It’s no secret that we are living in a unique environment of rising consumer costs, labor shortages, and the uncertainty of an end to the pandemic. All have put a strain on small businesses and profitability. If you haven’t done so, now is the time to evaluate your pricing model to re-align it with your business goals.
This process can be uncomfortable and stressful as you gauge the possibility of upsetting customers or losing valuable revenue; however, it is absolutely necessary in order for you to maintain your business margins. Sales across most industries have risen to near pre-pandemic levels and consumers are becoming accustomed to paying more for things now versus 2019. Reports from the Bureau of Labor Statistics show a 7% increase in the cost of living in 2021. More specifically, at-home spending on food has gone up 9.3% from January of 2020 when the pandemic started through October of 2021. The cost of living increase has, in turn, pushed wage requirements higher than before putting an additional strain on small businesses. Consumers don’t like it but are accepting that things cost more now than they did before. They will adapt to your price changes if they are reasonable and the quality of service is maintained.
Determining your price increase is a delicate balance of staying competitive in the market, maintaining your margin, and factoring in other potential future changes to market conditions. We recommend using a formula-based approach as a baseline for your price increases. This formula is simple…take your required profitability margin and add your new cost of doing business increase. For example, if your pre-pandemic margin was 15% and you’ve now seen that your labor and supplies cost has increased an average of 5% causing your margin to decrease to 10%, you’d need to move your pricing up by 5% to maintain your target profit margin.
Sounds simple! It is simple math; however, this is where you must do some additional research and due diligence. Checking competitor pricing is necessary so you can stay within a competitive price range of similar services. If you price too high, you may lose business. Too low and you are working very hard to make very little money. If you find that your price increases are much higher than competitors it should trigger some additional questions to answer….Are there better ways you can operate efficiently? Have you negotiated your fees with suppliers well enough?
Additionally, you should consider who should pay for your price increases. To maintain important business relationships, you may consider a smaller increase for your best clients while all new clients pay a new higher rate that meets the demands of your higher internal expenses. If you serve the masses such as a restaurant, your price increases should apply to all; however, it may be that certain items on the menu have a larger increase than others so your lower-cost items remain competitive while you make your required margin on items that have increased much more.
When is the best time to make an increase? You should evaluate your internal expense increases quarterly at a minimum. Evaluating regularly doesn’t necessarily mean changing your customer prices each evaluation. Evaluating regularly keeps you in the know and prepared for making good decisions when the time is right to make the increases. You will need to make your increase timeline based on the severity of expense increases on your business while weighing the impact on revenue. Ideally, price increases can be done over 6-12 months to make modest adjustments that do not disrupt sales.
This process starts with a good understanding of your current expenses and the recent impact of inflation on your business. For our clients, we are happy to assist you with comparative reports to aid in this analysis while helping you with guidance on what it takes to maintain your margins. Please contact Eric or Sandy should you need any assistance.
