Many small and medium-sized businesses negotiating the current economic climate may be wondering how to raise prices without losing customers. Rising inflation, interest rates and the ongoing effects of the war in Ukraine are having a lasting impact on small businesses with tight profit margins.
Though raising prices may be the obvious solution for businesses, customers are also facing the same squeeze and may be forced to change their spending habits. There are a few strategies you can use to raise prices and stay afloat without driving all of your customers to the competition.
Strategies for Successful Price Rises
According to Eurostat, hourly labour costs in the EU rose by 5.8% in the last quarter of 2022 compared with the same quarter of the previous year. This puts significant pressure on businesses that face increasing costs not only through increased salaries but also due to external factors.
Though increased costs are inevitable in most companies, businesses rarely want to be seen as passing these costs onto consumers. However, when faced with the need to raise prices, there are some steps businesses can take to reduce the impact.
When facing price rises, it’s best to be honest with your customers. This will establish trust. Because consumers are already aware of practices such as price rises and shrinkflation, your business risks alienating customers if it tries to hide price changes that affect them. Furthermore, if your customers suspect you aren’t being honest with them, they may turn to social media to complain. This could lead to a tarnishing of your reputation.
When you feel the need to raise prices due to inflation, increased prices of raw materials, supply chain disruptions or outside political factors such as wars, your customers will probably already be aware of the economic conditions that are affecting your business. In these cases, customers expect price hikes and most will accept them. Inform your customers in advance via a price increase letter that clearly explains the reason for the increase and how it will affect them.
Communicating price increases doesn’t mean giving all the details. Communicate with your clients honestly and clearly but share information only on a need-to-know basis. Relevant information includes the general reason for the price hike, when the price adjustment will take effect and what the new pricing structure will look like.
While you can briefly mention the reason for the price increase, you don’t need to provide too many details. Communications should sound professional and not be over-friendly or make it sound like you’re sorry (see the next point for more on this).
Businesses must be firm but fair and stick to their new prices without apology. When raising prices, it’s also important to raise them for all customers in the same category. It’s not fair to inflict a price change on some customers and not on others.
Businesses that seem apologetic for their higher prices may be seen as unconvinced of the reasoning behind the price hikes or willing to negotiate. If you’re raising your prices to cover increased costs, it’s a reasonable and necessary move. There’s no reason to apologise.
Use Price Hikes to Your Advantage
Transparency is not only the most honest policy, but it also allows you to control the message you send out. Raised prices can even lead to certain benefits for your business if you play your cards right. A price increase announcement could be a great time to announce something extra like improved customer service or a new online storefront.
If your business is struggling with rising costs, it goes without saying that any new features shouldn’t come at a great cost to the business. However, offering customers something they perceive to be a useful addition (such as free gift-wrapping) could soften the blow of higher prices.
Only Charge New Customers the New, Increased Price
Assuring customers that prices will remain the same but charging new customers the increased rate is a tried and tested method to retain customers and make loyal customers feel valued. You can also offer lower prices to clients who sign up for or renew a long contract with your company.
Another strategy is to offer existing customers an additional six or 12 months at the current pricing when you announce the price increase, giving them a grace period to benefit from your current, lower prices. Because managing personalised pricing rates can get complicated, it can be helpful to work with an end-to-end payment processor that can take care of the billing process.
Check the Competition
Check your competitors’ pricing strategy to see if it is in line with your own. Even loyal customers can be enticed by a competitor that offers lower-priced options, and customers will accept the new price more willingly if other businesses have also increased their prices.
Stay in Touch
A strong email campaign can be invaluable when you lose customers after a price increase notice. Keep these customers on your mailing list because their economic circumstances may change or, having tried the competition, they may have a new appreciation for the quality of your product or service.
Businesses that partner with a payment processor that offers merchant services can usually gather customer data to create personalised email campaigns. A simple email with a discount code or another incentive could be enough to help a customer return.
Other Strategies for Small Business Owners to Consider
When companies raise prices, they may have to think outside of the box to come up with ideas for retaining customers. Though some customers won’t accept price increases, there are strategies that small and medium businesses can employ to offset or reduce the damage and maintain customer satisfaction.
Create a Loyalty Program
Many customers can benefit from loyalty programs which can be launched at the same time as a price increase. This type of program isn’t typically costly for the business and encourages and rewards repeat customers. Handling this type of points-based system is easy with a payment processor that keeps all of your customer data in one place and can automate loyalty point accrual on transactions that are processed through your payment gateway.
Apply Price Rises Selectively
It may be advantageous to raise prices on your most popular products or services and leave the rest of your prices untouched. As a business, this will increase revenue and, although it will affect most customers, it won’t affect them all.
For example, a business that sells gourmet food products could raise prices on its 20 best-selling products and leave less popular products at the same price. This price change would reduce losses for the business and may not affect some customers at all.
Offer Packages at Different Price Points
Tiered pricing, or packages or bundles of services in which customers receive more services the more they spend, can work well for small businesses that offer services like cleaning, gardening or maintenance.
Tiered pricing can be a sound business decision as customers will often choose packages instead of buying individual products or services. As a result, they try more of your offerings and may end up spending more in the long run.
The packages you offer need to be well thought out, as pricing a bundle must make financial sense. Creating a viable pricing structure could be key to the feasibility of your business going forward.
Price Increases Are a Balancing Act
When your business faces increased costs and squeezed profit margins, the strategy you use to raise your prices can make a big difference to your reputation and customer loyalty. Because price is the bottom line for so many customers, small and medium businesses must accept that charging more will inevitably have some effect on their customer base.
In times of financial hardship, take stock and see which actions would make the biggest difference to your bottom line. Keeping both your margins and your customers happy is a balancing act. However, if price rises are handled with integrity and care, you can still come out on top.