By Karen E. Klein

Q: Primarily because of higher insurance costs, we have reached a point at which we need to increase prices. Although I have found a lot of information on pricing in general, there seems to be very little advice available on how and when to increase prices. Can you help?
-- R.B., Detroit

A: It's difficult to offer specific advice without knowing the industry or product involved. However, in general, experts say that raising prices should come as a strategic decision, not a nuts-and-bolts accounting procedure.

They also warn that hiking prices solely to cover costs sets a dangerous precedent. "If you raise your price in a highly competitive market to cover an indirect cost, the decrease in sales may make your insurance problem seem tiny by comparison," says David Walker, who has priced commercial products and services for 15 years as managing director of Ventis Group, a consultancy based in Westlake Village, Calif.

Before deciding, find out more about your customers and your competitors and their pricing, suggests Paul O'Reilly, a Los Angeles-based small-business consultant. Is the increased insurance cost something that affects just your company, or will it hit everyone in your industry? How big a factor is insurance to your business? Are your customers choosing your product or service mainly because of your attractive prices, or are costs less important to them? For most companies, pricing is a key marketing aspect and a factor that positions them in the minds of clients.

CUT OTHER COSTS.  "Depending on your industry and the size of your business and competitors, it may be relatively easy to implement some basic competitive research to determine the price range for products and services similar to yours," O'Reilly says. "One technique I have often advised clients to use is a strategic advantage survey in which you talk to your existing customers to identify what they consider the advantage you, your products, and your services offer over your competitors, and what weight pricing holds in their purchase decision."

If you increase prices at a time when your customers have many lower-priced alternatives and aren't clear on what competitive advantage your company provides, you will be taking a great risk. However, if your survey shows that your competitors' prices are lower than yours but you have a distinct advantage that your customers value highly, the increase my not hurt business.

If your research convinces you that increasing prices will put your company in a precarious position, seek ways to absorb the insurance increase by cutting costs elsewhere in your operation. Think about whether increasing sales volume will help cover your insurance bill. "Turn up the marketing machine, and drive volume," Walker advises. Offer "short-term discounts [like coupons], specials for your best customers, introductions of new products, or strategic partnerships with complementary producers, to form new product 'bundles.' Also, get serious about cost control, both in insurance [including alternative providers] and in other major cost areas."

RESPECT VOLUME BUYERS.  If you decide to raise prices, consider your timing. Where contracts are involved, anniversary dates are the most appropriate time to increase prices. "If you're in retail sales, then sell the old inventory at the old price and reprice the new shipment at a new cost to your customer," advises Martin Lehman, a small-business counselor in the New York City offices of SCORE (www.score.org), a small-business counseling organization. If you use multiple vendors to sell your products, consider their competitive alternatives -- you have to incorporate your increase into their marketing and selling cycles.

If volume factors into your business, consider increasing prices to low-volume buyers but keeping them the same or decreasing them for high-volume clients. "Analyze your unit cost and price and see whether you can affect the cost of your entire product suite by focusing on either high-unit profit items or high-volume profit ones," suggests Phil Borden, a longtime entrepreneurial consultant based in Long Beach, Calif. "Putting your emphasis on what makes you the most money overall may allow you to understand what products to adjust, and how."

Soften the blow of a price increase by playing up some feature of your products that makes them special in buyers' eyes. Then combine the price increase with an advertisement emphasizing those "new" benefits, Borden advises. You should also let your best customers know about the price increase in advance and urge them to order early to ensure that they get the old price before the increase goes into effect.

DISGUISE THE HIKE.  And if you must take the risk of raising prices, set them a little higher than you have to, Borden says: "If the product is not time-sensitive, the market will let you know [in the form of decreased sales] in time for you to adjust. You can then either reduce your price directly, offer a discount, or find another way to make your new 'decrease' look sexy, instead of like a retreat. If you get the extra, that's even better." Timing is everything.

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