Should I increase my prices due to inflation?

With inflation still high, getting your pricing right has never been so important. You need to protect your profit margins and livelihood from the increases in raw materials, cost of living, wage demands and wage increases due to the National Living Wage increase coming in April 2024. Even if inflation does meet it’s target of 4%, it is still 4% not 0% meaning costs are still increasing.

Many of us resist increasing prices because we worry about the reaction it will have with our customers. What if we come up against stiff resistance from customers? Or what if they take their business elsewhere? What if they are less accommodating because inflation is decreasing now?

In reality however, price increases are still happening everywhere due to the increase pressure on businesses and are something you should be forecasting and reviewing every single year. We’ve had some interesting conversations with clients over the past few months regarding pricing and whilst many didn’t think it to be right to increase prices earlier in 2021, many businesses are facing increased costs now which will have to be passed on to their customers in order to stay afloat.

We’ve found that many of our clients fall into three categories:

Customer Perception: The Coronavirus crisis has given owner-managers the time and space to work ON their business and evaluate their pricing structure to realise they haven’t been charging enough for years. Many haven’t increased their prices since the economic crash of 2008 for fear of “upsetting” customers and losing business
Increased Demand: The demand for some services has increased and therefore consumers will be willing to pay just that little bit extra to make up for the closure of your business through the restrictions
Increasing Costs: You’re spending longer on procedures due to the continued ever-changing rules on how you operate, meaning your prices need to reflect that
Setting prices can be as complex or as simple as you make it. Below we explain a formula that can help you increase your pricing without upsetting your customers.

Setting prices can be as complex or as simple as you make it. Below we explain a formula that can help you increase your pricing without upsetting your customers.

A simple method to increasing prices

The simplest method is to apply an inflationary increase to your prices. An increase of between 1 to 3% can often prove palatable to customers and can have a bigger impact on your profitability than you might assume.

A McKinsey study found that a simple 1% increase in pricing can potentially deliver an 8% increase in net profits. If such a commercial strategy is adhered to year on year the effect compounds and renders the business in a far healthier and wealthier state.
A little thought is needed as opposed to a blanket increase across the board. The products and services delivered require filtering to isolate those to which an increase can apply. Similarly, customers and their sectors require a little assessment to identify those to which an increase can be justified.

If your business increases prices a little every year, then it not only means you can keep pace with inflation but it also means you don’t fear those price increases each year because not only are your customers used to it but you are too – it becomes a normal in your organisation.

Inertia

If you have not increased prices by an inflationary amount in recent years, then it can cause difficulty because your regular customers are not expecting the increase. The communication with your clients and customers has to be clear and requires preparation to minimise debates and ensure a successful outcome.

The point to bear in mind is that your customers and competitors face the same challenges and some of them will be, or should be, contemplating a similar strategy. This can help in how you communicate to your customers as you will need to be prepared to explain the reasons behind your price increase, and no one should be embarrassed to stand by such a decision. Ultimately a

business has to make money otherwise it would be called a charity.
If you have a policy of incremental price increases each year, then your customer base will be used to this policy and a consistent and fair approach to pricing will remove some of the inertia felt in comparison to a business that is nervous about its pricing.

Ultimately if you don’t review your pricing each year then you are inadvertently giving your customers a price cut each year (in what is called “Real Terms”) but your customers won’t realise it or give you credit for it.

Increasing prices with inflation

Increasing your prices by a small percentage may have a positive effect on your business’s profitability but consider what the impact is if you do not increase your prices? With inflation increasing, the cost of materials and overheads and the cost of living are increasing, which then impacts the salaries you pay your team. And of course, you as a business owner don’t want to be working harder and harder each year for the same (or less!) money each year, you want to feel growth in your income too.

In the lead up to Christmas 2016, we wrote a brief article about the complexities of inflation and pricing, and how the published rates of inflation might actually not be the same as the inflation your business experiences. Inflation in your industry could be even higher! To read more see our article: What we can learn from Toblerone.

If your business’s largest cost is the people it employs then your business will be experiencing inflation higher than the 4.2% than the headline average inflation calculated by the Bank of England. Some sources are saying that inflation in the wages market is as high as 7% in some sectors. It also means that if your prices are not increasing then the chances are that next year the profits of the business will decrease.

If, in a year’s time, your business’s profits are down, and you didn’t increase prices now will you have the courage to say it was your error to not increase prices to meet the rising costs? How will you then tackle the declining profits for the year ahead at that point? Difficult decisions only get harder the longer you hold them off.

Adopting the 1 – 3% approach requires courage to get started but a strong initial decisions results in easier processes for the future.

In the current climate is a 1-3% increase enough?

Do you need advice on your pricing strategy? Or maybe you haven’t even thought about it until now?

Take the time now to reflect on your pricing and if it needs an increase to ensure your expenses don’t outweigh your profits. And talk to us. Pricing is a section of our A4G Breakthrough Recovery Programme. We can help review your pricing and commercial approaches to achieve a more profitable and secure future for your business.

Email discovery@a4g-llp.co.uk or call 01474 853 856 to find out more.

Review your pricing now