Editorial · June 16, 2022
Raising Prices: How Small Firms Can Handle Inflation
Raising prices is one of the hardest calls a small firm makes, and the latest numbers show why so many owners are facing it now. On June 10, 2022, the Bureau of Labor Statistics reported that consumer prices rose 8.6 percent over the 12 months ending in May. That is the biggest yearly jump since late 1981.
What the new inflation numbers say
The May report adds up to a clear picture. Prices rose 1.0 percent in May alone, after 0.3 percent in April. Food cost 10.1 percent more than a year earlier. Energy cost 34.6 percent more. Shelter was up 5.5 percent. Even with food and energy left out, prices were up 6.0 percent.
For a small firm, that means the things you buy are costing more. Supplies, fuel, freight and rent can all climb at once. If your prices stay flat, your profit shrinks each month. Waiting is a choice too, and it has a cost.
Source: U.S. Bureau of Labor Statistics, Consumer Price Index news release for May 2022, issued June 10, 2022.
Decide if and when to raise prices
Start with your own numbers, not the headline rate. The national figure is an average. Your costs may have risen more or less. Pull your last twelve months of bills and compare what you paid for your top five inputs. Then work out how much of that you have already absorbed.
Next, look at your competitors. SCORE, the nonprofit small business mentoring group, suggests studying how rivals have changed their prices in the past few years. If everyone in your field has gone up, customers are more ready to accept it. If you would be the only one, you need to offer something others do not.
Finally, pick a date. Do not wait for a perfect moment. Choose a start day far enough ahead that you can warn people, and write it down.
Sources: U.S. Bureau of Labor Statistics, CPI news release, June 10, 2022; SCORE, "How to Raise Prices Without Losing Customers," by Dean L. Swanson, Southeast Minnesota SCORE, June 2017
Be open with your customers
Retail and restaurant firms can often change a menu or a shelf tag without much notice. Service and business-to-business firms cannot. SCORE warns against sneaking an increase into a bill after the fact. Tell people ahead of time.
A good tactic is to reward loyalty. You can let a customer keep the old price for six months or a year if they renew a contract before the new price starts. That gives them a reason to stay and gives you steady income.
Keep the message short. Say what is changing, when it starts, and why. You do not need to share your profit margins. A few plain words about rising costs and what the customer gets in return are enough.
Source: SCORE, "How to Raise Prices Without Losing Customers," by Dean L. Swanson, Southeast Minnesota SCORE, June 2017
Ways to structure the increase
A single across-the-board jump is not your only choice. SCORE lists several other paths, and each fits a different kind of firm.
- Add a fee. If one cost, such as freight or raw materials, is driving the problem, a fee can cover it. But customers will expect the fee to go away if that cost falls.
- Phase it in. Raise prices for a small group first. If they accept it, widen the change.
- Protect current customers. Keep existing customers at today's price for a set time, and charge new ones more.
- Add value. Bundle in a feature that costs you little but means a lot to the buyer, such as longer support hours.
- Raise some prices, not all. Your most popular items drive most of your sales, so a small rise there can matter most.
- Offer a smaller option. A lighter package at the old price lets cost-minded buyers stay.
Source: SCORE, "How to Raise Prices Without Losing Customers," by Dean L. Swanson, Southeast Minnesota SCORE, June 2017
Do not apologize, and expect some losses
SCORE advises against saying sorry. If you sound nervous, customers may try to haggle. Talk about the benefits that come with the new price instead, such as better service or a wider range.
Expect to lose a few customers. Buyers who care only about the lowest price may leave. Many owners find that a higher price also brings in customers who value quality and are willing to pay for it. Track how many stay and how many go in the first three months, and adjust if you need to.
Brief your staff before the news goes out. Everyone who talks to customers should give the same short, calm answer about why prices changed.
Source: SCORE, "How to Raise Prices Without Losing Customers," by Dean L. Swanson, Southeast Minnesota SCORE, June 2017
A simple plan for this month
You can act on all of this in a few steps. First, list your top five costs and how much each has risen in a year. Second, check what your closest competitors charge now. Third, choose one way to structure the change from the list above. Fourth, write a short note to customers with the date and the reason. Fifth, tell your team. Then review the results after three months.
Inflation at 8.6 percent will not feel the same in every trade. Some firms will need to raise prices a little, and some a lot. What matters is that you decide on purpose, use real numbers, and tell your customers plainly before the change, not after it.
Sources: U.S. Bureau of Labor Statistics, CPI news release, June 10, 2022; SCORE, "How to Raise Prices Without Losing Customers," by Dean L. Swanson, Southeast Minnesota SCORE, June 2017