Should You Raise Your Prices?

by Blog

Have you ever felt compelled to raise your prices as a business owner, but you didn’t because you were
worried about your customers’ response? 

Small business owners often resist raising prices. They will go through extreme measures to delay or  avoid it, even when operational costs increase. It’s normal to feel nervous. We’re not too excited when  our favorite coffee shops or retail stores do the same thing as customers ourselves.

There may be other reasons for this hesitance:
Being locked into long-term customer contracts or bids where businesses get stuck between rising  costs and flat prices.
Concern about raising prices in a hyper-competitive market with ample supply may drive customers  away.
Price changes may come with significant one-time expenses (menu costs), such as updating sales  documents, websites, and POS systems.
Consideration about how pricing affects your brand, marketing, operations and sales, and customer  relationships.

We are also in the middle of a period of tremendous change. Supply chain challenges and rising costs are front page news. Your customers are expecting prices to increase.

Put another way, there may never be a better time to increase your prices.

Coping with Inflation

About 40% of small businesses in the US plan to raise their selling prices by 10% or more because of inflation. The main drivers of higher expenses are the cost of labor, inventory, supplies and materials, and fuel. There’s not one business that hasn’t been impacted by inflation somehow.

There are three ways to cope with inflation: raising prices, lowering costs, and accepting lower profits. Lower profits may work in the short term, but quickly become unsustainable. Reducing your costs requires investing in automation, training, and new business structures. And while I believe businesses should always work on increasing efficiencies and decreasing costs, raising your prices makes the most financial sense when your costs are increasing. Without healthy margins, your company becomes unstable and limits your options to invest in growth.

Change in Demand and Its Effect on Price Elasticity

Price elasticity is how customers react to the prices of products and services. When demand for something changes considerably after a price change, the item is price elastic. Usually, when prices increase, demand declines, but customers can react differently depending on the type of product and the market.

If there are substitutes for your products, demand is usually elastic, and business owners have less control over price. But, if there are no substitutes, demand tends to be inelastic, and you have some power over the pricing.
Is your revenue at risk if you lose a few customers? If you increase your pricing by 10%, will you lose all your customers? Likely not, especially in today’s market conditions. What percentage of customers would you need to lose to reach the same net profit?

An important calculation is to estimate the number of customers you could afford to lose with your new pricing strategy before it’s implemented. Of course, the objective is to not lose any!

In order to stay in business and continue taking care of your customers, you must maintain a healthy margin (including an income for the owner to live on).

Most Customers Will Accept Price Increases

Many business owners fear that they will lose many of their current and potential customers if they announce a price increase. However, while some of them may be choosing your business for the price only, they are arguably the minority next to your customers who care about other intangibles, such as your level of service, convenience, and product value. Good customers tend not to complain about minor price increases. They often expect it, especially when you provide a level of service that reflects the amount you charge them. If some customers leave, those who recognize your value won’t mind paying more for the quality services, products, and the experience you provide, especially when your customers perceive you make their life easier.

Communicate Your Price Increases

Even though some customers expect price increases, it’s always a good idea to communicate and set expectations. Be upfront with increased prices with an explanation of why. Again, right now is the time to evaluate your margin and prices. Your customers are expecting increases. They are seeing it everywhere from gas to food.

What are you doing to continue to offer value for your customers? Can you package products or services together to offer greater value? Are there less expensive lines you could carry to offer a choice?

The goal is good communication; not having your customers be surprised. How can you communicate a pricing increase in a way that your customers feel you are looking out for them?

Price Increase is not Gouging

Large, publicly traded companies don’t seem to have an issue raising prices. There have been several reports of national/international companies bragging on earnings calls about using the current crisis to raise prices higher than increased costs, increasing their margin & profit – in other words, price gouging.

This article is NOT talking about gouging. What goes around, comes around. I’ve been hearing several stories of people cutting back on what they are buying or choosing lower cost or no name options.

Gouging will only ever create a short-term return. In the long run, companies seen to be gouging will lose brand identity, trust, and over time, results.

Never Waste a Crisis

Sometimes, you can’t afford to refrain from raising your prices to sustain healthy profit margins. Inflation is going up, as well as business costs and we need to adjust to that. As big as the challenge has been in many industries for the last couple of years, it is also an opportunity to review your pricing and margin structure to ensure your business stays open today and is positioned to continue to grow.