Throughout some of the recent conversations I’ve been having with other business owners here in South Auckland, I’ve noticed one topic that seems to be on everybody’s radar – price increases.
Now I’m not talking about the price increases we’ve seen for everyday commodities – although that certainly plays a role in all of this. What I’m talking about is business owners debating whether or not to pass the impacts of our current economical state by raising their own prices (whether that be for goods or services) – and thereby passing these impacts onto their customers.
I don’t think I need to sit here and tell any business owner that margins are tough right now. You’re living and breathing this day in and day out. And it’s not just one factor driving these tougher margins, it’s a combination.
You’ve got increasing inflation – which, based on the figures released by Consumer Price Index (CPI) recently, has blown out to a 31-year high of 6.9% for the March Quarter. While the Reserve Bank initially estimated that inflation would peak at 6.6% in the March quarter and stay above 3% in the June quarter, these estimates were given prior to the current war in Ukraine. In light of this, ANZ economists have now predicted that it will peak at 7.4% in the June quarter.
This is naturally having a massive impact on the cost of living. Not only are things you need for your business increasing in price, but this cost of living pressure is also leading to wage inflation. Owners are needing to pay employees more in light of the increase in the cost of living – and in this tight labour market is only driving this wage inflation up higher, with less talent meaning employers are having to do more to recruit and retain staff.
Then you’ve got rising interest rates impacting working capital. As interest rates increase, the amount you have to pay back for your current liabilities (i.e., debt) increases – which, in turn, decreases the working capital available for your business. Having adequate working capital is crucial for business success (a well-run business should aim to have 3 months of working capital) – so if you can’t decrease your liabilities, you need to find some way to increase your current assets instead.
It’s a lot. It’s a lot to think about it, it’s a lot to manage, and it’s a lot to try and solve on your own.
Historically, SME business owners have been hesitant to pass any cost increases onto their customers, out of the fear that this may break their customers’ trust – and lead to their attrition.
This fear seems to come from the well-intentioned idea that, as an SME business owner, your pricing strategy needs to be to match the lowest-price competitor in your market – i.e., the only way to win business is to be the cheapest. But this is a misguided misconception – by competing on price alone, you encourage your customers to only view your product/service as a commodity (and potentially, of worse quality than your competitors), which obscures the real value of what you offer. Which impacts your profitability.
Getting your price right is a balancing act – you don’t want to go too low for the reasons mentioned above, but you also don’t want to go too high. And when customers challenge you on your price, it can be easy to default to offering a discount or a special in order to win their business – but this may not be the best strategy. Instead, what it presents is an opportunity to handle your customer’s objection, educate them on the real value you are providing, and what pain points of theirs you will be able to solve.
In a situation like the one where we are in now, where raising your prices feels like an inevitable eventuality, there are a number of steps you can take in order to ensure you’re not at risk of alienating your customers:
- Check your costs – if you’re worried about losing customers by raising prices, giving your current costs a once over to see if there’s any room for improvement (i.e., switching electricity providers) could be your first step. You may still need to increase costs after doing so, but it may be to a lesser degree.
- Stagger increases – if you have multiple products or service offerings, you may want to stagger their price increases over time, instead of all at once.
- Communicate with your customers – in this economy, a lot of people are going to be incredibly understanding that prices need to go up (I know I didn’t bat an eye at my coffee going up by 30 cents!). As long as you are being transparent about any price increases, your customers will likely be incredibly understanding.
- Continue to deliver great customer experiences – this, after all, is what will keep your customers coming back.
If you’re thinking about raising your prices but aren’t sure how to get started, the first thing I would recommend doing is figuring out what your business objective is (if you’re not already clear on it) – is it maximising profits, increasing or maintaining your market share, or something else? You can then use a tool like this break-even calculator to figure out the minimum income you need to stay in business, and then adjust your prices in order to meet that requirement while factoring in your business objective.