Inflation. We can't get enough of inflation right now. As a business owner, you have suppliers charging you more and services as expensive as they’ve ever been. This might be prompting questions such as how do I increase my prices and do it in such a way where I don't lose customers? The last thing you want as a small business owner is to lose customers at a time when prices are rising, and margins are being squeezed.
For many business owners, this is the first time they see costs rise as fast as they have over the last few months. You'd have to go back to the 1990s to see inflation this high. While there's not much you can do as an entrepreneur to slow down inflation, there are a few things you can do to protect your bottom line through price increases & diligent cost-cutting initiatives.
Before raising prices, try to see if you can cut costs in a way that doesn't affect business performance. If you can avoid increasing prices, more people will come to you, as everyone else will be charging more. So, while your competitors' margins may look marginally better (pen very much intended), you'll have a larger happier customer base.
Let’s look at four strategies to protect the financial health of your business in this inflationary environment.
Just like you get accountants to perform annual financial reporting, it's a good business practice to look at your books (expenses) and see what's adding value and what doesn't. Think of it as a Value Audit. By analyzing every cost you have and verifying the value it adds, you get a better idea of what's valuable and what’s not. Look at what Goldman Sachs is doing.
“Given the challenging operating environment, we are closely re-examining all of our forward spending and investment plans to ensure the best use of our resources.” That was CFO Denis Coleman commenting on plans to implement a hiring freeze & reinstate performance reviews. A measure historically used to get rid of poor performance workers. The moral of the story isn't to scare employees into thinking they're going to get fired but to help them kick it into high gear and add value to the firm. Apply this to not only employees but software & utilities you use that don't necessarily add value.
There is undoubtedly a benefit to increasing prices, but when it comes time to asking your clients to pay up, it's easier said than done. The good thing is you don't need to do it all at once. Instead, price increases can be done in stages, allowing you to test the waters. As a first step, you can try out the new prices on new customers and analyze the reaction. From this experience, you can pivot to current customers and implement the increase across the board.
No one enjoys receiving an invoice a few hundred dollars higher than expected. If you raise prices without explanation, your customers will likely get angry and make negative assumptions about why you raised prices. If you speak to them ahead of time and explain to them why you're increasing prices, it does two things for the client. First, it gives them the time to budget for the cost increase and second, it allows them to avoid negative surprises. You wouldn’t want customers to think you’re being greedy. By taking the time to explain that you're raising prices, customers will appreciate the advanced notice and the time you took to explain the increase.
Sometimes a cost increase will go over better if you make it look like an upgrade. For example, if you work in a business where competitors are abundant it’s essential to differentiate yourself and offer additional value for a higher price. If you're a bookkeeping firm, maybe that could be through providing checklists & templates on how to complete certain procedures. Creating these simple templates and guides comes at little cost and, once complete, can be reused from client to client when increasing costs. These guides are an added value that will help your clients & can help you verbalize cost increases in a good way.
Increasing prices efficiently can determine the success of your business in a harsh economic climate. Communication, above all else, whether in cost-cutting or price increases, is key to maintaining solid relationships with all stakeholders of your business.
By the way, if you’re looking to cut costs in your year-end financial management, look at our solution. 👇
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