Should you increase your prices this summer?
As inflation rises, more and more companies are announcing price increases. These are six factors to consider when deciding whether to follow suit.
There are compelling reasons for companies to increase their prices this summer. First and foremost, the costs are increasing. Wages in April and May increased to a 7.4% annualized rate, gas prices jumped 49.6% in the past year, and The May Inflation Rate jumped to 5%. Companies such as Chipotle recently announced price increases, and many others plan to do the same.
But before writing a generic “we need to raise the prices” memo, it helps for managers to consider the potential downsides as well as alternative strategies.
In an increasingly online world, it can be easy to change prices – just a few keystrokes. But I’ve found that managers often translate this simplicity into the way they make pricing decisions. However, correctly making a price increase decision involves looking at the issues on several levels.
The most common misconception is that raising prices by the exact amount of your cost increases ensures that current customers will continue to buy. Customers can understand your situation, but they also have their own issues. Faced with a barrage of higher prices, some purchases may need to be cut or reduced. My annual week-long beach vacation, for example, was reduced to six nights because my favorite resort increased its prices. Even if competitors raise prices, that doesn’t mean customers can afford or are willing to pay more. Going through the increase in costs does not guarantee a profit.
When it comes to price, customers have the memory of an elephant. If you expect an increase in the cost of inputs (or post-Covid demand) to be temporary, exercise caution in raising prices if the intention is to reduce them in the future (when costs or demand decreases). A higher than expected price remains in the minds of customers. They can pay for it once, but you don’t want to risk your product being mentally coded as “too expensive” and out of their future consideration. Once an opinion on a price is set in a consumer’s mind, especially for products whose price does not fluctuate regularly, it can be difficult to reverse that psychological impression.
Finally, taking into account the feelings and budgets of loyal customers is an integral part of the price setting process. Brian Treitman, owner of Massachusetts-based BT’s Smokehouse, recently shared this concern with me: “Believe me, it’s the hardest thing to make the decision to raise prices. “
With this information in mind, consider the following strategies to implement:
Watch out for the competition. If they raise the prices, it’s easier for you to do that too. Remember to evaluate the reaction of your customers (fully accepting the increase, stop or decrease in buying) as well as the possibility of maintaining the price to generate higher volume (stealing customers from competitors). If price competition continues, there is less opportunity for an increase.
Provide an explanation. To defuse the pullback, provide a data-backed narrative as to why prices are rising. Customers are more receptive when they understand why they are being asked to pay more. Common justifications include citing data on cost increases / CPI, noting how long the company has been increasing prices for, and in the B2B space, pointing out how much a customer’s product prices. have increased over time.
Reduce other costs. It is unrealistic for managers to believe that they have free rein to pass on any cost increases and that customers will basically say, “No problem, keep your profit normal and we will continue to buy the same amount.” »Offset rising input costs with savings elsewhere.
Deploy a “Better” version. The combination of pent-up demand and stimulus money can increase the receptivity of customers to purchase a higher end “Better” version of a product. The advantage of offering a premium version can be significant. In my experience working with companies to implement Good-Better-Best strategies, often 30-40% of customers choose Best, which is usually priced 40-100% above the current price.
Provide options to retain price sensitive customers. A price increase may not work for some customers. Instead of eliminating them, offer choices to keep them in the family. Examples include a cheaper and leaner “Good” version, a smaller volume offering at a lower price, or a protection package that mitigates future price increases.
Review the prices individually. I have found it inevitable that examining a company’s prices will lead to finding some that are too low. Appropriate pricing of these products can reduce the pressure to make a general increase or take unnecessary risks on other products.
During this “everybody’s doing it” time, it’s easy to slip into a “let’s raise the prices too” mentality. For a cost-motivated price increase, there is no guarantee of success. Careful consideration of potential drawbacks, re-examination of certain prices as well as costs and options can allow your business to successfully navigate current cost inflation. More importantly, these actions create a solid foundation for a pricing strategy that will continue to generate profits and growth in the future.