Uncertainty is the only certainty, and the indications are that we are heading for a huge period of economic uncertainty and possible recession.
As costs are increasing, profit margins are shrinking – the logical thing is to put your prices up to ensure costs are covered and some profit retained.
But how? How can an organisation increase its prices when it seems so many budgets are being cut and clients saying, ‘I can’t afford this’.
Let’s look at how to increase your prices when recession looms.
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. 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 are firmly fixed to the annual planning cycle. So, from the end of September they are starting to put together budgets for the following year.
This means you have to announce your price increases before they do their budgets – or the response you’ll get is, ‘That price isn’t in our budget’.
It might be you 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 spend and might sidestep what you offer.
Lots of DIY and home improvement companies eg kitchen suppliers do their annual price increase in October as people are trying to get projects finished before they start their Christmas spend.
So, timing is everything – choose the least bad time for your segments.
Clear communication is key
People need time to get used to an idea. I use the App Xero for accounts and book-keeping, 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 am 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: 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 did some research of 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 would have to change bank account, set up a new system, and then be back in the same position 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.
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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 in here that we’ll explore next: the real cost of researching and choosing an alternative.
Let’s look into this now.
How much hassle is it for them to go elsewhere?
There are some markets which are highly competitive and price sensitive – more on how to handle next. If, however, you are 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 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 one. One where your clients aren’t likely to argue over it because they can see how reasonable it is.
For example: A member of The Marketing Spaces was charging £17.50 per hour for their social media service. They needed to put their prices up but couldn’t afford to lose any of their customers. The figure that seemed best was £19.50 per hour. It was a small increase and didn’t tip into being over £20.
Overall, this increase gave them 20 hours x £2 = £40 more each week. Enough to cover rising energy bill costs. For their three clients it was a small increase that none of them actually even questioned.
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. Which is also really 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 at a time we are cutting down on 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 30 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.
What the alternative means to your business
Finally, the big reason to put prices up even at a time of recession is what happens to your business if you don’t. Ultimately, not covering your costs could lead to you not having a business.
To conclude
I’m going to end on a sad note, but it needs to be said – there are some businesses for whom costs are increasing so much that they cannot put their prices up enough to cover them. This article isn’t for you. It is for organisations who are facing modest increases in costs that a reasonable price increase would allow them to cover.
If you are in this sad position, then reach out to The Marketing Spaces community on our members only LinkedIn Group (you just need to be a free member to join the Group) and join us on a Coffee Break – our community is great at sharing practical, realistic ideas.
If you’re able to increase your prices to cover costs, then you may also want to watch our Insights video, New Year, New Prices: Why and how to put your prices up. This gives you a step by step guide to how to plan and put your prices up.
