One of the main reasons businesses are struggling during the cost of living crisis is because they don’t always understand how to calculate a price increase and how to communicate it effectively to their customers. This video looks at the best way to get this done so you can maintain your profits and your team.
The correct way to increase your prices and maintain your profits
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Something that is so important in helping businesses effectively navigate their cost of living crisis is what I talk about in this video. One of the things that you have noticed about the cost of living crisis is, obviously it’s increasing the cost of living for everyday citizens. But, for business owners it’s increasing the cost base. What happens is your costs go up and your prices stay the same then your profits will decrease. So, as an owner that’s bad for you if you’re going to be working the same hours or maybe even harder just to get paid less for it, resulting you in having to pay your team less. You’re employees will likely leave or have a drop in performance; that’s a worst case scenario really.
There’s quite often one solution, you can always try and save the costs, but what I want to discuss is another option. Let’s say you’ve been running a business efficiently anyway, then reducing your costs isn’t really an option. But, you’re probably in a lot of pressure to pay your staff more because of their disposable incomes decreasing. Essentially, the only other way a business can deal with this is by putting their prices up. It’s important to know how to approach a price increase with your customers otherwise it can pose a very real risk for your business. On the other side, if you don’t do it at all, your business will probably fail anyway because you just won’t be able to retain the staff, get paid what you’re worth and you’re going to end up with a serious challenge. It’s risky but you’ve got to do it in this economic climate.
Three thing that we need to think about when we’re pushing for a price increase. Firstly, what is the price increase? How are you going to calculate that? If you look at the costs of retail price index and it’s saying it’s at 9% at the moment and then next year it could be 10% does that mean that you just put a flat 9% increase throughout all your customer base and increase the prices that way? Or is there a better way to calculate it? Because, let’s remember, the retail price index is the economy as a whole but there’s certain sections of the economy where, essentially it may not have inflated by 9% and there’ll be other areas of the economy which have inflated by more than 9%.
So, you’ve got to have a really good understanding of what the inflation actually means for your own business, not the economy as a whole. Whenever you’re doing a price increase, you have to work on the basis that you’re probably not going to be able to do another one for around a year. It’s best not to react to what’s currently going on, you’ve got to think further ahead. This is an opportunity to think about what your competitors are doing; if you’ve got people in the industry who are charging double what you are, delivering the same thing, it’s still worth going in and getting paid what you’re worth, based on what everyone else in the industry’s getting. Inflation drives price increases partly, but so do your competitors and that’s definitely worth thinking about. That’s the first thing – how much to increase your prices by.
The second thing you really got to think about is how much of a notice are you going to give people? Depending on the kind of business you run, it might just be the next time the customer comes in. Or there might be a notice next to the price list saying: ‘Next month the prices are going to go up but at the moment they’re steady.’ Or, you might give them a longer notice, it depends on your industry. Sometimes, you don’t need one at all.
The third thing is how you communicate it. Like I mentioned, you might decide to leave a note next to your prices in your shop. But if you’re running more of a service based business, if you’ve got subscriptions, then what you really need to do is send out some sort of letter on email. You should mention why you are doing it while being really honest. The most important thing about your communication is not to have different prices for different customers. Make sure all your customers are on the same price for that type of service because people do talk and if there’s different pricing for each person, it can create resentment and distrust in your relationship with those customers. It’s that honest communication in the right kind of way. As always, you’ve got to invite people to have a discussion with you if they do to talk about it.
In conclusion, when increasing your prices you have to think about how to maintain your profits by keeping in mind the communication method, how much you’re increasing it by and how much of a notice you’re giving your customers. Getting those things right, the chances are you’ll probably still lose customers, but not as many as you think. there’s nothing wrong with having a slightly smaller business that makes more profit and charges a bit more. So you can’t be afraid of losing that volume.