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Pricing is a delicate subject. If you set your pricing too low, your margins will suffer, and the business won’t flourish. Conversely, customers might choose to look for more affordable options if they’re too high. How you set your pricing can ultimately, influence every part of your business. But sometimes it’s necessary to increase your rates. Either because of setting them too low, to begin with, or due to sudden increases in production and supply costs. That’s why today’s entry is focusing on how to raise prices without losing customers.
Follow Along With The Financially Simple Podcast!
This week on The Financially Simple Podcast:
- The effects of the current inflationary trend (02:35)
- A multi-faceted approach to determine what your price needs to be (04:45)
- Gauging competitor pricing (08:25)
- Peanut Butter Allocation (09:40)
- Determining your increase (10:55)
- Communicating your findings with your team (12:24)
- Transparency & Value (14:21)
- The value of a great customer experience (16:50)
- Monitor the impact of price increases (18:21)
Our Current Economic State
According to the most recent data from the U.S. Labor Department, the annual inflation rate is 8.3% for the 12 months that ended August 2022. This increase has damaged consumer confidence, causing them to spend less. In fact, J.P. Morgan cites a study by Morning Consult that reveals that 56% of U.S. consumers are willing to shop less overall.
Meanwhile, producer prices increased by 8.7%, the least in a year, and below 9.8% in July. The core index went up 0.4% on the month and 7.3% on the year. All of this puts small business owners in a precarious position. As producer prices increase, it has a negative effect on profit margins, necessitating a price increase.
This is supported by a recent study by Kabbage which found that small business owners reported increasing prices by an average of 21% across industries, largely due to increased costs from their vendors (54%) and raw materials (45%). This means price increases are a necessity, but how do you increase prices without losing customers?
Determine How Much Your Prices Need to Increase
Adjustments to your pricing strategy should be data-driven and never taken lightly. This requires a multifaceted approach. But what does this approach look like? Well, I like to break this down into seven stages. I know. Right now, you’re probably thinking, “Justin, why would I need a seven-stage method to determine how much I should increase my prices by?” As I said, this needs to be well thought out and data-driven. So, let’s look at this approach.
Assemble an Internal Team
The first step is an important piece of the process. Unless you’re a sole proprietor, you’ll need to assemble an internal team to help determine how much your price increase should be. Think of this team as a special advisory council. I suggest assembling this team with key team members in your finance, marketing, and operations departments. These are the departments that will have a direct impact on rolling out your price increases and communicating them with consumers.
Consider Your Business’s Current Position
Start by examining data from your KPIs and client feedback. Are your customers pleased with your offerings? If not, a price increase could do more harm than good. If you have it, you should review historical data on previous price increases. How did it affect your sales? Was there a significant impact on your revenue?
Assess Your Industry as a Whole
Some industries have a little more price flexibility than others. The same is true of different markets. Therefore, it’s critical to look at the rest of your industry to determine how much price dictates consumer demand. Ask yourself (and your team), “How likely is a price increase of ‘X’ going to deter our consumers?” Price sensitivity matters!
Examine What Your Primary Competitors are Doing
Just as important as looking at your overall industry is knowing what your competitors are doing in terms of price strategies. However, you want this to be as close to an apples-to-apples comparison as possible. Therefore, you should be examining competitors that offer similar products or services in the same way you do. For example, if you offer a hammer with a rubber grip and only ship to Brunswick, GA, then you shouldn’t look to competitors that sell wooden mallets that are only available in-store. Keeping it refined to similar competition will help define a reasonable benchmark for pricing.
Communicate the Change with the Rest of Your Team
This may seem like a no-brainer, but you’d be surprised at how many change initiatives like this fail because they weren’t effectively communicated. It’s important to generate buy-in, especially with your sales team, to control the use of discounts and rebates while also providing a standardized message to communicate the change with existing clients. So, it’s vital that you inform your team of the “how” and “why” behind your price increase.
Identify Individual Profit Margins
Work with your accounting department to dive deep and find the profit margins for each product or service offering. However, this can be a tricky proposition for many businesses. This is primarily because many accounting departments use what’s called “Peanut Butter Allocations.” What does that mean? I’m glad you asked!
Just like making a peanut butter sandwich, where you drop a lump of peanut butter on the bread and then smooth it across, many companies, especially manufacturing companies with multiple products, allocate their overhead. They simply smooth it across the product line. Over time, this can obscure your true margins for individual goods or services.
However, in most cases, you want to increase prices across all of your products or services. Peanut butter allocation works in this way, too. As you move to raise your pricing, “smooth” the increase across your entire catalog.
Determine Your New Price
Now you’re ready to determine your new price! Work with your accountant, financial advisor, and/or business coach to find the appropriate price, based on the data you’ve uncovered and your pricing strategy. While working through this process, it’s important to conduct some sales/profit projections to evaluate the impact your new pricing will have on the price per unit vs. its effect on sales volume. With the correct adjustment, you should land on a price that improves your profit margin while remaining palatable for your customers.
Communication: The Key to Raising Prices Without Losing Customers
Fortunately, everyone is aware that (at the time of this writing) we’re in an inflationary trend. With that, many businesses are increasing prices. This makes it a little easier for consumers to swallow. However, transparency and value remain high priorities for many consumers. So, how can you go about announcing a price increase with your customers without running them off?
1. Consider Your Timing.
Do you plan to increase your prices incrementally or all at once? Whatever you decide, you must be aware of the risks and rewards associated with each choice. Your decision could make or break the consumer response at a time when consumer worries are already high.
Regardless of how you increase your pricing, you must still be mindful of when you do so. For example, you may not want to increase your pricing right before the holiday or tax seasons. Additionally, you may want to inform your customers before you actually raise prices.
2. Remind Consumers of the Value of Your Product or Service.
Consumers place a premium on perceived value. As such, they’re often willing to pay more for goods and services they feel provide a great value. You could add perceived value by adding a low-cost product feature, or by making a few simple service upgrades. In fact, research from PwC reveals that 86% of consumers are willing to pay more for a great customer experience.
This means you could potentially improve the perceived value of your product/service by something as small as walking your client through the entire sales process, checking in with them to see how they’re enjoying your product, or sending top clients a small gift of appreciation for birthdays, holidays, or other special occasions.
3. Monitor the Impact of Your Price Increases.
Being able to measure the success of your changes is critical. Therefore, it’s important to develop a few metrics to ensure your increases are having the desired effect. Use internal data to measure how much of your increase is reaching the bottom line. If you’re still struggling to expand your margins after a price increase, you probably need to find ways to improve internal efficiencies.
Additionally, you should actively seek feedback from your customers. Consumer surveys are a great way to gauge how satisfied your customers are with your offerings and their value. Customer feedback is also useful when thinking about how future price increases might impact the business’s overall health.
Wrapping Up…
Friends, if you’re considering a price increase to one or more of your products and services, do so with proper care. Before setting your prices, it’s wise to follow the steps I’ve outlined. If handled incorrectly, changes to your pricing strategies can create disastrous outcomes at every level of your organization. I don’t say this to deter you from increasing prices. Instead, I want you to be confident in knowing how to raise prices without losing customers.
Look, life is hard. I get it. Life is hard, but life is good. Announcing a price increase can be frustrating, but it doesn’t need to be. If you take your time, review the data, and communicate effectively, we can make it at least financially simple. Let’s go out and make it a great day!
If you’re trying to determine what is a reasonable price increase for your business, working with a professional advisor could help. Reach out to our team to learn more about how we can help with this and other areas in your business.
