Learn how to tell if it’s the right move—and how to tell customers.

Raising prices can be challenging for a business owner, particularly when you’re worried about losing customers who might be upset at having to pay more. Asking more for your products or services can be unnerving, especially when you may not understand how an increase will impact your company.

Telling your customers is only part of the challenge; the other is figuring out how much of an increase you really need to increase revenue to your bottom line.

Here are a few tips to think about when you’re looking at increasing your prices:

Why Do You Think You Need to Raise Prices?

Ask yourself why you believe it’s time. Do you need to maximize cash flow? Are you looking to sell the business and need to increase sales? Or are your prices out of sync with your competitors? What’s the driving reason for you to bump up your prices?

Do You Really Understand the True Cost of Your Product or Service?

Understanding the costs associated with products or services is essential before you start upping the price tag. Make sure you have a good understanding of costs including:

Material costs // These are the costs associated with purchasing raw goods and materials for your product. For example, a car repair service needs to purchase tires and tools in order to repair cars. A janitorial service needs to purchase cleaning solvents, gloves and other supplies.

Labor costs // Just like it sounds, this is the cost of the labor you hire to produce or deliver services. For the car repair service, it’s the mechanics. For the janitorial service, labor costs are associated with the cleaning crew.

Overhead costs // Rent, utilities, supplies, mileage and other costs that aren’t associated with the product or service are considered overhead. Have you calculated what your overhead costs really are?

Do You Know How Profitable Your Business Really Is?

Are you making money? How would you know? Sounds simple, but often business owners don’t take the time (or want to learn) how to understand financial statements and if they’re adding profits to the bottom line. You might learn that you’re making more profit than you thought or you’re behind in reaching your goal. Profitability is certainly going to impact your pricing strategy.

Understand the balance sheet // While the balance sheet is not going to show you how much money you are making, knowing how to read it will tell you a great deal about the financial health of your company before you start to raise prices. Your balance sheet can tell you the size of your cash balance, the quality of the balances that you have in accounts receivable, your investment in property and equipment costs, and your commitment for loans and other obligations.

Look at your income statement // What are your noncash expenses? What is your cash flow? Analyze the actual results for the past 12 months to get a more realistic idea of your budget and forecast.

Sharpen your budget and forecasting skills // If you increase the prices on your products or services, are you going to see a drop-off in the number of units sold? Do you know the gross margin on specific items or services? How about labor costs? Do you need to consider giving raises based on economic forecasts? How much?

What Are the Tax Implications?

Considering all your sources of income, what tax bracket are you currently in? Will raising prices push you into a different tax bracket? If your tax obligation increases due to higher profits, what other steps can you take to reduce your income tax liability?

How to Break the News About a Price Increase

Once you’ve figured out what the increase for your products or services is going to be, then it’s time to communicate with your customers. The good news is that those customers who truly value what you do (or what you produce) will probably be more understanding than customers who aren’t loyal to your brand.

Give advance notice // If it’s a significant bump in your prices, give your customers a heads-up a few weeks before the price increase goes into effect. You’ll avoid surprising them, and they’ll respect you for giving them notice.

Make it easy for your customers // If a customer buys multiple units from you, give the customer information about the increase for each product.

Own the increase news // Be confident when you’re telling a customer about the price increase. If you’re tentative or timid, your customer may try to push back. Make the news short, be prepared to explain the reasons behind the increase and acknowledge that it’s a fact of life that prices need to go up.

Be ready to offer alternatives to how you’ve previously billed them // For your best customers, you could offer them a different pay arrangement (for example, paying over a longer time period).

Last of all, thank your customers for their business. Recognizing their loyalty to your brand goes a long way when you have to deliver the price increase news.