If you’ve read a financial news article lately, or just even shopped at the grocery store, you’d notice that prices are increasing. On everything. We’re at the highest inflation rates since 1991. The Consumer Price Index is up 6.2%. The Producer Price Index (the wholesale market) rose 8.6%. A few months ago, we wrote about raising prices, and the communication and mindset challenges that go along with it. And hopefully, you were able to successfully raise your prices without too much drama.
This isn’t over, though. It’s time to look at raising your prices again, and doing an honest analysis of the cost of doing business. Here’s some considerations for business owners, particularly small(er) business owners:
THE 5 WAYS
One of the cornerstones of ActionCOACH is a business financial tool called the 5 ways. It’s a super powerful way to grow your business, and there are hundreds of strategies that your coach can review with you. There’s a quick overview of the 5 ways here. One of the 5 ways to grow your profits is to get a handle on, and increase, your margin. Your margin is the percent of the revenue that you take home, after all direct expenses, salaries, and cost of goods is deducted. In the 5 ways calculator, it’s the final step to determine what you actually put in your pocket (or reinvest in the business) after all expenses are paid.
When looking at your pricing, if you’d like to keep your margin the same, and your costs have gone up, then the only way to make that happen is to raise prices. In a lot of cases our clients have had wages go up as they compete in the marketplace to recruit the best in their industries. If you don’t raise your prices, then the margins go down, and the profits in turn go down. All major decisions, this one included, need to be made with data, not emotion. Chances are, with most business owners that we talk to and work with every day, a price increase is the only option when you look at it with data.
NEW CLIENTS vs. EXISTING CLIENTS
One strategy to raise prices is to look at raising your prices for only new clients, while keeping existing clients the same. This strategy doesn’t work in all businesses, like for example retail stores or restaurants. You can’t charge one customer one price for a widget, and another customer another price. You can, however, offer loyalty programs that give frequent customers special coupons or discounts.
But raising prices for new customers works for a lot of industries, like medical & veterinary, service-based businesses like professional services, and more. New customers are rarely going to know what existing customers are paying, so it’s a natural way to make up some of those increased costs. A watchout here is to make sure that you have enough information, and enough proof that you’re worth it, to justify being above the market. All this takes is a little marketing – determining the proper target markets, and giving enough social proof that your product and service is superior. After all, if you having the cheapest price is the only differentiator between your product/service and your competitors, then your business is not going to grow.
PRICE INCREASE MINDSET
This price increase, unlike the last one that we encouraged 6 months ago, might be a little harder to take for the employees and especially the business owner. Communication is the key. Allow your team to understand enough of the financials that they have buy-in to the new pricing structure. Be sure that they beliefs and values are not holding them back from selling your product at a higher price. Again, looking at this price increase through data rather than emotion is key.
As far as the customer communication, the vast majority of businesses don’t have to communicate the price increases at all. Construction, remodeling, and trades businesses are generally quoted on a job-by-job basis, which is going to be communicated to the consumer at the time of estimate. Medical and veterinary pricing is set at the time of service, and there’s going to be a rare customer that notices that price increase. Don’t sweat it.
For those that are in an industry that would require communication to the customer, keep it short and sweet. Take the emotion out of it and start with genuine gratitude. Communicate that in order to provide the same outstanding service, a small price increase is needed. Inflation, Consumer Prices, and Producer Prices are now a topic in everyday life that we haven’t had to think about for 20 years. Chances are, they’re going to be expecting it.
Price increases used to be an annual conversation, if they were discussed at all, but we recommend that this become a semi-annual or even quarterly discussion with the way inflation is going right now. Keep providing excellent service, keep telling the story of your awesome business, keep the lines of communication open, and your profits will reflect that hard work.
Is it time to raise your prices in your small business? Do you need a strategy for how to raise prices in your small business? Are your employees struggling to communicate the price increase? We can help. Schedule your FREE, no-obligation business analysis today.