Raising Prices to Manage the Impact of Inflation
A 5-Step Framework for Small and Mid-Sized Businesses
Raising prices to manage inflation’s impact may be necessary for many small and mid-sized businesses. Most owners are understandably hesitant to raise prices. Waiting too long can cause disruptions to cash flow and your bottom line that may be difficult to recover from.
This article provides 5-steps to change your prices proactively.
Prepare a Forecast
To understand how much of a price increase you need. Prepare a forecast for the current and next year. Include an estimate of rising costs and changes in customer demand. If cash is a concern, add a cash flow forecast.
Using this forecast, identify alternatives to raising prices. Can you accept a lower bottom line for some time? Cut costs? Sell more at the current price? Are there other levers you can pull to meet your goals?
If adjusting the sales prices is one of the levers, the next step will help you determine how to get the most significant impact.
Identify High and Low Margin Products and Services
Review your products or services and identify those with the highest and lowest margins. This may require some data analysis. A visualization tool such as Power BI can simplify this process.
Here are some examples of companies in various industries that used this approach:
A mid-sized construction company met with the operations team to review each project, variances to budget estimates to complete, and project profitability.
A transportation company implemented a Business Intelligence (“BI”) solution to calculate and report the profitability of each vehicle.
An industrial supply company reviewed the service component and product component separately. The product component had lower margins but was critical to getting the service business. The service business had higher margins and recurring revenue. The CEO reviewed the profitability-by-service person report provided by their service management software.
Determine Your Updated Pricing Strategy
Use the forecast and understanding of your product and service margin mix to update your pricing strategy. This process can be relatively complex, depending on your market. The article 3 Strategic Options to Deal With Inflation 1 provides guidance to help you get started:
Recalibrate or Clean Up the Portfolio - Change how you bundle your existing products or services. For example, if you are in a price-sensitive market, change the quantity of product in a package or service level in a bundled service offering.
Reposition the Brand - Change your marketing communications to support pricing in a higher tier for underpriced products and services.
Replace the Price Model - Review how you are currently pricing. Is it per month, per bundle, per hour? Consider adopting a new approach that is more supportive of your current goals.
You may need to plan for a dip in revenue as your sales team and existing customers adapt to the new pricing model, but the investment will pay off as your pricing model will better align with the current market.
Because Pricing Strategy is particular to your market, consider enlisting a marketing consultant to provide market data and assist with this endeavor. If your current pricing model is outdated, use this opportunity to invest in this area of your business.
Communicate to Customers and Update Sale Agreements
How you communicate price increases will be specific to your company and its customer relationship. The options range from posting the price increase on your website to meeting with each customer.
No matter the form of the communication, the following principles apply:
Call the action a price increase, not a price adjustment, or other euphemism - Owners “are naturally reluctant to tell customers they are raising prices. While this may seem unimportant, euphemistic messaging can cause serious harm, fraying the relationship with loyal customers. Authenticity and honesty matter to customers, especially for bad news.” 2
Clearly explain the reasons for the price increase - Include the price increase, the effective date, and the reason for the change. Your motivation may include supply or freight cost inflation, labor cost increases, supply shortages, etc. The perceived fairness of the motive is a key determinant of how customers react.
Link the price increase to a customer-centric value narrative - Provide a clear link from the price increase to the value you provide. For example, To maintain the quality of our services, we must increase our prices.”
Use clear language to explain the new options and the value your pricing strategy provides.
Update your sale agreements to reflect the new pricing. Review customer contract language and preemptively add language that allows for further price adjustments to highly volatile supplies. For example, include a fuel surcharge that could offset future transportation cost increases.
Get the Sales Team On Board
The success of this new pricing depends on your sales team’s ability to communicate and sell it. Equipping them for success includes the following:
Instill Confidence in Your Front Line - Your “sales force needs to confidently articulate why your product offers the highest value compared to rivals. To be clear, “value” doesn’t mean the lowest price. Instead, it offers the most benefits for the clients” 3
Use Compensation to Align Your Sales Team’s Interests to Your Goals - Re-visit your sales compensation to align your sales team’s goals to your new pricing strategy.
How We Can Help
Highpoint CFO provides CFO consulting services. Contact us to find out how we can help you with forecasting, cash flow and working capital management, by-product profitability reporting, and data analysis using business intelligence tools such as Power BI.
About Highpoint CFO
Highpoint CFO is a CFO consulting firm based in Tampa, Florida, that serves clients throughout the US.
Scott Young is the President and Principal Consultant at Highpoint CFO. He is a CPA, Certified Merger & Acquisition Advisor (CM&AA), and Certified Value Growth Advisor (CVGA) with over 25 years of experience in finance and accounting at industry-leading companies.
#smallbusiness #mediumbusiness #consulting #CFO
Sources and Recommended Reading:
Oded Koenigsberg (January 18, 2022). 3 Strategic Options to Deal with Inflation. Harvard Business Review. Digital Article.
Utpal M Dholakia (2021). If You’re Going to Raise Prices, Tell Customers Why. Harvard Business Review, Digital Article.
Rafi Mohammed, (July 02, 2012). Using Pricing Strategy to Boost Sales. Harvard Business Review. Digital Article.
Utpal M. Dholakia (August 09, 2016). A Quick Guide to Value-Based Pricing. Harvard Business Review. Digital Article.
Rafi Mohammed (April 01, 2014). The Art of Raising Prices: Lessons from Amazon Prime. Harvard Business Review. Digital Article.
Jonathan Byrnes and John Wass (February 04, 2022). Precision Pricing When Inflation is Rising. Harvard Business Review. Digital Article.
Dholakia, Utpal. Priced to Influence, Sell & Satisfy: Lessons from Behavioral Economics for Pricing Success. Kindle Edition.
