Kara Stanford
Strategic Marketing Consultant with over 25 years of experience.
CEO & Founder of The Marketing Spaces.
Kara Stanford
Strategic Marketing Consultant with over 25 years of experience.
CEO & Founder of The Marketing Spaces.
Every year, costs increase therefore, profit margins shrink. The logical thing is to put your prices up to ensure the true costs of running your business are covered and profit is at least retained. But how?
So many small to medium businesses struggle to increase their prices, often out of the real and present fear of losing clients.
“Why is a marketer talking to me about pricing?!”
As I take you through the principles of a price increase for small to medium businesses, the steps you can take to put your prices up and final thoughts to help you, you’ll learn how to increase your prices in a way that results in a minimum negative impact on your bottom line and can actually increase your profits.
The principles of a price increase
Timing is everything
Choose the right time to put your prices up.
It may seem like there is ‘never’ a right time but there are certainly times that are worse than others. Your job is to figure out the least bad time to increase your prices.
This requires really getting into the shoes of your clients and figuring out:
- What is the worst time to announce a price increase?
- What else is happening in their world that you need to avoid clashing with?
- What is the least bad time to announce a price increase?
An example might be your clients, who are firmly fixed on the annual planning cycle. So, from the end of September, they start putting together budgets for the following year.
This means you have to announce your price increases before they do their budgets—or you’ll get the response, ‘That price isn’t in our budget.’
You might sell to customers who have huge financial pressures around Christmas. So, a price increase in October is better than December, when everyone is really scrutinising their spending and might sidestep what you offer.
This is where your Customer Persona should come into play. If you haven’t updated your understanding of your client’s business or financial cycle in a while, then do so now.
So, timing is everything – choose the least bad time for your clients.
Clear communication is key
People need time to get used to an idea. I use an app for my accounts and bookkeeping, and they gave me 3 months’ notice that their prices would be going up.
Here was what they did and how I felt about it:
Email 1. Announcing price increase
I felt annoyed that it was yet another price increase I’m having to foot (so many are happening!) but it’s three months away, so I didn’t need to do anything about it then. It went in my, ‘Think about it later’ bucket.
Email 2. Reminding me the price increase was happening next month
Mild irritation felt but no surprise as I already knew this was coming. I put a date in my diary to do some research to see if I could get a similar service cheaper.
Email 3. Telling me my next bill would have the price increase
I finally researched alternatives. By now, I was pretty much resigned to the fact that there was a price increase coming. I also found out that I could get something cheaper for 18 months but it would be a lot of hassle as I’d have to change bank account, set up a new system, and then be back in the same position of a price increase 18 months later.
Eventually, I reached the conclusion that the price increase was modest compared to the hassle of leaving – and it was hardly a shock that the increase was coming. So, I stayed put.
**
Clearly, this is a simple example of one person choosing an App.
But the lessons we can learn from this are:
- communicate in plenty of time
- keep up the communication
- then execute the price increase.
There is one other lesson here that we’ll explore next: the real cost of researching and choosing an alternative.
Let’s look into this now
Calculate how much hassle it is for them to go elsewhere
There are some markets which are highly competitive and price sensitive – more on how to handle those in a minute. If, however, you’re operating in a less price-sensitive market, this piece of advice is for you: choose a price increase that makes sense for you financially but isn’t worth the trouble for them of moving away from you.
An example of an industry that fails to do this is the Insurance Industry.
Every year we get a quote for our car insurance from our current provider. It often leaps up by £100 to £200. Enough to make us go: how much???
So, every year, my husband does his research and finds a cheaper quote from a competitor. Then he phones our current car insurance provider and says, ‘I am prepared to pay this much’ – he normally gets a price which is only a £50 to £75 increase.
The point is, the price increase is so much that it makes us seriously look at alternatives.
Then, we take up the car insurance company’s time (time = money spent on staff) haggling. I suspect that for a national car insurance company, this is all worth it for the amount of people who just take the new price and think nothing of it.
However, for many smaller organisations who need to charge that higher price to cover costs and retain some profit, we need our clients to accept that price increase.
So, make it a palatable price increase. One where your clients aren’t likely to argue over it because they can see how reasonable it is.
Real example:
One of my Marketing Spaces’ clients was charging £30 per hour for their service. They needed to put their prices up but couldn’t afford to lose any of their customers. The figure that seemed best was £32 per hour. It was a small increase and didn’t tip into the next ‘£5 bracket’.
Overall, this increase gave them 30 hours x £2 = £60 more each week. Enough to cover rising costs.
For their clients, it was a small increase, which they didn’t really want to question as they were happy with the service being offered, knew it was a hassle to replace them, and understood why prices had to go up.
What to do when your audience is highly price-sensitive
Let’s look at how to raise prices when you are in a highly price-sensitive market and your customers are likely to jump to a cheaper competitor.
First, determine exactly how price sensitive they are.
