Should I raise my prices?
How to test a price rise before you announce it, with one sum you can do on paper.
The break-even sum
If your gross margin is m and you raise prices by p (both as fractions of the current price), you can lose up to p ÷ (m + p) of your sales and still make the same gross profit.
| Gross margin | Price rise | Sales you can lose and break even |
|---|---|---|
| 40% | 5% | 11% |
| 40% | 10% | 20% |
| 25% | 10% | 29% |
| 60% | 10% | 14% |
Example: a café with a 40% margin raises prices 10%. It can lose up to 20% of sales and earn the same gross profit as before. Lose fewer than that and it is ahead. The lower your margin, the more room a rise gives you.
Why one best guess misleads
Most owners guess one number: “we might lose 5% of customers”. The real answer is a spread. Some regulars won’t notice, some will shop around, a competitor might move at the same time, and costs keep changing too. A plan that works on the average guess can still fail in a good share of realistic outcomes. That’s why it helps to play the decision out many times with the uncertainty included, a method called a Monte Carlo simulation.
Questions to answer before you announce it
- What’s your real margin? Include the costs that rise with each sale, such as ingredients, freight and card fees.
- Which customers are price sensitive? A rise on your most compared item hurts more than one on add-ons.
- Is a smaller rise safer? Compare a few options, not just yes or no.
- How will you show it? Prices shown to consumers in New Zealand should include GST. Give regulars notice and a reason.
- How will you know? Pick the number you will watch, such as weekly orders, and the date you’ll review it.
Test it with Gnomon
Gnomon has a ready-made model for price changes. Give it your numbers and your range of guesses about customers, and it plays the decision out up to a million times, then tells you go, review or stop, with reasons and a fix. It can compare several options and find the best plan among them, and it can work backwards to the number you need, such as the lowest price rise that keeps you safe. If you have six or more months of past sales, it can learn from them.
You can ask it in plain English from Claude or ChatGPT once it’s added as a connector: here’s how. Gnomon is in beta, so treat its answer as a second opinion, not a guarantee. The same approach works for deciding whether you can afford to hire.
Questions
How do I know if I should raise my prices?
Work out how much of your sales you could lose and still make the same gross profit: price rise divided by (margin plus price rise). If you are likely to lose less than that, the rise pays off.
How many customers can I lose after a price rise?
With a 40% gross margin and a 10% rise, you can lose up to 20% of sales and keep the same gross profit. With a 25% margin and a 10% rise, up to about 29%.
Do prices in New Zealand have to include GST?
Prices shown to consumers should include GST. Prices for business customers are often shown excluding GST, as long as that is made clear.
Can AI tell me whether to raise prices?
A chat AI will give you a confident opinion. A decision checker such as Gnomon instead plays the price change out across many possible outcomes using your numbers and tells you how often it works.
Test the rise before your customers see it.
Run a price change through Gnomon with a free test key, or ask it from Claude or ChatGPT.