3 Tips to Consider If You Plan to Raise Your Prices This Year
Facing the effects of inflation and supply chain issues, some companies, including small businesses, have started raising their prices, and others are looking at doing so at some point this year.
It can be a tough decision, particularly for small business owners and sole entrepreneurs who fear they’ll lose customers if they implement even slightly higher prices on their products or services.
Here are 3 tips worth considering if you’re a small business owner assessing whether to increase your prices or fees this year.
Approach with caution. Experts and successful entrepreneurs caution business owners about pricing strategies - it’s not as simple as it might appear, particularly during an uncertain economy.
“The most common misconception is that raising prices by the exact amount that your costs have increased ensures that current customers will continue purchasing,” says Rafi Mohammed, founder of Culture of Profit, a pricing strategy consultancy firm.
Keep in mind that your customers could be facing their own problems brought on by this economy and are making decisions on their future purchases accordingly, writes Mohammed in a Harvard Business Review (HBR) article.
Consumers may be faced with a barrage of higher prices and will look at cutting or reducing their purchases, says Mohammed, who’s written two books on pricing strategies, including The 1% Windfall: How Successful Companies Use Price to Profit and Grow.
“Even if competitors are raising prices, this does not mean that customers can afford — or are willing — to pay more,” he writes in the HBR post. “Passing through increased costs does not guarantee a profit.”
Price right. Considering the sentiment and pocket books of loyal customers are key components when it comes to price-setting, Mohammed advises.
Brian Treitman, owner of Massachusetts-based BT’s Smokehouse, told Mohammed, “Believe me, it is the hardest thing ever to make the decision to have to raise prices.”
With pricing strategies, one way to retain your most price-sensitive customers or anchor clients is to provide options, Mohammed says.
“Instead of writing them off, offer choices to keep them in the family,” he writes in the HBR article. “Examples include a cheaper, stripped-down ‘Good’ version, a lower-priced smaller volume offering, or a protection package that mitigates future price increases.”
Be upfront about the price hike. When you decide on raising prices, is it best to give customers plenty of notice or implement the higher pricing without an announcement?
Your exact strategy could depend on your type, size, and age of business. Newer companies and solopreneurs will want to proceed with caution to avoid the risk of jeopardizing newly-established relationships and any significant clients who may be jarred by the increased pricing.
And experts warn that just because consumers see higher prices across the U.S. economy doesn’t mean your customers will welcome a price hike by your business. But it does seem that giving a heads-up to your customers could ease the news.
“Instead of subtly upping prices and hoping consumers wouldn’t notice, however—long the industry standard for consumer goods—many brands are finding that it pays to tell their consumers what’s going on in advance, as a way to gain trust,” Raisa Bruner writes in a Time article.
Bruner says that companies are choosing honesty when communicating to customers about the stresses that have caused a change in their pricing, citing fashion brands like Cult Gaia and Girlfriend Collective and monthly subscription services like shaving company Billie and butcher delivery service Porter Road as examples.
But some larger companies are choosing to be part of another trend popular in this type of economy: shrinkflation.
According to the Time article, shrinkflation is the process of reducing the amount or quality of the product while keeping the price the same, explains David Ball, president of retail consulting firm The Grayson Company, in the Time article.
As an example, Ball says in the article, a package of Hershey Chocolate Kisses may carry the same pricing as last year, However, its weight has decreased from 11 to 10.1 ounces, “effectively a 9% price increase in disguise.”