What we're talking about
A business might need to raise the price point of its products or services (whether that's specific products or across the board). This could be for a number of reasons: to simply increase profit margins; to reposition the business and change its perceived value; to match changing norms in its sector; because a retailer or stockist demands they do; or, as is particularly relevant in the current climate, to react to an increase in supply-chain costs and broader inflation. All businesses will need to increase their prices at some stage or other.
Why it's important
One of the age-old questions for businesses is how to increase prices without deterring customers and damaging the volume of sales. And it's always a relevant issue, but it's increasingly so in the current climate. Small businesses have to find a way of maintaining or increasing the profit margins on what they're selling. But simply passing on all of your rising costs to the customer is very risky – it'll quickly put people off. Instead, you'll need a considered, data-led, well-communicated strategy that looks to maintain long-term value for your business.
Many business owners spend far too little time on their pricing, considering its importance to profitability. Well, that's changing fast. In a recent survey of US business owners by financial services brand Kabbage, respondents reported increasing prices by an average of 21% across all industries; nearly one in five businesses were planning on raising prices above the rate of inflation. This is a critical business decision that'll impact every area of your operations – plus your future survival and growth.
Things to note
Price increases should be part of a multifaceted approach. Simply increasing the price you sell at isn't the only method of looking after your profit margins – and it shouldn't be your first thought. For many business owners, it should be a last resort and certainly part of a wider strategy. That could include minimizing the amount of inventory you hold; looking for more favorable payment terms from suppliers; embracing pricing strategies like product bundling; reimagining your product design (eg, shrinkflation); or getting creative with new product lines. You should aim to cut costs while increasing revenue. It's also worth checking if you're losing profits through overuse of discounts and offers.
You'll need a wide-angle understanding of your profit margins. If you're increasing prices, you need to analyze everything your business sells and your total product profitability to understand the impact that your changes will have. Don't be too narrow in your focus – a strong understanding of your profit margins across all your products or services will mean you can bring in different pricing strategies for individual products with confidence in what'll happen to your wider business' profitability.
It's not purely an accountancy decision. Price increases will have a knock-on effect across your whole business, and in areas you might not have considered. That could range from marketing strategy and promotional materials to the training needed for your sales team, to customer service and feedback or staff morale and motivation. You'll need to consider and plan for all the areas that'll be affected.
Communication is king. It's hard to overstate the importance of communication here. Luckily, small independent businesses generally have more customer goodwill than large corporations when it comes to price hikes. But you'll need to consider exactly how you'll inform customers and all other stakeholders, for that matter – including your employees. The right communication strategy, implemented well before any price increase occurs, can even result in an uptick in sales if done right.
How to… approach a price increase
1. Create an internal team. Unless you're operating your business on your own, you'll want to create an internal team of the key people involved – decision-makers across marketing, finance and operations. This shouldn't fall on one person's shoulders.
2. Think about your current standing. Consider the strength of your business' position. Are you confident that customers are satisfied with your current offering? Are you receiving positive feedback? This is an inexact science, but it would be a brave move to raise prices when your product or service isn't strong. Look at historical data – if you've raised prices in the past, what impact did it have on your sales and revenue? Do you have any products that are in high demand or often sell out?
3. Think about your sector at large. Next, consider the current situation in your sector more broadly. What's price sensitivity like generally within your product category? For example, if you're selling coffee, customers have a certain expectation of what it should cost in comparison with luxury items like jewelry or sunglasses. Has there been a recent increase in new entrants into your category that are driving prices down?
4. Check out your competitors. Time for a deep dive into what others are doing. This is a super useful gauge to know where you can go with pricing and to understand customers' alternatives. Benchmark against three competitors who sell a similar product delivered in a similar way (for example, if you hand-make your products, don't compare yourself to those that are mass-produced at scale).
5. Communicate with the rest of your team. Let everyone in your team know – well in advance – that you're planning on increasing your prices, even before you know how much by. A price increase shouldn't catch employees by surprise. Explain the reasons behind the decision clearly. You might have to hold a special meeting if you have a sales team, outlining the process and giving them a guide for communicating with existing customers.
6. Itemize your products or services. With the help of an accountant, dig into the numbers on the products you sell and work out the profit margins for each. Think about price sensitivity across your portfolio. Hopefully, you'll be able to identify products with a higher profit margin, which are the products that'll have the biggest impact on your profitability. At the other end of the scale, do you have products that are seen as value products (staple goods that customers often judge a brand's value by) that you'll need to maintain the price on?
7. Land on a new price. Ideally working with an accountant or financial advisor, and based on what you know (including your various pricing strategies), determine a new price for the product or products you've decided to amend. To guide you, it's worth creating sales-profit projections – comparing the revenue implications of a price increase per unit with the effect you anticipate it'll have on sales volume.
Basically, any change needs to result in higher profit. You can either adopt a rudimentary approach and do this yourself using guesswork, or enlist an accountant or software to help. Remember that your new pricing architecture has to be consistent and logical to a browsing customer.
8. Think about ways you might add value. Any price increase will be softened if you're able to offer additional value. Consider if there are budget-friendly ways that could add value to what you're selling – like creating instructional materials, offering free gift-wrapping or future discounts. Of course, these add-ons can't negate the additional profit from the price change.
9. Consider timing. When and how you increase your pricing is super important. You'll need to decide if you'll do it incrementally or make the change all at once. There are arguments for both. Additionally, when you do it is critical. If you're affected by seasonality, consider when the right time is to bring in the change (eg, many retailers increase their prices around the holiday season, when customers pay less attention to changes). Other strategies to consider include raising prices at the beginning of every year, or after a certain period with particular clients.
10. Create a communication plan. Outline a plan for how you'll communicate the changes to your customers. That includes what you say, how you say it and where you say it. Prepare a response in case of negative comments, too. Customers appreciate transparency – especially coming from a small business. It's also key to give customers plenty of notice if you can, particularly if you sell to other businesses or if you run a subscription-based model.
11. Track it. Any price increase needs to be carefully tracked to see if it's working for your business' profitability. So, build in some performance transparency. That should include key financial figures – total sales revenue and volume of sales being two obvious metrics to track – but also customer feedback. Consider how people are responding to the changes you've made.
• Increasing prices isn't a silver bullet for dealing with rising costs and inflation – it should be one element of a multifaceted approach.
• Use all the information at your disposal when it comes to setting new prices – including competitor research, pricing strategies and crunching the numbers so that you know which products in your portfolio will really shift the needle.
• Coming up with a clear communication plan and a logical timeline is crucial. That applies to both your customers and the rest of your team.
Perspective: In this piece for the Harvard Business Review, marketing expertUtpal Dholakia explains why telling customers is so important when you increase prices – and three research-backed ways to do it.
Example: This article in TIME magazine shows how a range of small businesses have found creative ways to communicate a price hike to their customers – and have seen business thrive as a result.
Tools: There's a host of financial-planning software that you can use for estimating what a price hike will do to your profitability. Causal is an excellent business-planning tool, and Freshsales is great for beginners.
A version of this article was published in the Courier Workshop newsletter. For more deep dives into essential business concepts, sign up here.