Inflation has risen at its highest rate in three decades. Prices are surging for many goods and services, resulting in a lot of discussion and analysis about the financial strain on the consumer. But let’s face it, businesses are also struggling with rising costs of their own. Organizations are paying more than ever across all aspects of their operations; labor shortages are forcing higher wages, pandemic-driven consumer demand for online purchases has disrupted supply chains and shipping logistics, and production costs have skyrocketed due to a surge in price for raw materials and energy.
And while many businesses have had no issues raising their prices to accommodate this new economic reality, others are still struggling with doing so. In fact, “should I raise my prices?” or “will the business still be OK if I raise my prices a little bit?” have recently become the top questions posed to our advisors. Company owners and leadership teams, especially in the middle market, are increasingly expressing fear and uncertainty about making this crucial decision. Some are concerned with losing customers or clients. Others are convinced they can simply lower operating costs, often to the detriment of product and service quality. And some just don’t have a full grasp of their financial situation, which has hindered their ability to understand how to best address the problem.
So what is the answer?
To do what’s right for your business AND your customer in today’s economic climate, the answer is an unequivocal, yes. Companies should raise their prices and do it now. It is irresponsible as an owner, entrepreneur, or business leader to ignore the necessity of adaptation in unprecedented times.
“It is irresponsible as an owner, entrepreneur, or business leader to ignore the necessity of adaptation in unprecedented times.”
However, deciding to raise prices does not come without its share of challenges. How you choose to raise prices is of extreme importance if you want to avoid alienating your customer.
But, before we explore how best to tackle this problem, consider the following to help ease any lingering doubt:
- Prices for businesses are up 8% over the past year and these costs are predicted to rise even more, which means an even bigger hit to your bottom line. Especially considering that the average profit margin for businesses across all industries is 7.7%.
- Increasing prices is easier than decreasing operational costs. If you opt to cut too many corners, it puts undue pressure on your already taxed staff and may ultimately result in an erosion of your product or service.
- Your competitors are raising their prices. Across every industry, we are seeing price hikes. Whirlpool, Unilever, ConAgra, McDonald’s, Harley Davidson, and Hasbro, just to name a few, have not only openly discussed their need to raise prices, but have seen enormous success as a result. It made good business sense for them to do so, and the gamble has paid off.
- Your customers (mostly) are unphased by these price hikes (for now). Consumer spending is still high, driven by the $2.3 trillion in savings amassed during the pandemic, paired with rising wages and stimulus checks. Not to mention, if you have a great product or service that people want or need, consumers are willing to pay more for it. The consumers that aren’t, are likely not the loyalists needed to keep your business thriving in the future anyway. But keep in mind, your window to raise prices is shrinking. Customers aren’t going to be as accepting as they are now forever, especially if the effects of the pandemic continue to wane.
“Customers aren’t going to be as accepting as they are now forever, especially if the effects of the pandemic continue to wane.”
Hopefully, by now, we have provided you with enough evidence to show that raising prices is the right decision for your business, your employees, and yourself, but how you do so is of great importance. Let’s dive into how you can stay responsible to your business and your bottom line without scaring off your customers:
This doesn’t mean you need to explain to your customers in detail how you came to this decision (though some companies have done this very successfully), or the ins and outs of your operating costs, but it does mean that you shouldn’t try to bury or otherwise disguise your price increases. Companies that attempt to hide hikes as hidden fees, surcharges, or taxes, typically aren’t well received. You may have also heard of the “shrinkflation” trend, where businesses are keeping prices the same but delivering less of or a lower quality product. We don’t recommend this approach. It’s best to be upfront about the price and what the customer is getting for that price. If your product or service provides value, they will stick around. Not a single one of our members who have chosen to raise prices, and did so openly and honestly, have had any pushback from their customers.
Don’t get too greedy.
Yes, a successful business needs a healthy gross profit and a steady increase in gross margins over time, but in our current economic situation, raising prices too much could backfire depending on your industry. Consumers are hyper-aware of what is happening and are willing to accept this new reality, but only up to a point. What the “bridge too far” is, depends on your product, your category, and your customer, but a good rule of thumb is to think about what your gross profit was before your overhead began to rise. Increase prices for your products as a way to supplement your losses and get you back to where you were at the height of your success.
Leverage customer insights.
Don’t forget to tap into all that great customer insight that you (hopefully) have gathered over the lifetime of your business. This will help you understand how to keep your repeat customers happy despite the price hike. For example, if your customers have grown accustomed to free shipping and have cited that as a key reason they keep coming back to you, then suddenly charging for shipping may not be the best solution for recouping your costs. Or, maybe you’ve identified a subset of highly loyal customers that make monthly purchases. Would they be willing to opt-in for a monthly subscription for a slight discount helping to reduce some of their costs while giving you a steady stream of guaranteed revenue? The key is to think of the customer first. When in doubt, ask. Send out a survey or questionnaire to gather even more insight to help you make the right decision. Check out a recent blog post by our CEO and Co-Founder Terry Dry on more tips on how to make your organization ‘Customer Obsessed.’
Focus on what you do best – making a great product or providing a great service!
Consumers are willing to pay more for the goods and services they love and/or need as long as the perceived value does not wane. Once you raise prices, it will be more important than ever to ensure that the quality they’ve come to expect does not in any way falter. This goes beyond just the product or service itself to also include ensuring customer service and experience remain top-notch. Give your consumer zero reasons to think that a price increase comes with a decrease in quality. This should also factor into how much you decide to raise prices. Consider what improvements you may need to make to the overall customer experience to keep them satisfied, happy, and returning.
“Give your consumer zero reasons to think that a price increase comes with a decrease in quality.”
Whether or not to raise prices is a decision every business has to make at some point, regardless of economic conditions. It is an essential part of the evolution of any growing organization. But today, right now, at this moment, there should be no hesitation. Business owners, entrepreneurs, and leadership teams must overcome their apprehension. Your competitors are raising prices. Your customers are accepting of it. The economy is demanding it. As long as you are armed with the proper financial analysis, customer insights, and a great product, you will not only weather the storm but thrive despite it. To become future-proof, a business must embrace change and swiftly adapt to whatever lies ahead. As we like to say, “Inevitable Change = Limitless Opportunity.”
Need some advice on how to navigate this tough decision? Reach out to us at firstname.lastname@example.org.