Wondering How to Raise Prices Without Losing Customers?
The Consumer Price Index (CPI) rose 4.7% (on a year-over-year basis) in October 2021. This was the largest gain since February 2003. Inflation is generally driven by higher prices for day-to-day basics, such as rent/home prices, food, and transportation costs. Prices are rising and affecting us all to some degree, depending on our circumstances. And the rough climb seems nowhere near done. We’re seeing an economic chain reaction affecting (nearly) everyone in the country. And small businesses are really feeling the sting, and are wondering how to raise prices without losing customers.
Many large corporations and even whole industries, routinely raise prices without telling their customers. This happens most frequently in consumer packaged goods.. It’s common for large multinationals to reduce quantities while maintaining the same price. This increases the per-unit amount paid by shoppers but keeps the package price unchanged.
The last thing most small business owners want to do is raise their prices, but when they face rising costs due to crazy inflation, there’s not much wiggle room. According to an October survey, members of the Canadian Federation of Independent Business (CFIB) the planned price increase for next year has reached another all-time high at 4.3 per cent. The increasing cost of doing business (74 per cent), supply chain challenges (63 per cent), labour shortages (54 per cent) and inflation (53 per cent) are the top concerns for small business owners.
Under-the-radar hikes just aren’t possible for services or products sold by a Sale of Goods contracts or a subscription model. In these cases, the news (that prices have increased) must be communicated to customers before the next billing cycle comes around. If done wrong, the news causes customer complaints, negative Google reviews, or even losing customers.
Tell Customers Why
To soften customer resentment, there are a few actions you should take when communicating a price increase to your customers or clients. These are backed by consumer psychology evidence and the experiences of UpSide and our clients.
Call the action a price increase, don’t term it an “updated price” or “adjusted price”. It’s fairly common practice to see this though because managers and small business owners are reluctant to tell customers they are raising prices. But, euphemistic messaging very rarely pays off and actually erodes relationships with loyal customers. Honesty and authenticity matter to customers, especially for the bad news. It makes people suspicious and critical of the information provided.
Research shows that after the amount of the increase, the perceived fairness of the motive is important to people. With the continuation of the pandemic, supply chain issues, and labour shortages, there’s a general expectation of inflation. Under circumstances, like we’re seeing now when customers learn that a business’s prices are increasing, it just confirms their expectations. Make the effort to write a short and straightforward explanation for why your business is raising prices. Don’t fool yourself with that “cheaper is better” narrative. It’s shortsighted thinking and leads to more problems down the road.
The most effective price increase communications are customer-centric, as they give a credible explanation for the price increase that resonates with core customers. This works even when higher prices are due to an increase in input costs. In this case, tell your customers that you can only continue to provide the current level of service/benefits if you raise prices and that you are choosing to do so rather than lower the quality. Convey this information to your customers or clients the way you’re most comfortable doing it. Call your most loyal clients personally, put a sign on your website, email your customers list through an email marketing app to track who opens, and/or include a message on your latest invoice.
Align yourself with the people who believe in you and do your best to lessen the sting. If you know your suppliers’ rates will be going up soon, suggest to your customers that they purchase or pre-pay now to lock in today’s prices. Or you may even want to provide a small discount for prepayment creating a win-win scenario.
Unfortunately, we never know when there’s going to be another calamity around the corner, like the natural disasters in British Columbia or the widespread power outage in the Northeast that was due to an alarm system’s software bug. The best thing we can do is to prepare and plan ahead for potential issues. There are benefits to planning ahead for significant events.
If you’re experiencing gaps in cash flow, there’s the possibility of financing cash flow, which would help you meet those operational expenditures. Invoice financing is a short-term (usually up to 90 days) loan that is borrowed against outstanding receivables. A business receives a next-day cash advance for invoices that clients are due to pay. It’s a great option when you have gaps in cash flow and want help managing your monthly fixed costs. Many small businesses have a hard time covering expensive materials while waiting for the money to come in, and that’s where invoice financing companies like FundThrough come in. Their Velocity Invoice Financing is a Canadian working capital solution, as it allows small business owners to access funds tied up in outstanding receivables. Bottom line, it gives you control and the choice of when you get paid instead of waiting for that ‘cheque in the mail’.
Every business needs certain things in order to function and these supplies can add up quickly. Small businesses tend to pay more for stuff because they lack the volume of large corporations. Consider joining a group purchasing organization to get you the best deals on the things you need for your business. Across Canada, there are numerous formal, local and regional co-operative purchasing arrangements, known as Regional Purchasing Co-Ops. Sector Group Purchasing Organizations, or Sector GPOS, also have a long history in Canada in both the public and private sectors.
Hurting the Bottom Line
If inflation is hurting your business’s bottom line, you probably need to raise prices.
Don’t try to be cheaper than all of your competitors. Remember, at the end of the day you still need to pay employees, be paid for your own work, and still make a profit. Just remember to tell customers why ahead of time with a short and straightforward explanation. You don’t want to wait and surprise people with new prices suddenly. Move forward by thinking and planning ahead. This could include invoice financing and a group purchasing organization.