that it doesn’t come with marginal costs. Volume-driven growth requires incremental costs related to product creation or service provision; price-driven growth fall straight to the bottom line (in theory).

What folks don’t talk about is HOW to raise prices — the practical tactics and psychological hurdles that come with raising prices in a small business context.

Next week, in Part 2, I’ll dive into the specifics in Guesswork Unveiled (paid subscribers only).

But this week, in Part 1, I want to set the stage for you.

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You’re a searcher, roughly 35 days after closing. You’re still drinking from a firehose. You’ve spent 6 hours on support with AT&T and finally convinced them to move the business phone number to your billing account.

You’ve learned all your new employees’ names, but you’re not sure who (if anyone) trusts you yet. The ink is barely dry on your multi-million dollar personal guarantee.

It’s 7pm on a Friday, your 5th week in the business, and the daily fire drills have slowed down. You’re alone at the office. You can finally hear yourself think.

You log into your business bank account — there’s not enough transactions in the feed yet, so you can see your starting balance, when you were flush with all that working capital you received at closing.

And then you see the balance today — and your stomach seizes up for a brief moment. A chunk of money is missing. Where did it go?

You scan the transaction feed and immediately spot the culprit — your first debt payment was auto-debited by your lender. You start doing some mental math. What’s your total balance, divided by monthly payments — you have maybe 6 months of runway?

You log into QuickBooks and run the Accounts Receivable report — it’s grown to $75K. You have no clue if that’s good or bad. You switch to the business email and send out 15 invoice due reminder emails in a flurry.

The sudden gap down in your bank account feels like a punch to the gut. You need the business to generate cash…now. You question yourself — was it actually a good idea to give a $10K/year raise to that one employee the day after closing?

You know that 30 days from today, another debt payment is going to vanish from your bank account. And then again. And again. One hundred and twenty months in a row.

Your phone rings — it’s one of your investors, calling to check in on how you’re doing at the end of another long week. You put on a brave face and talk about how the transition has been going, how great the seller has been to work with, etc.

And then the investor asks you the key question: “So, when are you going to raise prices? That was a key part of the investment thesis I recall.”

You scramble, not wanting to overpromise. “Oh, I know we’re definitely priced too low compared to our competitors; the seller hadn’t raised prices in 4 years. But I don’t want to rock the boat quite yet with our clients, so I’m just waiting for the right moment.”

The idea of losing a client right now is terrifying. You ran a great search and bought a good business with no clients over 20% of revenue.

But what about that client that’s 8% of revenue? You do some napkin math.

You started with $3 million of revenue and $600K of EBITDA. That 8% of revenue client is $240K/year in revenue. The business runs at a 60% gross margin, so roughly $144K of that turns into EBITDA…and you can’t really change your overhead if you lose that client.

$144K of lost EBITDA — that’s almost a quarter of your EBITDA.

More napkin math. You had 1.4x DSCR at closing — if you lose $144K of EBITDA, you’re pretty much cash flow breakeven.

And that’s only if that one client leaves…what about if the 5% client also leaves?

Your brain struggles to process — you can’t think through the math clearly. You can’t figure out what happens if the other 87% of revenue accepts some kind of a price increase…you just know you can’t take the risk of losing revenue right now. Not when you’re 30 days away from that next debt payment.

“There’s plenty of other low-hanging fruit to focus on for now,” you assure your investor. “Plus I’d like to build some trust with the client base first before making any changes in price.” (Forget that your deal model assumed an 8% price increase in year one.)

You end the call on a chipper note — “Enjoying the grind so far!” — and go back to staring at your screen, your bank account balance laid bare in front of you.

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So yes — JUST RAISE PRICES.

But how do you actually do that?

How much of a price increase? On what timeline?

How do you build conviction that customers will accept prices increases?

How do you build enough self-confidence that you can roll with any volume declines?

More on that next week in Guesswork Unveiled, my operator-focused weekly paid newsletter.

(And, if you have any particular thoughts or wisdom to share on the topic, please do let me know! I have a lot of thoughts, but always open to hearing opinions.)

Thanks,

Guesswork Investing