The United States Bureau of Labor Statistics (BLS) uses a metric called the consumer price index (CPI) to measure inflation, suggesting only buyers are affected by rising prices. The impact on the seller side of the equation is often overlooked. Unfortunately, small businesses, ecommerce sites, and retailers are frequently portrayed as the “bad guys” when consumer prices go up.
Economic principles like supply and demand tell a different story. Supply chain issues are still affecting manufacturing and distribution on a global scale, making it more costly for retailers to buy and stock the products that are sold to consumers. When the seller’s costs go up, consumer prices increase. That’s one of the most basic equations in business management.
Understanding the situation and accepting it are two different mindsets. Consumers know prices will increase due to inflation, but they’re still resistant to it. Small business owners are challenged with figuring out when to raise prices and how to do it without losing customers. Getting those two things right requires a strategic approach. Do you have a plan in place for this?
Tips for strategically raising your prices
A recent report from Umpqua Bank found that small businesses are far more likely than their larger counterparts to increase prices over the next year to offset the impact of inflation and other economic uncertainties. Specifically, the data shows that nearly three quarters (74%) of small businesses anticipate price hikes. Here are a few tips on how to strategically raise prices to help offset inflation.
1. Research your costs and your competitors
Raising prices simply because “everyone else is doing it” is not a sound business strategy. There’s an opportunity in this climate for a competitive advantage if you can cut costs and leave your pricing at its current level. Product sellers may find this to be more difficult because the cost of goods sold (COGS) is a variable you can’t control. Service businesses may have more margin to work with.
Research what your competitors are doing. Try not to focus strictly on price because price wars compress margins and inevitably hurt all parties involved. If you must raise prices, find ways you can add value. Examples of this are extended warranties or bundle packages. Surveying your customers may give you some additional ideas in this area. They’ll appreciate the effort.
2. Create loyalty and incentive programs
Loyalty programs are most effective when customers receive real value in return for their patronage. One way to use a small business loyalty program is to keep prices low for customers who meet certain criteria, like making a minimum number of purchases per month. You could even charge the higher price and then give a percentage back in the form of coupons or retail “points” to redeem for future purchases.
In the ecommerce world, retailers often build automatic discounts into their shopping cart for customers who meet minimum order requirements. This encourages consumers to buy in bulk. Offering an “auto-ship” option for those bulk orders can secure recurring revenue, which is a cost saving mechanism because there’s no marketing or sales costs on a repeat order.
It can take some time and money to get a loyalty or incentive program set up, but you can apply for a business line of credit to help cover those short-term costs and set your business up for long-term success.
3. Be transparent about price changes
Consumers don’t like surprises. Life is complicated enough in this post-pandemic world. Sending a notice announcing the price increase and explaining why you’re doing it helps establish good faith. The message you want to convey is, “We’re all in this together.” Emphasize that you don’t want to raise prices. Economic circumstances dictate that you need an increase to stay in business.
Your notification needs to be professional with a personal touch, so avoid sending impersonal letters that start with “Dear Customer” or something similar. Addressing a customer by their first name adds a personal touch. Acknowledge their concerns about rising prices and explain why they’re necessary. Offer a loyalty or incentive program if you can. In other words, let your customers know that you care and you’re not just bumping up prices needlessly or mindlessly.
4. Have a response plan in place
Someone is going to be unhappy regardless of what you do. Prepare a response for the negative feedback, particularly if it comes on social media. Raising prices in an economy where costs are going up is just part of doing business. Consumers know that, but some will complain about it anyway. Unfortunately, the loudest voices online are often the most negative.
Engaging with your critics on social media fuels the fire and brings attention to their negative comments. State your position with a short response to your customers, not the naysayers. You can do this on your own social media page, on your website, or through emails and other forms of direct communication. Share your response language with employees and management so everyone is on the same page.
Price increases may be inevitable
Accepting the reality of price hikes is just as important for your business as it is for your customers. Price increases may be inevitable if costs continue to rise. Your business may already be at that point. Try to reduce your costs and research what your competitors are doing. Create loyalty and incentive programs if you can. When you raise prices, notify your customers in advance and prepare a company response for any negative feedback you get. Consider all this part of the cost of doing business in 2022.
