It comes as no surprise to business owners that operational costs are on the rise in 2023. As the nation grapples with the ongoing impact of Brexit, global conflict and the economic fallout of the pandemic, businesses have seen costs rising throughout their supply chains.
Rising inflation has necessitated increased business spending on essentials and stymied profit margins. Furthermore, the cost of living crisis has necessitated a great deal of belt-tightening among consumers, with a Consumer Price Index increase of over 9% as of February 2023. Understandably, this has driven down business revenues and further eroded the operating profits of businesses of all sizes.
This has resulted in a quandary for businesses. Maintaining current pricing methods and cash flows could become untenable, while increasing prices risks alienating cash-strapped customers. The good news is that with a well-considered price increase strategy, businesses can have the best of both worlds: increase prices in line with inflation while still providing value for money for their customer base. In this post, we look at how to increase prices.
Step 1- Analyse your infrastructure and spending
Before you look at how to raise your prices, it’s important to make absolutely sure that you need to increase your prices in the first place. A thorough audit of your operations using business intelligence software may reveal avoidable costs that are slowly eroding your profit margins.
Identify hidden operational costs
Operational inefficiencies, Increased automation of core processes, for instance, can often result in greater cost-efficiency as well as a reduction in costs caused by human error. Likewise, re-evaluating your payment structure to ensure that you get the best deal for your usage can lead to cost savings without impinging on quality. Your suppliers may also be willing to offer a discount if you are able to order in slightly higher volumes and have the requisite liquidity and storage capacity.
Address the hidden costs that plague your business and you may find that you can maintain your existing pricing structure. Even if you do have to raise your prices, you can tell your customers that you’ve done everything you can to avoid it.
Consider streamlining your product range
Whether you’re a retailer or a restaurateur, your product range could present opportunities to save money. Each product you offer has its own sales volume and profit margin. If both are low, it may be worth dropping the product.
Shrinkflation: Is it worth considering for your business?
Shrinkflation is the practice of slightly reducing the size or packaging of a product while maintaining the same price point in order to improve its profit margin. While this can be unpopular among consumers, the shrinkage may be negligible and more popular among your consumer base than increasing your prices or discontinuation.
Step 2- Identify your competitors’ pricing methods
The prospect of raising your prices can be daunting. But it can be much less so if your competitors are doing the same. A little competitor analysis can reveal how your competitors’ pricing has adapted to the present climate.
Of course, it’s important to ensure that you are comparing your business with like-for-like competitors. A loaf of bread from an artisanal bakery, for instance, shouldn’t be compared with its low-cost mass-produced equivalent at a local supermarket.
If your competitors have increased their prices, there may still be some room for manoeuvre. Where competitors have raised their prices in excess of inflation, you may be able to price your products more competitively than their offerings while still maintaining healthier margins.
Step 3- Clarify your new pricing strategy
Before you announce your price increase to your customers, you need to know where and how to implement that price increase. The clearer your new pricing strategy the more transparency you can offer your customers.
Take a 360° approach to your price increase strategy
It’s important to be judicious in where you apply price increases. Adding to product costs across the board may be both unpopular and unnecessary. Instead, approach your pricing strategy with a 360° view of your profit goal. Only as much as you need and only apply price increases to the products that most affect your gross profit margins. Products that do not sell in high volumes may be best left with a smaller profit margin.
Implement flexible pricing
For example, instead of just pricing items based on cost, look at demand. If a product is clearly outselling its competitors, consider raising its price in line with the demand.
If customers continue to buy their preferred product, you’ll make more profit from it. This compensates for reduced sales of other products. If they switch, you may increase sales of other products.
Implement custom pricing
Customising your pricing models can improve cash flow without compromising your value proposition. No matter what sector you’re in, there are usually ways to create predictable, recurring revenue. For example, in food and beverage, consider offering customers food or drink deals for a monthly fee or running a loyalty programme or strategic promotion such as a meal deal. Adapting your offering to a subscription model is another great way to add value for the customer while also increasing your revenues.
Step 4- Communicate your price increase strategy to your customers
Now that we’ve looked at how to increase product prices, it’s time to look at how to communicate your new pricing to your customers. Most consumers are savvy enough to understand that businesses are not immune to the across-the-board living costs that they themselves experience. If they feel that price increases are fair, justified, and transparent their perception of your company is much less likely to be negatively influenced by a price increase. Customers will have a much more adverse reaction if they feel that price increases have been implemented by stealth or are excessive.
Square Online Checkout
Create free payment links in seconds with Square Online Checkout.
Communicate price increases well in advance
Consumers may find bad news easier to digest when they have more time to take it in. As such, it’s a good idea to communicate your price increases to customers before implementing them. 30 days is a reasonable timeframe.
Be clear about why you’re raising your prices
Customers are far more likely to take umbrage at price increases if they are deemed arbitrary or excessive. Explain why you need to raise your prices with specific reference to which costs within your supply chain have increased.
Be sure to fill your communications with friendly and empathetic terms. Assure them that you are still committed to meeting their needs and providing them with the quality that they have come to expect.
Communicate your price increase strategy across multiple channels
Finally, ensure that your price increase is communicated across multiple channels including email marketing, social platforms and in-store if you operate on physical premises.
As well as ensuring transparency, this may also encourage a surge in revenue as customers scramble to buy before your new pricing methods come into effect.
Step 5- Assess the impact of your new pricing
Having successfully implemented your new pricing strategy, you’ll need to spend the next 3-13 months tracking its impact on your business. Of course, total sales revenue, sales volume and net profit are all important metrics. But you should also consider customer feedback. This will allow you to adapt your strategy to ensure price increases do not impact your brand value.
Contact our sales team to learn more about how Square could help your business.