25 April 2024

How to increase prices safely and successfully: a five-step guide for business owners

At a glance

  • Before you increase your selling price, understand your product’s value proposition, market and customer base.
  • Choose pricing strategies such as dynamic or value-based pricing over cost or competitor-based methods to mitigate negative impacts.
  • Communicate price increases transparently to customers, providing reasons and adding value to the product or service to maintain trust and satisfaction.

There’s no avoiding it. In a period of inflation and higher costs of living, most businesses must raise their prices sooner or later. But it’s often not easy to pass on whole cost increases to your customers.

Hiking prices rapidly could impact sales or customer loyalty. There are many factors to balance and, even when you’ve decided how much to put prices up, you’ll need to communicate that and find other ways to sweeten the deal for customers.

Let’s look at five steps to increasing your prices safely and sustainably.

1. Ensure a robust product strategy

Without a solid core strategy around your product, it will be difficult to understand where and how you can raise prices. For example, make sure you understand:

• Your market and most valuable customers
• What makes your business different and competitive
• What customers value about your products and services
• How your brand stands out.

Steve Bird, Business Growth Adviser at consultant Elephants Child, says: “When I take on a client, I ask them what profit they make per product per month, and by customer segment. Often, they don’t know this. But you need to know it before you can start pulling the levers of the business – for example, by focusing on the most profitable customers and conveying value to them. This should help you improve sales and profitability even when costs and prices are rising.”

2. Assess your current pricing strategy

Your current pricing strategy may be based on:

• Cost plus a certain margin
• Competitors’ charges (think petrol companies competing on pump prices)
• Dynamic pricing, flexing charges according to demand (as budget airlines do)
• Value, charging what customers are willing to pay (for example, smartphone brands).

Cost and competitor-based pricing make it harder to hike prices without negative impacts. Dynamic and value-based strategies make it easier.

Steve explains: “With competitive pricing, you won’t succeed unless you find a way to make the product cheaper and/or differentiate from your competitors. Otherwise, you’ll take a hit to margin when costs go up.

“With cost-based pricing, you might react to costs rising 10% by putting prices up 10%. But if you don’t understand why customers are buying, they might move to a competitor. Some products are commoditised, but most have a value attached to them. If you understand that value and can see it’s unrelated to cost and inflationary pressure, you can find ways to handle that pressure more easily.”

There are often ways to use dynamic and value-based pricing, even in commoditised markets.

“I used to have a business selling hooks for solar panels,” says Steve. “These were commoditised, but we added value by telling UK traders these were ‘UK hooks for UK roofs’, and it was better than buying from foreign competitors. We also added a stripe of red paint and attached the brand values to that visual brand. It made a big difference to sales.”

3. Do your research to gauge your price elasticity

Price elasticity of demand is a measure of how a change in price for a product will change the demand for that product. Understanding the price elasticity of your products will help you understand how much a price increase will impact sales, so you can plan accordingly.

Gather customer feedback to get a more granular feel for your customers’ attitude to the prices of your products. For example, run focus groups asking how much more they would be willing to pay for each.;

Then assess other factors that might influence sales, such as availability of substitutes and how necessary your product is to customers. For example, do you provide energy, which is essential, or luxury holidays, which aren’t?

If there appears to be room for movement, test a price rise on a small segment. If it works, roll it out more widely.

4. Consider price-changing options

Before hiking prices, explore all potential ways of doing it. For example, Steve says: “With the hooks business, we knew much of our cost was in warehousing. We started discounting volume sales, so our customers held more stock, not us. Also, these days, many people are willing to pay for deliveries and they understand shipping costs are rising. So, if you don’t already, you could separate postage and packing rather than include it in the price.”

Consider whether you could disaggregate your prices further – for example, in the way budget airlines charge separately for bag size, seating and speedy boarding.

“Some airlines use a combination of pricing strategies,” says Steve. “For example, dynamic pricing changes according to how full the aircraft is. They also segment their market so they know, for example, a family may pay for bigger bags because they’re going on holiday, but business travellers will pay for speedy boarding. None of that relates to the fuel cost – it’s just about demand and finding out who is willing to pay more for which value-added service. Every business should make such decisions, but few do.”

More sophisticated price strategies may require a dedicated person or team to run them, adds Steve. “Some small companies don’t have the time or scale to do that,” he says. “But if you do, it could give you the edge.”

5. Soften the impact

When you put prices up, explain the reasons to your customers. Cheryl Sharp, founder of accountancy firm Pink Pig Financials, says: “You can ease the pain by increasing prices gradually, giving plenty of notice and demonstrating the product’s value. When we made a big price increase, we immediately charged more for new clients, but allowed existing ones to step up over one to two years. We explained why prices increased and used the opportunity to discuss clients’ pricing and whether they should increase their fees too.”

Jake Munday, co-founder of sign maker Custom Neon, says: “Passing on higher costs requires a considered and strategic approach that respects customers, maintains product integrity and ensures business longevity. Without explanation, it can seem underhand and leave a sour taste. Being upfront with customers about the reasons behind increases – whether it’s rising material costs or improved product features – builds trust and understanding.”

Custom Neon also enhances product value alongside price increases whenever possible, so customers feel they’re getting more. This might include additional features, improved customer service, complimentary add-ons or faster delivery.

Whatever your strategy, hiking prices is an important move, so it’s critical to understand your wider business and personal financial-planning goals. To discuss your situation, contact us today.

SJP Approved 11/04/2024

By Matthew Forbes