f you’ve felt the effects of inflation and a changing economy this year, you aren’t alone. With higher prices across the board, it is challenging to know how your business should react and adjust its price structure. If you increase your prices too much, you risk losing valuable customers. On the other hand, if you don't make adjustments, your profit margin will suffer.
A solid understanding of your business and when and how to adjust prices will help you stay competitive (and profitable) while keeping loyal customers.
Inflation Trends In 2022
Consumers everywhere are feeling the pressure of rising costs, which comes on the heels of a global pandemic that households and businesses are still trying to recover from. Higher prices have bombarded American wallets at the gas pump, the grocery store, and everywhere in between.
The U.S. Bureau of Labor Statistics recently released the latest consumer price index (CPI) data. The CPI is a broad measuring tool of prices for goods and services in the U.S. The data released showed that in April 2022, the CPI had increased 8.3% over the previous 12 months.
Food prices increased 10.8% over the previous 12 months, the most significant 12-month increase since 1980.
Consumers aren't the only ones affected by inflation. In fact, almost nine out of ten small business owners have felt the effects of inflation this year. According to the Bank of America 2022 Small Business Owner Report, 88% of business owners say inflation is impacting their businesses. Of business owners surveyed, only 31% were confident the national economy would improve, and only 39% were confident that their local economy would improve.
When Should You Increase Prices?
Determining when and how much to increase your prices isn't always easy. You may be facing cost increases that affect your bottom line, and you may have to create a new pricing strategy in order to maintain healthy profit margins for your business.
Remember: Raising prices without fully considering when and by how much could hurt your business in the long run, so it’s essential to take a well-thought-out approach. The right pricing strategy comes from an understanding of your business’s individual performance and needs, as well as an understanding of the market.
Review Your Business Budget
You may find that you can increase your profit margin without simply relying on raised prices. While a price increase is typically the only way to keep up with inflation, you might be able to absorb some costs and adjust your business budget for inflation.
Consider Consumer Demand, Seasonality, and Competitors
Try to understand your business in the context of the market. Your business’s performance and consumer demand play a huge role in pricing efforts. Raising your prices is often more successful if your products or services are in demand.
Don't forget about your competitors, either. Knowing where your competitors price their products or services and when they tend to raise or lower their prices can help determine the correct course of action. You can monitor competitor prices manually (it’s easier if you offer a niche product or service), but you may have more success with a competitor price monitoring software, particularly if you own an ecommerce business.
Seasonality can also influence your pricing strategy. If you raise your prices when consumers are typically hit harder financially, usually around holidays or tax time, you may face more pushback from your customers than during other times of the year.
How To Adjust Your Prices For Inflation
If you're considering raising your prices to account for inflation, create an overall pricing strategy instead of constantly reacting to the increased cost of goods or economic conditions. You can approach price hikes with careful planning – without simply marking everything up. Adjusting prices may also depend on your type of business. Product-based businesses have unique challenges that may differ from service-based businesses.
Raising Prices for Goods
Adjusting prices on goods is typically a response to cost increases on your end. As the cost of goods increases from vendors and services, many businesses pass the extra cost on to customers. However, customers can shop around and find comparable products at lower prices. Unless you can prove that your quality product is the best option, you may receive pushback from current customers. Even then, your customer may not have the means to accept higher prices even if your competitors are also raising prices.
Some strategies that can help you as you determine pricing strategies for your products include:
- Lower other prices: Consider lowering the price of other products or services to compensate for the increased cost of select products.
- Provide options: Create alternative versions of the same product at higher or lower price points. Consider a "good, better, best" strategy with some of your products to allow customers to choose their price point.
- Evaluate pricing continuously: Your pricing strategy shouldn't always be reactionary. In order to take a proactive approach to pricing, your business should analyze price points on products year-round. Doing so allows you to catch when a particular product's price is too low. Pricing your products correctly to begin with can make it easier to navigate economic uncertainty or inflation.
Raising Prices for Services
If you’re a service provider, it's generally more challenging to put a tangible value on your business’s offerings. What may seem like a fair price to you may be too much for your ideal customer base. Research the market and your competitors to see what they offer and how they price their services. Then, analyze your company offerings to see how they compare. Adjust your pricing accordingly. Some other options that can offer relief to your customers include:
- Offer multiple service packages: Consider expanding your services to offer basic and premium services at varying price points.
- Bundle pricing: Offer discounts to customers who purchase multiple services from you.
- Include additional services: Consider adding free services to existing service options to make price increases easier to swallow.
Tips For Communicating Price Increases To Customers
Consumers never want to pay more for items or services than they pay now. If anything, they want to see prices decrease, not increase, over time. While price increases are often necessary, communicating pricing changes upfront can help you maintain a good relationship with your customers. Here are three considerations as you adjust prices to the goods or services you offer.
Communicate Changes With Your Staff
Your employees will be on the front lines receiving customer feedback whenever there's a price increase. Take time to communicate changes with them and present guidelines and suggestions for communicating with customers. Often, the best advice is to listen to your customers as they share concerns.
The best policy for communicating pricing changes is to be direct with your customer base. That could mean releasing marketing materials that discuss upcoming changes and their reasoning. It could be as simple as sending out an email or letter explaining the changes to your existing customer base. Face-to-face communication might be necessary when adjusting prices depending on your business structure or clientele.
Share Information In Advance
Consumers don't like making a purchase only to get surprised by recent price hikes. Let your customers know in advance when you make changes. Doing so gives them time to assess their situation and budget for changes.
Sometimes, you may need to adjust your policies and pricing or offer other solutions to satisfy essential clients. If not, you could risk losing loyal customers.
Making a Plan
There’s no question that balancing customer needs and business needs is difficult. Take an honest look at your business, including costs, profits, upcoming goals or hurdles, and the current economic conditions.
Do your research to determine the best time to raise your prices and by how much. Make a plan to share any price hikes with your customers early enough that they can budget for any changes. And finally, be proactive: evaluate pricing throughout the year. It also doesn’t hurt to look for ways to save money on your end, including switching suppliers, reducing inventory, and adjusting lead times – as long as you don’t compromise the quality of the products or services you sell.
This page is for informational purposes only and is not intended to be relied upon as legal, financial, or accounting advice. Please consult your own professional if you have any questions.