No matter how passionate you are about your business and its customers, the fact of the matter is that making money is always going to be high on your list of priorities. For some, right at the top.
That’s why creating a solid business plan is so critical, and why we’re always going on about accurate bookkeeping, financial forecasts, and monitoring cash flow so you can make better decisions. And one of these decisions? Increasing your prices to keep cash flowing in the right direction.
Increasing prices isn’t always quite as simple as it sounds, especially when you’ve got a base of loyal customers who are accustomed to what you currently charge for your product or service. As a business owner, you’ve got to do what you need to, to continue growing your business. You also want to avoid putting anyone off. It’s a tricky balancing act to master.
In this article, we share our advice on all things price increases: when to do it, signs it’s the right time, how often you should bump up your prices, and how to keep customers happy in the process.
When is the right time to increase prices?
The starting point for almost all business decisions is in your financial reporting, so you can identify what the issue is, and how best to fix it. For instance, if the business isn’t making enough money is it because sales are low, costs are high, or the price is wrong? Checking the figures will help you understand what’s what.
Getting the pricing right can be particularly challenging for fledgling ventures, so you might find you need to reassess and adjust as things change.
When your own outgoings increase
As a business owner, you’re almost always someone else’s customer, as well as being a supplier. You’ll often find yourself on the other side of the transaction, buying goods and services to use in your business which means you’ll inevitably be subject to suppliers increasing their prices.
Inflation or market demand dictates that the materials or services you use will gradually increase in cost over time, making it necessary to raise your own prices to reflect your extra spending. Monitor your expenses and overheads to keep track of this, and consider how long-term any price-hikes are likely to be.
For instance, the new Health and Social Care Levy will see an increase to the rate of Class 1 National Insurance. This affects both employees and employers, so it’s a long-term increase to employer costs.
When you register for VAT
Businesses must register for VAT once their taxable turnover in a 12-month period reaches the £85,000 threshold, or you might find it useful to voluntarily register early. Once you register, you’ll need to charge VAT on all taxable sales.
This leaves you with two options in terms of pricing:
- Keep your prices the same, absorbing the additional VAT amount. What you charge the customer won’t change, but you’ll make less profit on each sale in order to pay the VAT bill.
- Add VAT to your existing prices. It’s more for your customer to pay, and if they’re not VAT registered, they won’t be able to claim the VAT back, but you’ll keep your profit margins.
When you take on new employees
Employing new staff means you’re going to have to pay their salary, make employer’s National Insurance and pension contributions, and so on. Normally, taking on staff means you’re making enough sales to need the extra help, but new recruits in your workforce also brings new skills, talent, experience, and a fresh perspective.
You’ll be able to expand your offering and develop your product or service, so you might decide to invest in the talent in order to grow, rather than the other way around.
Other signs it might be time to increase your prices
- Customer reviews demonstrate that people are consistently surprised at how affordable or cheap your prices are – especially in comparison to your competitors.
- It’s been several years since the last time you reassessed your pricing.
- You run a trial period of new increased prices with no repercussions on your sales.
- Your accountant has suggested that it would be a positive move for your business.
How often should I increase my prices?
Although there’s no set timeline for increasing your fees, it’s clear to see why doing so too frequently would put off customers. On the other hand, not reassessing your prices often enough could mean missing out on opportunities to boost your profit and stand out in the market.
Enlisting the expertise of your accountant will also give you access to valuable professional insight – don’t forget, they see behind the scenes of a lot of businesses!
How to keep customers happy in the process
Customers are never going to celebrate paying more – that’s just the reality of the situation. What you can do is take measures to reduce the risk of any backlash, and remain considerate to your customers when implementing additional costs.
- Timing is key – Choose your timing wisely, such as seasonal changes for popular items.
- Introduce a new product or service at the same time – Adding value to what you offer customers shows customers they’re getting something back for the additional money you’re asking them to spend.
- Consider only raising prices for new customers – If you’re particularly concerned about how your customers are going to react to increased prices, you might consider freezing costs for existing customers and applying new prices only to new customers.
- Allow some wiggle room for discounts and promotion – Build in some allowance for discounts when thinking about your new prices to appease customers who might not be best pleased about the additional costs.
- Create additional packages at lower costs to entice – If you offer services as a package, consider offering new combinations so customers pay for what they actually use.
- Consider targeting a more affluent demographic – As well as nurturing your existing customer base, think about appealing to a more affluent demographic too. These are the customers who will be more willing to pay higher costs. You could do this through paid promotion such as social media and paid search ads.
- Take a forward-thinking approach – Don’t just consider your past and present status when deciphering your new pricing structure, think about the future too. What you don’t want to do is increase your prices with a short-term strategy and then come to realise you need to do the whole thing again not long after.
The most important thing to remember when it comes to communicating with your customers is to remain honest, transparent, and approachable. If a customer respects your business and feels loyal to it, they’re more likely to be willing to accept increased prices, no matter how you go about justifying it.