As a revenue-generation tool, price raises can be a handy implement—a slight bump can happen almost instantly, and if it’s successful, can bolster a company’s bottom line.
But for many small business owners, the decision to increase the prices comes with many questions: How much should the price be raised? Will the increase in revenue offset any decrease in unit sales? Will the news inspire loyal customers to consider buying from competitors? Uneasy answers to these questions can cause small business to worry whether an increase will do more harm than good.
However, sometimes business owners have little choice but to embrace an increase, says Stephen Light. Light is the co-owner and chief marketing officer of Nolah Sleep, a mattress and sleep accessories company in Greenwood Village, Colorado. In 2016, the cost of toluene diisocyanate, a chemical compound that the company uses to produce their polyurethane foams, increased by nearly double.
It was a complete surprise, according to Light.
"Back then, I had no idea the world was experiencing a shortage until the price of the raw material increased," he says. "I had to force myself to think about the situation rationally."
For Light, that meant raising his prices.
Just because you have to raise your prices, however, it doesn't mean it must be done without a strategy. If you’re looking to raise prices, consider the following steps as part of your process.
1. Talk to your Chief Financial Officer or accountant and your customers
A first good step is to confer with your numbers people as well as your customers. Light suggests going over numbers in categories such as raw materials, logistics, outsourced work costs and marketing and advertising, among other variable and fixed expenses with your finance team. Another good step is to speak with a handful of customers that you good relationships and ask them to weigh in on your decision to possibly raise prices.
Roberta Perry, founder and president of ScrubzBody Skin Care Products, consults with her vice president of production.
"I might even ask questions in my business group of professional makers Indie Business Network," she adds. "Then I will ask a few cherished customers."
Perry will talk to those customers about how they feel about the rising prices. Generally, the reaction is positive, she says.
2. Coordinate the timing of raising prices.
You can raise prices whenever you need to, but if you’re waiting for the right moment, some business owners suggest
Scenario #1. Raise prices when something is changing in the company.
Perry says that small businesses sometimes suffer from “raising price-itis” more than larger companies.
“We are more visible," Perry explains. “We have more direct connections with our customers, so when the price changes, it is noticed more. For this reason, I have always done it at specific times in our growth, like when we moved to a new shop. Or when a new product was being introduced. This way, it never feels random or opportunistic.”
But what if you have to raise your prices at a time when you aren't making a change with your business? How should you clarify the jump in prices to your patrons?
The right type of marketing can make consumers have the mindset of, "You know, this product or service is so great, I don't mind paying high prices.
Perry reminds her customers of the value of owning her skin care products (for example, they're handcrafted and not mass produced). The goal when explaining higher prices and reminding everyone of her products' value, Perry says, is to make it so that her customers "are willing to pay a little more. They understand they are buying something special."
(Of course, if you're selling something mass produced and cheap, and you have to raise the price, instead, you may have to emphasize how your product or service is still low, compared to your competitors.)
Scenario #2. Raise prices when the world is changing.
The pandemic is one such example, but there are other situations that necessitate a price increase. Take, for instance, gas prices increasing when you’re a delivery service. Customers are likely to understand that that changes the math for you, especially if you explain the reasons for the price jump. You can do that on your website, in signage in your store and in marketing materials.
3. Use marketing to help with raising prices.
The right type of marketing can make consumers have the mindset of, "You know, this product or service is so great, I don't mind paying high prices."
Create an influencer marketing program.
Brands, Light says, "should partner with influencers and reputable people to review their products to boost their perception of the product’s quality. Once the market’s perceived value increases, companies can safely increase the price, and consumers will still buy the product."
Hold a sale before raising prices.
Perry once ran an “Almost Changing Prices Sale” a few days before she raised her prices.
“Customers like the transparency and it gave them a chance to stock up once more at the regular and sale prices,” Perry says.
Customers bought a lot of products while being made aware of the upcoming price increase, Perry's business had an influx of cash and everybody went away happy.
Offer a subscription or a discount for loyal buyers.
To avoid higher prices, some customers may be willing to spend even more, if you give them a discount for being regulars.
Think of the restaurant that offers rewards for spending a certain threshold, or the companies that offer a cheaper subscription if you pay for a full year instead of monthly. Those discounts don't take away from the fact that you're raised your prices, but it can take the sting out of it for a customer.
Raise the quality of your product or services with your prices.
If you own a restaurant, and buying a hamburger is going to be more expensive for your customers, you could start buying a better type of beef from your supplier. That will cause the burgers to be even pricier, but if they’re better burgers, your customers may not mind in the least.
Add a new perk.
Or don’t change the product or service—but add a new flourish. Yes, now you have to pay more, but you’ll receive 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 lowball your prices only to realize 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.
Read more articles on cash flow.
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