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When should I raise my prices?
Read time : 7 mins Added: 11/01/2024
We are living in challenging economic times, often characterised by rising inflation, unpredictable interest rates and higher business costs.
This can contribute to a feeling of uncertainty and, for some business owners, a lack of confidence about future trading prospects. Keeping your business profitable and resilient can be challenging when costs are increasing. Deciding that you need to raise your prices financially impacts your customers, so it needs careful consideration.
Business owners may be reluctant to raise prices during times when customers are facing large increases in their household bills. Nevertheless, adjusting prices may be essential to making sure sustained profitability or, at the very least, breaking even for continued business operations.
In challenging economic conditions, businesses that understand their market and customers are well placed to increase prices without impacting sales. This article will give you suggestions for how and when to raise your prices and some ideas on how to reduce your costs to stay profitable.
Your market position
Your ability to raise prices and pass your rising costs onto consumers depends to a certain extent on what you are selling. Companies selling essential goods such as; groceries, fuel and healthcare tend to be able to raise their prices in line with inflation. Or at times, above inflation, without adversely impacting the volume of sales. After all, we all need continued access to food and medication. However, if you sell non-essential goods or services, it can be much harder to keep pace with inflation without seeing a reduction in sales volume. So how do you navigate this difficult decision?
In the context of inflation and price rises, there's a general expectation that everyday items and non-essentials might get more expensive. This may give some businesses leeway to raise prices now to offset some of the increased costs of doing business.
It's a good idea to do some competitor research to see what other firms in your industry are doing. You can then decide whether to follow the norm or to take another approach that could differentiate you from your competitors and perhaps even increase your market share.
Current business confidence
When you are considering raising your prices, it can be helpful to benchmark your business confidence against other companies in your sector, region, and the UK overall. The Lloyds Bank Business Barometer report helps businesses to make better decisions by giving them access to UK-wide business sentiment. Subscribe now for this helpful report, market intelligence and insights in your inbox each month.
Alternatives to price increases
Raising your prices can be challenging - many businesses are worried about communicating price increases to their customers. Before you make a price increase, it's worth considering other options that could allow you to manage the problem of your increasing cost of goods, especially if you sell non-essential goods or services.
There are a range of things you can do to save costs including negotiating with suppliers, consolidating premises and reviewing your stocks and fixed assets. Why not get some ideas from our other article on how to save costs. You could also choose to reduce your product or service offering:
- If you make goods, can you reduce the size/weight/volume and keep the price the same?
- If you offer services, can you reduce the package and keep the price the same?
Price increase considerations
If you have reviewed all your costs and you decide you need to increase your prices because there are no more savings to be found, there are a few things to consider to minimise the impact on sales volume.
Ask yourself (or your teams) the following questions:
- How long ago did you raise your prices? If it was recently, your customers may see this as profiteering.
- How do your prices compare to your competitors? If you are already significantly more expensive than your competitors you might find resistance to increases from your customers.
- How are you placed in the market – premium, budget or somewhere in the middle? If you are a market leader with a unique offering, people may have no choice but to stay with you, so you can implement a higher price increase without losing customers.
- How loyal are your customers? Are customers likely to switch away from you if your prices increase? Look at previous promotional activity or price changes to understand likely customer behaviour.
- Which products/services can withstand a price increase? Perhaps some products are currently under-priced and can withstand a larger increase? Maybe some customers are more profitable than others and you need to tread carefully when considering increasing their prices? An across-the-board uplift of 10% might not be the best approach even though it may be easier for you to implement.
- How can you market your products to reduce the psychological impact of the increase? Can you split the cost across several weeks or months to make the headline figure more attractive? Can you focus on discussing the value your product or service brings to the client rather than talking about the price? Use social proof from other customers to help sell your product at the higher price point.
Other preparation for price increases
It’s important to work out how a price increase will affect your cash flow. Create scenarios for different changes in prices and how selling lower volumes would impact you. Look for ways to increase the value of your product or service at the same time as you increase the price to make it more palatable for your customer. This could include giving some bonus content, offering a loyalty scheme, or providing a superior level of customer service.
Make sure all your teams are aware of price changes so that communication to customers is consistent. Have clear policies around bulk discounts, special temporary discounts, or temporary premium services, so that your team can have unambiguous conversations with customers when they are discussing prices.
Communicating price increases to customers
When you have decided on your new price, how will you communicate this to your customers? If you are selling a premium service, you may need to speak to customers individually on the phone, in person, or by personal email whereas if you sell via an outlet, you may not specifically communicate the price increase apart from via the pricing label or on the shelf price. You might send a broadcast email to all your customers if you have memberships or subscribers.
The communication you send to customers telling them about the price increase needs to be clear about which prices are increasing, by how much and why you have taken the decision to raise your prices. Try to have an empathetic tone, recognising that the situation is difficult for all and explaining that you’d prefer not to have to increase prices, but you have exhausted all the other alternatives.
Give customers a contact point in case they have any questions and make sure staff manning the helpdesk have been trained in how to deal with unhappy customers as well as understanding if they have any leeway on prices if customers threaten to leave.
Monitoring the impact of price increases
Once you have increased your prices, it's vital to track any changes this makes to your sales volume and gross revenues. If your price increase causes too large a drop in sales volume, then you may find yourself worse off than before you put up your prices, which is an unsustainable position. By carefully tracking what's happening to demand as the price changes, you can find a price point that optimises sales volumes whilst helping you to cover all your higher costs.
Many businesses shy away from the difficult area of pricing and are reluctant to give customers the 'bad news' that their prices are going up. However, right now is perhaps the best time to bring in new prices given that many consumers are expecting costs to escalate. Pushing your price up now is likely to be more widely accepted as inevitable by your customers, rather than waiting until you have no alternative but to make an increase to survive and finding your customers aren't so receptive.
Passing costs onto consumers is always going to be a difficult decision but sometimes a necessary one. With careful planning, market research and honest communication to your customers, you can raise your prices and reduce the risk of a detrimental impact on your customers, staff and investors.