Did you hear the news from last week’s inflation report?
Consumer prices increased more than 5% between May 2020 and May 2021.
Given the Federal Reserve’s 2% inflation target, that’s a pretty steep increase.
Have you taken a look at your own cost of doing business lately? Your cost of labor, materials, supplies? Chances are, those are all going up, meaning it’s time to raise your prices, too.
But how do you actually go about doing that without nuking your Hampton Roads business? Let’s dive in.
Steve Kallam’s Tips for How to Raise Your Prices Properly
“Do not let what you cannot do interfere with what you can do.” -John Wooden
When you’re the one out purchasing goods and services as a consumer, you obviously want to pay the lowest price you can for the desired quality. But as a Hampton Roads business owner, the reality is that you need to charge high enough prices to cover all of your costs, plus generate a profit. Simply put, the raw materials and labor it takes to produce a specific result in your business cost money, and that can lead to difficult conversations and difficult decisions regarding your own pricing.
Maybe it’s just me, but it seems like there was a different attitude about price increases a generation ago. Not only did customers expect prices to go up over time, it was often a great marketing tactic to let customers and clients lock in pricing for a period of time.
Today though, consumers have become conditioned to look for lower prices. Many years of low inflation, combined with the ability to research pricing and quality online, have combined to make price increases seemingly more difficult to implement without sparking outcry from customers.
So, how do you go about this? The first thing to do is understand where your pricing structure already is and, from that information, determine where it really should be.
How to Raise Your Prices Tip #1: It’s Not a Level Playing Field
By far, the biggest worry for companies in respect to price is the cost of goods sold. How much does it actually cost you to provide the solution your company provides to customers?
More and more items can now be considered a commodity, and value-conscious buyers often have access to a greater number of similar products and services than ever before. Understanding how labor and material costs impact your bottom line is a critical first step in arriving at any price increase – but it’s not the only step.
Increased competition is a major factor in what prices you can charge. For example, a small town hardware store two generations ago might have had little – if any – competition. Today, most Americans are within an hour drive of a big box home improvement store, not to mention the fact that much of what they need will come directly to their home with a few mouse clicks. This increased competition creates downward pressure on prices.
But at the same time, like we’re seeing more recently, other factors can drive increases in price. Labor costs across the country are increasing. Supply chain disruptions are increasing the cost of raw materials.
It’s important for you to study what’s going on in your own industry. Take a look at benchmarking studies published by trade organizations in your industry, as well as research reports and analytics published by various consulting companies. We can help you locate this kind of data if this is completely new to you, so don’t hesitate to ask us for help on this.
Once you have the data about various price pressure factors, and how those factors are trending into the future, you’ll be able to stay a step ahead on forecasting your cost of doing business. This makes it easier for you to set future prices, and spread out price increases to minimize sudden shock to your customers.
How to Raise Your Prices Tip #2: Overcoming the Objection
Ultimately, though, no matter how well you understand the market for your products and services, the fact of the matter is that, yes, you have to raise your prices.
Here’s what tends to surprise business owners: In many cases, your highest-value customers will have little, if any, objection to the actual increase. These customers are smart cookies, and they know that prices rise over time. They understand that inflation is a reality, and they understand that you need to raise your prices to stay in business.
Most of the time, the only vigorous objections will come from your less profitable, higher maintenance clients – likely the same ones that frustrate you already and don’t value your services. It’s at this point that you can make a decision as to whether to retain these customers, or use the price increase as an opportunity to free up space for better customers. How’s that for a change in perspective?
How to Raise Your Prices Tip #3: Managing the Message
Once you’ve determined you need to raise pricing, it’s critically important you and your team can effectively share that message far in advance. Sales teams should be talking about price changes in their regular conversations with existing customers. Not only should they be saying a price change is coming, but they should also be transparent about the factors driving the increase. Maybe even going so far as to make suggestions to clients on how to mitigate the costs in the short term (if applicable to your particular products/services).
More than anything else, everybody on your team needs to present a united front when it comes to raising your prices. If you have a sales team, they can’t simply blame “the head office” for the price increase. They need to be able to articulate why prices are going up. Again, transparency is the winning formula here.
Additionally, your team needs to be ready for ongoing follow-up with customers in order to ensure that there aren’t any perceived changes in the quality of your products or services.
You want to assure your customers that your commitment to them is the same, no matter the price. Ultimately, raising your prices is a painless process if you do so in baby steps and your team effectively communicates the price changes.
More than anything else, remember that price increases are simply part of running a business for a long period of time. This isn’t taboo, and customers usually prefer that you’re upfront and honest about such things.
To help determine the best prices for you to charge for your products and services, it can be helpful to look over a detailed breakdown of the costs you incur in running your Hampton Roads business, along with industry benchmarks and cost trends. To schedule a time for such an analysis, book a time here:
To getting things done,
Virginia Accounting Services