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You can charge more for goods and services without chasing off business – if you communicate the change with honesty and integrity.
Most businesses hate raising prices because doing so can increase the risk of losing customers, but today’s economy isn’t giving them any choice. Soaring inflation, rising input costs, higher wages — they’re all forcing companies to increase how much they charge for goods and services.
While it might feel a little risky to raise prices, it’s possible to do so without hurting your business. The key is to communicate honestly and act as a trusted partner to your customers.
Most customers realize that suppliers have costs, too, and may occasionally need to raise rates to protect their margins and continue operating.
“If you need to do it, you need to do it,” said Philip King, a cash flow adviser at C2FO and the UK’s former small business commissioner. “You can’t just go on and on absorbing costs.”
Here are five guidelines to keep in mind when you need to announce higher prices.
The first step to raising prices effectively is being “in the know.” You as a business owner should never be surprised about cost increases and why they’re occurring.
“Know your business,” said Kristyn Baker, C2FO’s vice president of procurement and sourcing strategy. “Know all the components of your business so that it never comes as a surprise. And when I say that, I mean all the way down to the plastic wrap, bubble wrap, whatever you’re shipping and your transportation costs, because all of it’s going to ripple through.”
Business owners need to understand why costs are going up, so they can explain the changes to their enterprise customers, who will have to explain it to their superiors.
When you tell customers about a price increase, be specific. It’s not enough to point to general economic trends like inflation or hiring shortages — what’s driving your increase? Did you have to raise wages by 10% to retain your workforce? Have you lost a critical supplier because of a conflict or natural disaster and the replacement charges 20% more?
Buyers will appreciate that level of detail.
“It gives them comfort to say, ‘OK, well, you’re not just loading in ancillary things or things that don’t make sense,’” Baker said.
And be sure to communicate price changes as early as possible. Some large buyers may even have specific rules about when a price increase must be disclosed. Baker’s previous employer, one of the world’s largest retailers, required suppliers to give 60 days’ notice.
Price increases might be inevitable, but suppliers can also look for ways to share the pain or reduce it, King said.
For example, instead of hitting buyers with a 15% price increase all at once, spread it over a couple of months. Prices could rise 10% in the first month and then grow an additional 5% in the second month.
Be sure to ask what they want. Every customer is different, and some might prefer the opposite, Baker said.
Suppliers could also suggest other product solutions. If Ingredient A is 20% more expensive, the supplier might recommend a way to use less of it by adding in a different component.
One of the more dangerous ways to fight a price increase is through “shrinkflation.” That’s when a producer keeps prices the same but shrinks the size of the finished product.
While some consumers might not notice the difference, there is always a risk that it will attract negative news coverage. Several high-profile brands have been featured in stories after shoppers realize they’re receiving less than what they previously paid for.
It might be possible to use shrinkflation as a strategy if it’s communicated openly, especially to your buyers, King said.
“I think it’s the pretense that people recoil at,” he said. “A commercial buyer is no different. If they haven’t been told (about smaller unit sizes), that will have a negative impact on the relationship.”
And be sure to talk with other teams in your organization before announcing a price increase externally. Your colleagues on the finance or technology teams might have ideas for offsetting some of the price increase.
What if your costs are increasing, but you’re locked into agreed-upon pricing with an enterprise buyer?
It can be helpful to explain your situation to your buyers, Baker said. They want to see you succeed and continue operating.
They might not be able to pay more in the short term, but they could offer other help, like placing your product in more stores, agreeing to buy more in the next ordering period, or promoting it more – for example, placing your product on an end-cap.
Unfortunately, sometimes there is no way to lessen the impact of a price increase.
King remembers one particular customer meeting from his time at a computer manufacturer. The company was raising prices and reducing the customer’s payment terms. There was literally no good news to be shared.
So when the meeting started, the sales representative immediately did something that others might have avoided: She told the customer exactly how bad things were and quickly shut down any hope of reversing the changes.
Her strategy worked, King said. Because she was honest about the situation, they were able to spend the rest of the meeting talking about what they could do going forward.
“That’s why I think it’s so important to talk as grownups and have a partnership approach,” King said.
You can raise prices without losing customers if you’re thoughtful about how you announce and implement those increases. Acting as an honest partner — one who shares all the details and looks for solutions — will go a long way toward preserving your customer relationships in what can be a tricky situation.
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