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As a business owner, you’re no doubt aware of the impact that cost-of-living expenses and inflation are having in Australia. It’s across the board: the consumer price index – a key measure of inflation – rose 7.8% in the 12 months to December. Supply chains remain stressed and that’s also putting pressure on prices. In short, there’s every chance your vendors have put their prices up.
This leaves you with the difficult choice of increasing your prices or cutting into your profit margins. The latter might not be an option if it threatens your sustainability, so you can see a dilemma: do nothing and not survive or put up prices and drive away your customers.
Don’t worry though – if you do it strategically and communicate it well, raising prices doesn’t have to be scary. Especially in an environment where your competitors most likely need to as well.
In this article we’ll show how you to effectively increase your prices and bring your customers along with you.
Super quickly though, while rising overheads and vendor costs are likely behind your need to raise prices, there are several other perfectly legitimate reasons a company might change its pricing. Maybe your business model has changed and you need to reposition yourself to reflect the increased value you now offer; perhaps you need to increase your profit margins to remain viable; it could be that pricing expectations for your whole sector have changed and you don’t want to appear undervalued.
Whatever the reasons, read on.
Where are you at right now?
Before increasing your prices, you first need a clear understanding of where you’re at. How, exactly, is inflation affecting your costs? Which products, services, materials or staffing costs are costing you more? Is that on everything or only in some areas?
What are your best-selling products and their profit margins? When it comes to raising prices, you’ll be looking for something that moves the needle for the business as a whole. It could be a small increase on a few high-selling SKUs or it could be larger price rises on slower moving but more significant items.
What feedback do your customers give you? How sensitive are they to price? If they see your products or services as unique or of higher quality than your competitors’, then you’ll have more room to manoeuvre. If they see what you sell as a commodity they can get elsewhere then you may need to stick close to the market rate.
Do you have any data on previous price increases? How did they affect your total revenue? The goal is to maintain or increase profitability; it’s fine to sell fewer units at a new higher price so long as total profitability is positive.
What’s your current cash flow like? This is critical for weathering a temporary dip in profits or if you choose a strategy of holding prices firm in the hopes of gaining market share. Square has a powerful set of tools for monitoring and optimising your cash flow.
What are your competitors doing?
Time for some competitor research. Do you have good visibility of what other businesses, delivering similar products in a similar way, are doing? Be sure to compare like with like: an artisan ceramics studio shouldn’t benchmark its products against dinnerware from a big-box store, for example.
If your competitors put their prices up, then you probably can too. Or maybe their increase is your opportunity to hold tight and corner the market.
Decide on your new pricing strategy
With what you know so far, it’s time to choose tactics for raising your prices. Review your existing pricing strategies we have a guide for that, and make predictions about how you think each price change will impact your total sales. Remember, it’s total profit rather than total sales that matters here. Your projections might indicate fewer sales but you could still end up with better profits.
Take a 360° view of the profit goal. That means adding only as much as you need and only on the products that most affect your product margins. You might be able to run with a reduced margin on something you sell less of, for example.
Decide if you’ll raise prices in one fell swoop or gradually. There are pros and cons for each: a large jump could shock customers but incremental adjustments mean ongoing price rises. Will you make price rises on different products all at once or will you increase different groups over time?
Could the new prices be advertised as a temporary surcharge? This only works if you can be certain that your vendors’ prices will fall in the future.
Are there any opportunities to sidestep the issue, at least partially, by adding value to a product at the same time you increase its price? Depending on what you sell, could you offer free gift wrapping and a personalised card, a post-sale follow-up or tutorial, a warranty, or a future discount? Of course, make sure these value-adds don’t cancel out the additional profit you need to make!
Another way to sidestep making a direct price rise is to introduce a new product, preferably one where you have some latitude to set an entirely new, more profitable, price. Similarly, you could offer multi-product packages that allow you to highlight the total saving to your customers while protecting your profit margin across the bundle by mixing high- and low-margin goods.
So-called shrinkflation may be a dirty word among consumers but it’s one more thing you could consider if you feel your market won’t accept a direct price rise.
Lastly, consider your timing. Are there seasons when your products are more in demand? A bridal gowns salon might increase its prices before spring; other stores might reassess prices before the festive season, when consumers will be gift shopping and less price sensitive.
Communicate your price increases
Before you tell your customers about the new prices, bring your team into the loop. Ensure that everyone is aware of price increases, the reasons behind them and when they come into effect.
Bad news never hurts as much when we have time to get used to it. So give your customers as much warning as possible (30 days could be a good yardstick) that you need to put prices up.
Most importantly, explain why you need to. Communicate this in warm, personal terms that consider your customers’ needs and anxieties (we’re all doing it tough right now) but also help them relate to the people (you and your team) behind the business.
Explain that the price rises are necessary because your vendors have raised prices, for you to stay in business, or because you’ve had to give your staff a pay rise to help them with the cost-of-living crisis and you’re committed to being a socially conscious employer. Explain that you must increase prices if you’re going to keep delivering the same quality of products or services they’ve come to love.
Use your full range of email marketing, social media and in-store explainers to tell your customers that your prices on some things will be going up from the date you’ve settled on. This works like a reverse sale, offering buyers the chance to get in at the “old” prices.
If you need more advice, we’ve got a full article on how to communicate your price increases. Check it out here.
Measure the results
You’ll need to track the results of your changes over the next quarter, six months and year. Look at total sales revenue, sales volume and net profit. But also consider customer feedback and sentiment. A customer survey with a giveaway can be a great way to seek formal feedback.
This article is for informational purposes only and does not constitute professional advice. For specific advice applicable to your business, please contact a professional.