Best Practices for Raising Prices and Maintaining Customer Relationships
According to the Bureau of Labor Statistics, the Consumer Price Index (think inflation) has risen over 6 percent in the last twelve months. Granted, that’s just an average. Energy prices (including gas) are up significantly. So are vehicle prices. So are food prices. Oddly enough, though, alcohol prices have dipped slightly. (In the midst of all that bad news, who would have thought?) More to the point, maybe your costs have gone up—squeezing or even eliminating your margins. While improving efficiency and cutting costs could make up some of the difference, eventually you may need to raise prices.
The industry and business type may affect customer reactions to price changes
If you run a B2C business that is largely transactional (retail, restaurants, etc.) then raising prices isn’t particularly difficult. The odds that the average customer will realize (much less get upset) that your eggplant parmesan entrée costs a dollar more are slim. The same goes for most products; the major risk of raising prices in a price-sensitive environment is that competitors may be able—or at least willing, for a short period of time—to undercut you.
But if you run a business with long-term contracts, long-standing customer relationships, or long-established prices for goods and services, raising prices comes with immediate risk. Say I run a shipping company, I purchase wood pallets from you every month, and for the last year you charged me $12 per pallet. In October I ordered 2,000 pallets, you charged me $24,000 ($12 x 2,000 = $24,000). Even a small increase on the price per pallet will feel significant at these quantities. A twenty-five cent increase per pallet translates to an extra $500 to the bill on a 2,000 pallet order.
Yet, over the last year your margins have steadily shrunk. Lumber costs are higher. Labor costs are higher. Nationwide demand for nearly every consumer product has spiked sharply. Decreased supply and increased demand means other customers are willing to pay more—and in some cases, a lot more.
The facts, logic, and reasoning for raising prices are all on your side. But that doesn’t mean the call you’ll have to make to let me know the price has gone up will be any easier.
Let’s work through it step by step.
How to raise prices: step-by-step guide
1. Consider the nature of the customer/price relationship.
Many small business owners, eager to land enabling customers, will lock in (whether formally or informally) at a certain price point. In the example above, you may have been so desperate to land my 2,000-odd pallets a month business—and the consistent cash flow it produced—that you just named a price. No codicils. No qualifiers, like “may be adjusted for the cost of raw materials.” We made a deal.
And now you need to change the deal.
We’ll talk about that scenario in a moment. For now, consider the flip side: customers are accustomed to changing prices, or are used to calling to determine the current price. If that’s the case, alerting them to price increases is standard and expected.
But you should be ready, especially if the increase is significant, to explain why. Be specific, but not too specific—otherwise you may find yourself having to justify every price change in the future. If commodity costs are up, say so. If supply costs have risen, say so. If fuel prices are fifty percent higher than last year, which they currently are, say so.
Empathize, but don’t be apologetic. The fact that costs outside of your control have risen is not your fault. Also, keep this in mind: If your costs are up, chances are your customer’s costs are up as well. Starting the conversation by saying, “I know you’re aware of how much (insert your industry’s drivers here) costs have gone up…”
Most people will immediately understand, at least in general terms. And those who don’t will be less likely to argue, if only because we all like to seem like we’re in the know.
2. Make a business case, but with a twist.
When customers push back, facts and figures are your friend. Again, though, don’t share numbers that are too specific; that opens you up to monthly price justifications based on current material and labor costs. (“If material costs are down .4 percent, why isn’t your price at least that much lower?”)
Then turn the focus to what you’re actively doing to mitigate at least some of the need to increase prices. Talk about changes in workflow. Or materials ordering procedures. Or new supplier or vendor relationships you’ve established. Explain how you’re working hard to minimize, as best you can, the need to increase prices.
Which creates a natural transition to…
3. Explore and provide options.
Maybe you’re willing to provide a discount based on larger order quantities, or if the customer shifts from a net-30 payment term to a net-15—or better yet payment upon delivery. (Cash flow is king, afterall.)
Perhaps there are pricing options that could be achieved by shifting to different quality tier, or creating new quality tiers. (Think “good,” “better,” “best.”)
These discussions may help you salvage the relationship, and should give you better insight into each customer’s needs. Those insights will also make it even easier for you to meet those needs in the future.
4. Create better processes for future customers.
No matter how prepared you are, no matter how reasonable your justification, and no matter how hard you try—some customers will get upset when you raise prices. Those conversations won’t be fun, so use that discomfort as fuel to create an environment where similar conversations are less likely to happen in the future. Explain to new customers that you’ll do your best to keep prices firm, but that major swings in market forces may require future increases. Include language to that effect in proposals and contracts. (Most contractors now include language in bids to the effect of “material prices may vary from those quoted in this proposal and will be re-calculated to reflect costs at date of signing.”)
Finally, create a periodic process to review costs, prices, and profitability levels and to raise prices sooner rather than later. Incremental price increases, even if more frequent, are a lot easier for customers to swallow than an occasional major price increase.