It might seem like price is the key thing, but are there other factors, such as quality, convenience, habit and so on that might come into play. What is also important to them?
For example, we shop at our local Tesco. We know we could save around £10 to £15 on our weekly bill there if we drove to the nearest Aldi or Lidl.
But… that would involve a 40-minute round trip instead of a 5-minute round trip. That involves petrol. We also know that we can’t get certain foods we use a lot at Aldi or Lidl – so we’d have to pop to Tesco anyway. That’s more time spent shopping.
We weighed it all up:
- An extra 35 minutes in the car
- At a cost of £5 in petrol
- And still having to go to the local Tesco, so another 15 minutes (5 mins journey time, 10 mins in the store)
- A total of an extra 45 minutes each week for people who are time-poor.
We decided that, for us, it wasn’t worth it.
And that is why our local Tesco, even though they operate in a price sensitive market, can still put prices up – because convenience and location for many of their customers is so key.
So, what else is important to your customers?
Make sure you retain that aspect and they are more likely to accept a price increase.
A sad thought
This article is for organisations facing modest cost increases that a reasonable price increase would allow them to cover.
It’s sad, but it needs to be said—there are some businesses for whom costs are increasing so much that they cannot raise their prices enough to cover them.
If you are in this unfortunate position, this article isn’t for you. Please get some expert business financial advice.
Steps you can take to increase prices
There are four steps I help clients work through when putting their prices up:
- Plan it
- Determine the price increase and notification period
- Determine your Communications Plan
- Execute your Plan
I’ll take you through each in turn.
Plan
Your Price Increase Plan needs to be a one page overview which has:
- The price increase
- Date it’s from
- When you need to amend paperwork and systems
- What you need to communicate
- When you need to communicate it and who to (if at all).
Here’s how you start to populate this very clear plan.
Determine the price increase and notification period
There are different ways to calculate the price increase needed. I always encourage people to start by considering:
- The true cost of delivering your product/service
- Your market positioning, e.g. cheap and cheerful; good quality; middle of the range
- How much profit do you want to make
- Competitor prices – make sure you are looking at alternatives your clients could choose instead of you and benchmarking yourself against them
- What you think your customers can bear.
All of these things come into play when you raise your prices. Decide on your price increase and put it in your plan.
Make sure you also determine how much notice you need to give existing clients. For future customers, put your prices up immediately. Why? They’ve never paid the current price. Start quoting at the new price now.
When dealing with existing clients and checking contracts, remember to take into account what we discussed in Timing is everything at the beginning of this marketing insight article.
Decide how much notice you’ll give existing clients. Put it in your plan.
Determine your Communications Plan
First, figure out the message you want to share about your price increase. It needs to be short, direct and clear.
The big question is: what is the best way to convey the actual price increase?
As a percentage increase, e.g. only 3%
As a flat amount, e.g. only £1.95 per hour
As a flat amount, e.g. only £10 per item.
Which looks better?
Hourly rate going up from £25 per hour to £30:
- 20% increase
- £5 increase
Product X going up from £50 to £52.50
- 5% increase
- £2.50 increase
Day rate going up from £350 per day to £375
- 7% increase
- £25 per day increase
You need to choose a way of expressing it that makes it look like the smallest increase.
This can then be combined into a short, polite written message that is repeated at least three times (emails, letters, an email with the first invoice with the new price, etc.).
‘Due to increasing costs, we’re raising our prices by £ or % from [insert start date].
This increase allows us to deliver the same [insert level of service you provide e.g. good, high quality, speedy, fantastic] level of service you value and expect from us.
We will remind you again on insert next comms date.
Please don’t hesitate to contact us/me if you have any questions.
Then, decide how much you need to communicate it. This depends on your client base, the notification period, and your company’s current communications style.
I would advise at least two price increase communications directly to the client – one to tell them it is coming at a later date and one to remind them it’s happening in one week/day.
I always tweak this message depending on the relationship with each client.
Execute the Plan
Put your prices up immediately for new clients. For existing clients, put them up on the day you said you would.
Check:
- Your invoices
- Your pricing menu
- Your proposals
- Your Ts and Cs.
Send out the communications to your existing clients, according to your notification period and your plan. Just go ahead with it. Not doing it is worse than doing it.
Final thoughts
What if you don’t put your prices up?
Finally, the big reason to put prices up is what happens to your business if you don’t.
Ultimately, not covering your costs and slowly letting your profit margin erode could result in you not having a business.
When I coach clients who are really struggling to raise their prices, we spend time discussing what happens if they don’t. We look at the different scenarios of their prices staying the same, where their business could be if they don’t make that change, and how they feel about that.
This often provides the last impetus to do the research, make the plan… and put prices up.
Increasing prices is a natural part of running any business and should be part of your ongoing marketing strategy. Done thoughtfully, it should not damage your business but instead strengthen it.
