When you run a business, there are two key ways to increase profits: reduce your costs, or increase your revenue. One of the most efficient ways to increase revenue is to increase your prices.
But for many small business owners, the decision to raise prices presents a number of questions. How much is an acceptable price increase? Will increasing prices lead to a decrease in unit sales? Will the news push loyal customers to buy from a competitor instead? It’s common to worry that raising prices could do more harm than good.
However, it is often not a matter of choice. If your direct costs go up, you risk losing money if your prices don't increase to match.
“Often, companies set prices and don’t change them for years, even though costs have gone up, even if it’s just through inflation,” says Damian Connolly, managing director at Sakura Business, an advisory firm for SMEs. “Just increasing prices in line with inflation can help your cash flow.”
With the right pricing strategy, you can make price increases work for you. Consider the following steps as part of your process:
1. Explore your expenses, and be open with your customers
Connolly advises looking at all costs involved in delivering a product or service, including administrative costs, packaging, and shipping.
When calculating how much to increase prices, Connolly recommends looking at what increase will deliver your target profit margin, while also referring to inflation – your price increase should be at least the same as the current inflation rate.
Meanwhile, the right communication can help customers to understand the need for a price increase. Nadia Hamila runs Amboora, an online store selling authentic foods from Tunisia and Morocco. When the world went into lockdown, shipping prices increased, and sourcing products became more expensive. As a result, Amboora raised product prices by a little over 10 per cent.
Hamila used Instagram Stories to share videos taken in the street markets of North Africa, giving customers the opportunity to see first-hand how products are sourced. “It helped people to see the genuine roots of our product, and it helped that our videos also captured atmosphere and colour,” explains Hamila. “While people were in lockdown, it was almost like the feeling of being on holiday.”
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2. Choose the right time to increase prices
You can raise prices whenever you need to, but if you’re waiting for the right moment, there are at least two scenarios that could signal an appropriate time.
Scenario #1: When your business changes
SMEs can often seem more visible than larger organisations as they typically have closer, more direct relationships with their customers. It can therefore be helpful to have a tangible ‘reason’ for increasing prices, such as a move to new premises, or the launch of a new e-commerce site. This helps to persuade customers that the price increase is not random or opportunistic.
Scenario #2: When the world changes
The past year is one such example, but there are other situations that could necessitate a price increase. Take, for instance, fuel prices increasing when you’re a delivery service. In August, the ONS (Office for National Statistics) revealed that there had been a 3.2 per cent increase in the cost of living from the start of the year. Much of this increase was driven by an increase in UK fuel prices during the same period [1]. The resultant higher transport and shipping costs for businesses were being passed on to customers.
Customers are likely to understand that wider changes like these have an impact on your business, especially if you clearly explain the reasons for the price jump on your website, on signage in your store, or in marketing materials.
3. Use marketing strategies
There are other simple marketing strategies that can reduce the risk of customers responding negatively to a price increase.
Hold a sale for loyal customers before raising prices
Connolly recommends offering your best customers access to a special discount before raising prices. This allows customers who are price-sensitive to "lock in" purchases at the existing price, which can drive long-term brand loyalty. If customers make additional purchases during this sale period this move will also boost your company’s cash flow.
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Offer a subscription or a discount for volume/long-term purchases
Another way to take the sting out of a price increase is to offer an incentive for customers to commit to a long-term contract or volume discount. For example, your business could increase prices by 8 per cent, but offer a 5 per cent discount for customers who commit to a 12-month contract, or who spend over a certain amount, says Connolly.
At Amboora, Hamila offset her price increase — and improved sales —by offering discounts to customers who purchased a bundle of three products. “We’ve actually seen an increase in sales since introducing that discount,” Hamila says.
Raise the quality of your product or services
If you need to raise prices due to increased costs, it could be worth looking at other ways that you can improve quality that could seem more tangible to your customer.
For example, if you own a restaurant and the building rent is increasing, you could consider buying higher quality beef and marketing this as an improvement to your product, while increasing prices to accommodate both additional costs.
Add a new perk
Or don’t change the product or service, but instead add a new flourish. Customers might need to pay more, but perhaps you can offer free shipping?
Raising prices successfully takes a lot of forethought, but you’ll be better off for it if you think things through. The last thing you want to do is aim low with your prices, only to realise later that you have to raise them even more — that could drive customers away or start to turn them against you.
And that's too high a price for any business to pay.
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