In the life of freelancers, as we master our craft more and more, it is sensible to increase our rates to match our skill level. But doing it in a way that doesn’t damage your relationship with customers – and your sales revenue – is a true art.
Small businesses have to find a way of maintaining or increasing the profit margins on what they’re selling. But simply passing on all of your rising costs to the customer is very risky – it’ll quickly put people off. Instead, you’ll need a considered, data-led, well-communicated strategy that looks to maintain long-term value for your business.
In a recent survey of US business owners by financial services brand Kabbage, respondents reported increasing prices by an average of 21% across all industries; nearly one in five businesses were planning on raising prices above the rate of inflation. This is a critical business decision that’ll impact every area of your operations – plus your future survival and growth.
It should however be noted that price increases should be part of a multifaceted approach. Simply increasing the price you sell at isn’t the only method of looking after your profit margins – and it shouldn’t be your first thought. For many business owners, it should be a last resort and certainly part of a wider strategy. That could include minimising the amount of inventory you hold; looking for more favourable payment terms from suppliers; embracing pricing strategies like product bundling; reimagining your product design (eg, shrinkflation); or getting creative with new product lines. You should aim to cut costs while increasing revenue. It’s also worth checking if you’re losing profits through overuse of discounts and offers.
It is also super important to analyse everything your business sells and your total product profitability to understand the impact that your changes will have before you increase your prices. Don’t be too narrow in your focus – a strong understanding of your profit margins across all your products or services will mean you can bring in different pricing strategies for individual products with confidence in what’ll happen to your wider business’ profitability.
Honestly, we can’t stress enough how preparation is key. Price increases will have a knock-on effect across your whole business, and in areas you might not have considered. That could range from marketing strategy and promotional materials to the training needed for your sales team, to customer service and feedback or staff morale and motivation. You’ll need to consider and plan for all the areas that’ll be affected.
Another big thing to consider is how you will communicate this new increase in price with your clients and all other stakeholders, for that matter – including your employees. The right communication strategy, implemented well before any price increase occurs, can even result in an uptick in sales if done right.
Before informing them of an increase, consider the strength of your business’ position. Are you confident that customers are satisfied with your current offering? Are you receiving positive feedback? This is an inexact science, but it would be a brave move to raise prices when your product or service isn’t strong. Look at historical data – if you’ve raised prices in the past, what impact did it have on your sales and revenue? Do you have any products that are in high demand or often sell out?
Next, consider the current situation in your sector more broadly. What’s price sensitivity like generally within your product category? For example, if you’re selling coffee, customers have a certain expectation of what it should cost in comparison with luxury items like jewellery or sunglasses. Has there been a recent increase in new entrants into your category that are driving prices down?
Scoping out your competitors is also worth doing. This is a super useful gauge to know where you can go with pricing and to understand customers’ alternatives. Benchmark against three competitors who sell a similar product delivered in a similar way (for example, if you hand-make your products, don’t compare yourself to those that are mass-produced at scale).
Before you confirm a new price, check in with a professional, ideally working with an accountant or financial advisor, and based on what you know (including your various pricing strategies), determine a new price for the product or products you’ve decided to amend. To guide you, it’s worth creating sales-profit projections – comparing the revenue implications of a price increase per unit with the effect you anticipate it’ll have on sales volume.
Remember that with a price increase, clients will start to expect additional value from your services. Consider if there are budget-friendly ways that could add value to what you’re selling – like creating instructional materials, offering free gift-wrapping or future discounts. Of course, these add-ons can’t negate the additional profit from the price change.
Timing is also crucial when it comes to price changes. When and how you increase your pricing is super important. You’ll need to decide if you’ll do it incrementally or make the change all at once. There are arguments for both. Additionally, when you do it is critical. If you’re affected by seasonality, consider when the right time is to bring in the change (eg, many retailers increase their prices around the holiday season, when customers pay less attention to changes). Other strategies to consider include raising prices at the beginning of every year, or after a certain period with particular clients.
Any price increase needs to be carefully tracked to see if it’s working for your business’ profitability. So, build in some performance transparency. That should include key financial figures – total sales revenue and volume of sales being two obvious metrics to track – but also customer feedback. Consider how people are responding to the changes you’ve made.