Increasing prices is one of those business decisions that most small business owners would rather not think about. We worry about customer backlash or customers taking their business elsewhere. Some owners even wonder about the fairness of price increases.
But with the recent increase in inflation, raising prices is an issue business owners can no longer ignore. Cost increases reduce business profitability. Lower profits means less cash to pay bills. So let’s talk about the process of raising prices and how to approach that in a way that leads to successful outcomes for your business.
First of all, consumers are not universally opposed to price increases, they just want to know they are being treated fairly. For example, consumers have learned that when oil prices rise so will gasoline prices. If those gasoline prices do not rise there will be a shortage of gasoline, so given the alternatives, consumers would rather pay the higher prices than do without gasoline. This is a choice of self-interest, so there is a sense of fairness in the choice which the consumer understands.
Using that example as guidance, let’s look at a three-step process for successfully raising prices in your small business:
Step 1) Justification. To set the stage for the price increase we need to offer reasons for the increase that provide easy to understand data for consumer consideration. For example, “employee costs have increased”, or “raw material costs have increased 6% in the last year”, or “transportation costs have doubled since last year”. Ideally, consumers have heard stories in the news about all these issues so that our recitation of these same issues, personalized for our circumstances, make sense to them. Not only are we providing data to the consumer but we are also giving them an opportunity to feel some empathy for what we are dealing with. That can have a powerful psychological effect when consumers see gasoline prices increasing every time they fill their gas tank or experience rising grocery prices.
Step 2) Sell the Value of the Increase. Now that we have the consumer’s attention and perhaps their empathy, we now need to communicate why the increase is in their best interest. Remember, in the gasoline example, consumers know why the increase is in their best interest; no price increase, no gasoline.
To sell the value of our price increase to the consumer, we need to understand the value we sell them on a daily basis. Is it Convenience? Quality service? Unique products? Delicious food? Entertainment? Whatever it is, we can communicate the value of the increase with a promise statement.
“This increase will allow us to continue to provide the exceptional service you have come to expect from us”
“With this increase, we will continue serving the delicious entrees that you have come to enjoy at our establishment”
“Our commitment to quality service which you have come to expect from us, will be maintained by this increase so that we can remain your first choice in service providers”
The promise statement should be constructed to demonstrate why the increase is in the consumer’s best interest.
Step 3) Hold Firm. Some consumers will question the price increase or complain about it. This can be good news because they are seeking confirmation of fairness, they are not necessarily looking to walk away. Their objections can be handled by modelling empathy for their feelings and then referring back to the Justification for the increase and the Value of the increase. By standing firm in our response, we make the case for the intrinsic fairness of the increase.
The success of this method ultimately depends on the value our business provides to our customers. If the nature of our business meets compelling customer needs, solves compelling customer problems, and provides an exceptional customer experience, only the most price sensitive customers will walk away from us!
Want to learn more about improving or growing your business? At the North Idaho College’s Small Business Development Center our mission is to help your business thrive and grow. We offer classes, webinars, and business coaching at no charge to you.
• To take your business to the next level, call us at 208-665-5085 or visit North Idaho SBDC at nisbdc.com.
• Check out Training & Webinars at NISBDC.com/trainings-workshops/
• Meet with a Business Coach
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Warren Mueller is in his sixth year as an SBDC Business Coach. He spent 25 years in international business development in the defense contracting and specialty chemical industries. He is also a consultant in Strategic Pricing and Pricing Management. In 2014, he published a book on Strategic Planning for small businesses and nonprofits.