Mastering the delicate art of raising prices

by Citizens Staff

Rising labor costs, supply chain issues, inflation, and other financial factors may prompt thoughts of a price increase to improve business financial health. Some business owners resist this step, fearing it will drive away customers, but this does not have to be the case. How much you raise prices, the positioning, timing, and other factors may shape how customers respond.

Review these price-raising tactics to institute a price hike and keep customers happy.

Know the numbers

Understanding profit margin for each individual product — the revenue left over after subtracting expenses associated with producing it — is foundational to determining how much to raise prices. An easy way to calculate profit margin is to subtract "cost of goods sold" from an item's revenue. Cost of goods sold includes the costs directly related to creating and selling something, such as materials, labor, and vendors. It does not include indirect costs like sales, marketing, distribution, and rent. With an accurate profit margin number, it is easier to determine how much you need to raise prices. Seek out expert advice to create expense projections that show the potential impact of cost changes on pricing based on inflation or interest rate shifts.

Research market pricing

Another important aspect of a price increase is competitor prices, because what others charge may impact what buyers are willing to pay. Competitors' prices may be hard to find, but online searches, Google Alerts, salespeople, and even customers may be able to help you piece this information together. With a clear understanding of what others charge, determine where your current prices fall in the market continuum. Look at online reviews and other customer feedback for insight into how customers perceive current pricing. Are you considered a bargain, priced fairly, or premium priced? If your prices are on par with competitors’, evaluate whether the offering's quality or uniqueness justifies a higher price point.

Consider timing

The adage "timing is everything" applies to price hikes, since customers may be more receptive to increases at certain times of the year. For example, service-oriented businesses, such as landscapers or snow removal companies, might institute a price rise at the beginning of the year or season. For other businesses, customers' budget calendars may dictate optimal timing. In either case, offering customers a contract with guaranteed prices for a set period, such as six months or a year, is a way to offer value and help retain more price-sensitive users of a product or service. Avoid focusing only on short-term cash flow increases, since customers may be more receptive to smaller, more-frequent increases than one large hike.

Provide notice

Give your current customers advance notice of an impending price increase, along with a brief explanation of what prompted it. For example, material or labor costs may have gone up, or you might have recently added new features or updated packaging that enhances convenience or value. If only certain products or services will be affected, make this clear so there are no surprises. Be transparent about what the increase will be and when it will go into effect. If applicable, don't forget to update your promotional materials to reflect the updated pricing. Providing notice can help customers adjust their budgets accordingly. It might also give them the opportunity to buy before the price increase kicks in, which could provide a sales boost.

Emphasize company value

As you prepare for price changes, look for opportunities to reinforce what sets your business apart from competitors. Illustrate how you contribute to customer success and the unique value only you provide. If you are not sure what buyers value most, conducting customer interviews can help. The effort may pay off, as emphasizing company value when you boost prices could help maintain customers' loyalty. For example, a catering company might highlight the short turnaround time it requires for orders or its commitment to using environmentally friendly supplies. A technology company may share case studies on how its solutions help users gain operational efficiencies and cost savings. Other potential value might be unique market expertise, access to hard-to-get materials, or good customer service.

Consider alternative pricing structures

If your product or service lends itself to tiered pricing, providing a few options at different price points could pay off. Keep the options simple, such as "basic," "standard," and "premium," and clearly outline what levels of service customers receive at each level. Highlight what benefits customers could receive if they upgraded to a price level, such as dedicated customer service representatives or early access to new products. Consider offering a higher-priced option for buyers who can afford to pay more to get premium service and retaining a standard offering for buyers who cannot, or do not want to, pay the new price. For price-sensitive customers, it might make sense to offer a lower-priced option, such as a pared-down version of a product or service. For example, if you provide corporate training services, you might create a package with fewer sessions or an online-only experience for a lower cost. Budget options can be a way to expand your customer base and retain customers who cannot afford new higher prices.

The bottom line

No matter how big or small a price increase is, communicate to customers that higher prices will help you serve them better. Thank customers for their support and remind them that your company is committed to meeting their needs.

Raising prices may feel like a big step, but it doesn't have to be. With the right planning and communication, it's possible to protect company profits and keep customers loyal.

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