In the current business climate, inflation is top of mind for business owners. With respect to price increases, many entrepreneurs feel they have no room for a change in pricing when it comes to their products. Entrepreneurs and business owners should be thoughtful about how they approach price increases, understanding potential second-order effects. There are opportunities that exist to thoughtfully address business and customer pain points without raising prices, while also preserving margins.
Here are five ways business owners can deal with inflation without losing customers.
The first is to make data-driven decisions. If you don’t have a detailed understanding of your cost drivers, you risk leaving margin on the table. When you make data-driven decisions, it allows you to double down on impactful, high-return-on-investment offerings while minimizing or eliminating low-margin products or services.
Secondly, you must understand customer price sensitivity. It is imperative that you use all the data at your disposal when making price increase decisions. By doing this, you should be able to understand your customers’ sensitivity to a given price change. If your customers have high price elasticity, they will be able to better stomach unexpected price increases. However, if your customers have low price elasticity, even small price changes can drive down customer demand. In this scenario, it makes better sense to adjust non-price variables.
The next option for business owners is to adjust non-price variables. For this, you must think about ways to adjust business operations to accommodate increases in input costs. One example would be adjusting lead times to better manage order flow. A second option is to adjust the “one-size-fits-all” approach to order management. You might introduce added fees and surcharges for valuable add-on services such as rushed delivery or order quantities under a certain level.
A fourth option is to explore innovation in product and service offerings. As a business owner, this requires you to reimagine the design of your products most impacted by inflationary pressures. This might be the cost of materials, packaging, or even certain features. For this to be successful, you need to focus on process improvements to drive cost synergies.
Finally, there must be clear and concise communication with your customers. You need to ensure that you craft a transparent message to customers about increasing prices and why they are necessary to maintain the quality of your products. When communicating, you must remember that the “how” and “when” matters, and you need to get ahead of a price increase conversation, so customers don’t feel blindsided. Ultimately, you need to make sure you maintain clear communication both internally and externally. When it comes to your sales team, you need to train them on how to best communicate this price change to both existing and potential customers.
While it might seem overwhelming to figure out if a price increase is right for your products and services, it ultimately comes down to planning. As a business owner, there is no one-size-fits-all solution, but rather many different options to address the specific needs of your business. By taking the time to understand the different options, you will be able to make decisions that are right for you, your customers, and ultimately your business.
NICK OLIVER, senior financial analyst for EAP
