Raising your prices to meet inflation: How and when to do it

Rising inflation is taking a toll on business owners. According to the Bureau of Labor Statistics, the Consumer Price Index (CPI) for all items rose 8.3% from April 2021 to April 2022, just slightly down from its record increase in March 2022. 

It’s no wonder, then, that 64% of small businesses surveyed in CBIZ’s Main Street Index for Q1 2022 said inflation is their biggest concern. 

If your business has suffered from the effects of inflation, either with tighter cash flow, fewer customers, or lower revenue, you may need to raise your prices (again). CBIZ’s survey found that 70% of small businesses are increasing their prices to deal with inflation, with 36% of those raising prices between 4-10% and 19% going above a 10% increase.  

Raising your prices can help you compensate for higher business expenses, but it also comes with concerns, chief of which is putting off loyal customers. Ultimately, though, if you don’t find a way to offset your extra business costs during this inflated economy, your income will be going down considerably. 

If you’re planning an upcoming price hike—either for the first or second or third time—here’s what you need to consider. 

When should you raise your prices?

Even when the economy is steady, many businesses raise their prices each year to stay competitive and account for gradual increases in inflation. Here are some good signs it’s time to make a change: 

• Your finances are taking a serious hit—with no sign of improvement: If you’re strapped for cash to maintain regular operations and you’ve already exhausted every option—like cutting expenses or taking a personal pay cut—you might need to raise your prices.  
• Your employees need more financial security: If you need to give your employees a pay bump or commuting stipend to help support them through the tough economic conditions right now, you may need to raise your prices for customers. 
• You haven’t raised your prices in a while: If you haven’t raised prices in six months to a year, it’s probably time to reconsider your numbers. 
• Your customers have stayed loyal: If the majority of your customers have continued to support your business even with their wallets stretched, you’re in a good position to increase prices. You can gauge customer loyalty by looking at your customer retention rate, customer reviews, and net promoter scores. 
• You’ve gained a significant amount of new customers in the past year: If you’ve recently acquired more customers than what’s typical for your business, raising your prices may not disrupt your sales or revenue. 
• Your vendors have raised their costs: If your inventory or production costs have gone up, you may need to raise your prices to compensate. 
• You’ve added new value to your products or services: If you’ve enhanced your products and services, or if you’ve improved your customer service or shopping experience significantly, you can more easily justify a price increase. 
• You’re drowning in work: If you’re struggling to meet customer demand efficiently, it may be time to raise your prices so you can hire help or invest in new tools to streamline your operations. 
• Your competitors are all charging much more: If the competition is outpacing you and you currently offer the lowest prices in your market, it might be time to bring prices back up. 
• You dominate the market: If your business has a hold on the market either because of your unique offering or location, you may be able to raise your prices without losing a lot of customers. 

The bottom line: there’s no perfect time to raise your prices, but there are lots of valid reasons to do it. If you want to increase prices to stay afloat financially or bring more value to your customers or employees, go for it. 

How to raise your prices

Once you’ve decided to change your pricing structure, you need to figure out the most effective—and least disruptive—way to implement the change. Here are four steps to take: 

1. Gather data

The first step is to gather data so you can make an informed decision about which products or services to raise prices on. Here are some strategies to try: 

• Conduct market research: Look at your competitors’ pricing structures, review the latest consumer shopping habits, and read up on your industry’s news and trends. 
• Review customer feedback: Send an email survey to your customers, or just review your recent online reviews and net promoter scores to gauge how people are feeling. Even if no one mentions prices, you can still learn which products or services people love the most and what they appreciate—or dislike—about your customer service. 
• Analyze sales: Using your point-of-sale system or inventory management software, check out your recent sales volume and patterns. Perusing the numbers can show you which products or services customers gravitate to and which ones people don’t take advantage of; from there, you can compare the different price points. 

2. Crunch the numbers

The next step is to take a fine-tooth comb to your finances to determine how much to raise your prices by. You want to find out what’s necessary (what’s the minimum price increase you have to make to offset costs?), what’s advantageous (what type of price increase has the potential to help you get ahead?), and what’s urgent (when do you need to raise prices?). 

It’s helpful to meet with your business accountant to review your financial documents and crunch some numbers, but here are the main factors you need to consider: 

• Profit and loss statement: Review your revenue or sales from the past year to see how steady it’s been and how much has dipped. 
• Cash flow: Review your cash flow statement and cash flow forecasts to find out how much money you have coming in over the next several months—and whether or not you’ll be in a cash crunch. 
• Cost of goods sold (COGS): Recalculate your COGS to find out how increased shipping, materials, and production expenses have affected your profit margins.

Once you have a better idea of the numbers at play, you can mull over your options for executing the price change. There are lots of possibilities. You can do a one-time price increase across the board, do a series of gradual price increases over several months, increase the price on your highest-volume product only, or roll out new products and services at higher prices. 

If you’re a service-based business or have a subscription model, you can also raise prices not by upping the cost of your offerings, but by introducing or increasing fees. Whatever your plan, make sure your finances and market data support your approach. 

3. Figure out how to appease customers

A critical part of increasing your prices is figuring out how to satisfy your customers in the process—or at least not upset them. The best approach is to make decisions with empathy, putting yourself in your customers’ shoes to ensure you’re accounting for their needs. Here are a handful of strategies to try:

• Increase options: Give your customers more choices. Try offering a wider variety of products or services, or giving customers the choice of bundling offerings for a higher price. 
• Add value: Beyond improving your products or services, you can also try giving a free gift with certain purchases, offering free or discounted shipping, extending warranties, and revamping your customer rewards program.  
• Step up customer service: Brainstorm ways to take better care of your customers. You could extend your store hours, for example, lengthen your product return timelines, streamline your online checkout process, give customers multiple payment options, make digital communication easier, or improve your in-store shopping experience.
• Adjust your marketing strategy: You may need to update your value propositions or reframe your product messaging to appeal to customers on a different level. 
• Be transparent: Unless your price changes are nominal, it’s a good idea to let customers know about them ahead of time. Keep your communication transparent and empathetic. Thank customers for their business, let them know what to expect in terms of pricing and why, answer any questions they might have, and reiterate the value you strive to bring with your products or services. 

4. Measure the results and keep evolving 

Tracking the results of your price increase is key to making smart decisions going forward. Beyond measuring your sales and customer retention rates, work on keeping detailed records of your price changes and implementation strategies, so you can review what works and what doesn’t. 

It’s also helpful to pay attention to industry news, stay up to date with your competitors, and stay connected with your customers. How they respond to your price change will inform everything from future pricing to customer service and marketing plans. 

Other strategies to minimize the effects of inflation

Raising your prices is one of the most effective long-term strategies for dealing with inflation, but there are also other ways to get ahead of inflation. Here are just three:

1. Invest in technology: Technology that makes day-to-day tasks and operations more efficient can save you money and time. Think: customer relationship management software or AI-powered chatbots. 
2. Make creative adjustments: Try narrowing your list of services or eliminating low-selling products. You could also cut back on expensive business activities that don’t have a high ROI, like throwing store events. 
3. Get a business loan: It may seem counter-intuitive, but taking on a reasonable amount of debt can give your business the boost it needs. Getting a business loan to reinvest back into your business can help you reach more customers and generate more revenue.

Our Funding Circle business term loans have predictable monthly payments, affordable interest rates, and fast turnaround times, so you can make the moves that support your business’s growth. Learn more about our loan or apply today.

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