With the Consumer Price Index rising at the fastest rate in decades, inflation is a major concern for many Americans—especially business owners. According to Bank of America, 88% of business owners reported that their business has been hit by inflation, and 68% are responding by raising prices.
Let’s say a product usually costs you $5 each to make, and you sell them for $20. In this very simplified example, that gives you a profit margin of $15, or 75%. Of course, in real life you’ll have more expenses that factor into your pricing, but for the purposes of the metaphor, we’re keeping it simple.
Due to inflation, maybe it now costs you $7.50 to make that item. If you maintain your price of $20, that extra $2.50 will cost you 12.5% of your profits. You’d have to increase your price to $30 per item to maintain a profit margin of 75%.
But a $10 price increase on that product could drive some customers away, so how do you protect your bottom line without losing customers?
Revisit your budget and cash flow projections
Rather than increasing prices, you may find other ways to help maintain profits by cutting some costs. Maybe it’s a new supplier with lower prices, maybe it’s cutting back on some products that aren’t selling well. If you’re a service business, maybe it’s reducing travel costs by offering some services remotely.
Whether you offer goods or services, don’t forget to include competitor comparisons when you’re determining your prices. If customers can purchase something similar for a lower cost elsewhere, what else can set your business apart?
Adjust prices thoughtfully
As sharp jumps in cost can drive customers away, a blanket price increase may not be the best method if you do have to raise prices. Some other strategies you may want to consider are:
- Spreading the price increase across multiple products: If Product A now costs more to make, but Product B costs the same, you could increase the price of both products by a smaller amount rather than putting a larger increase on Product A only.
- Lowering other prices: Maybe you can lower the price of Product B to help compensate for the increased price of Product A. Consider discounts for loyal customers. For services, you could also offer bundle discounts or set different price level packages.
- Consider seasonality: Raising prices at high-expense times of year, such as the holidays, can make the adjustment even harder on customers. You may want to raise prices in an “off season” instead.
Communicate Clearly
If you decide to raise prices, communication is key. Make sure your employees are familiar with the new prices and offer suggestions for how they should handle concerns from customers. Customers likely won’t appreciate being surprised by a sudden extra expense, so you may also want to consider communicating the change directly with loyal customers. Remember that there are times when you’ll want to be flexible, and times when you’ll need to hold firm.
Pricing your goods and services appropriately can be a challenge, but once you have it right, it can be much easier to make it through periods of inflation. Keeping a close eye on your cash flow and working with a business advisor can help. Padgett’s network of EAs and CPAs can work with you to address concerns like pricing and cash flow, so find a location near you today!