Supply chain shortages. Inflation (which grew in May at an annualized rate of 5%). Higher wages to fill job openings (up in April and May at an annualized rate of 7.4%). Higher prices at the pump (gas prices rose 49.6% compared with last year). All of these factors and more combine to require many small businesses to raise their prices at this time. How you do it may go a long way in retaining customers. (The following is adapted from a blog several years ago.)
Concerns about raising prices
Naturally, you fear that raising prices will reduce demand. You need to determine the impact of elasticity on your pricing. This term means: the “measure of responsiveness of demand and supply of a good or service to an increase or decrease in its price.”
Some goods and services have more elasticity. For example, the use of professional services may decline when prices are increased. Conversely, some goods and services are inelastic, with demand continuing despite price increases (e.g., gasoline at the pump, utility costs).
Where do your goods or services fall on the elasticity scale? This is something you should determine so you know how much flexibility you have in raising prices.
Ways to raise prices
There’s no set formula or strategy for raising prices. You have to determine what works best for your situation.
Consider the following factors:
As you look ahead to 2022, what cost increases do you face, and how much? SHRM projects wage increases to be about 3%. Obviously, to maintain your profit margin you need to have your prices keep pace with increases in your expenses. Also consider new or added costs (e.g., COVID-19-related costs; supply chain disruptions triggering higher prices; offering free shipping instead of charging for it).
You don’t want to price yourself out of the market by charging more than your competitors for the same goods or services. If you offer more, you can charge more. Also, you need to keep your marketing proposition in mind, meaning whether you promote your business as luxury or high-end or at the other extreme as thrift conscious.
There is no law that you have to charge the same price to all customers. You may want to continue current prices for existing customers, but charge higher prices for new customers. Or you may want to retain prices for customers doing a certain level of business with you (in effect a discount for them), while hiking prices for other customers.
How often you raise prices depends on what your business offers. Fees for services may not increase as frequently as retail and restaurant charges. For example, HelpScout, a customer-service platform, keeps prices unchanged for existing customers for at least 2 years. Some businesses like to make price changes at the beginning of the year, while others do it whenever they deem a change to be necessary. Another strategy suggests making gradual increases on a regular basis. However, doing this may be more difficult to explain to customers than infrequent price hikes.
Notice to customers
Do you want to give customers a heads up about coming price increases? Do you prefer to silently raise prices? Harvard Business Review suggests that you explain to customers why you’re raising prices. HBR said “the perceived fairness of the motive for it is the second-biggest driver of how customers react.” HBR suggests that you don’t use a euphemism, such as a “price adjustment”; be straight with customers that it’s a price increase.
English stateman Harold Wilson said: “One man’s wage increase is another man’s price increase.” You need to take rising wages and all other factors into account in your pricing…and do your analysis now.