How to put up prices when you a run a small business
At some point, every small business has to increase prices to keep up with the cost of doing business or to stay solvent. A report from accounting software provider MYOB shows that for almost a third of small businesses in Australia, pricing will be a major consideration in 2016.
Yet many small businesses underestimate their ability to increase their prices, says Tim Reed, chief executive of MYOB.
"They feel nervous, especially if it's a client that represents a large slice of the profitability of their business. The potential to lose that client makes them very reluctant to have that conversation."
Most customers will happily accept a reasonable price increase if they feel they have had a good deal with no increases for a number of years, says Reed. However, making "regular price increases that are smaller in size, and where your customers become accustomed to them, is generally a better strategy than a 15% price increase every five years".
Timing them at the beginning of each calendar or financial year can also take the sting out of price rises. Reed says that no matter what your timing is, you always have to communicate a price rise.
"There is a fundamental level of respect that comes with that. It could be something as simple as, 'Happy new year, we've had a great year. However, our rates are going up by 2% in line with increasing costs.' When positioned as a CPI increase, most customers will accept this."
That said, a CPI increase only enables you to keep up with rising costs.
Beyond merely keeping up with inflation, Reed says that SMEs should reflect on the value they offer their clients and whether there is a case to increase rates.
However, he sounds a note of caution: "If you are not offering additional value, then don't make the mistake of increasing your rates."
Preparation is everything
Before you talk to your customers about a price increase, it's critical to be prepared.
"Writing down the arguments prior to engaging with a client on price makes plenty of sense," says Reed. "Then you need to consider if the discussion on price should be conducted face-to-face with the client or via an email. Once you've decided on the communication approach, you have to take the leap of courage."
When planning a price rise, Reed recommends that small business owners put themselves in the shoes of their customers and clients.
"Consider how they are likely to react," he says. "If you know a certain client will react poorly, prepare yourself for their reactions, so that you're able to respond appropriately."
Robert Vinci, a director of family-owned Ace Landscapes in Sydney's north, says his suppliers often dictate price increases.
"If my supplier puts up the price of turf by 10%, then if I don't increase my prices by 10% I'm out of pocket," he says.
But before passing on the increases to his customers, Vinci always canvasses his competitors to see if they have ramped up their prices.
"We're all in the same boat because we use similar suppliers," says Vinci. "However, at Ace we always aim to be the last to put up our prices even if we have to wear the costs for a month or so."
Being the last to impose an increase gives Ace a window to attract new customers. "Even when we eventually increase our prices, we usually keep some of the new business thanks to our level of service," says Vinci.
Before raising a product's price, Ace Landscapes also considers how many customers the product brings through its doors.
"We stock railway sleepers, for example, which are scarce at the moment. We'll happily wear suppliers' price increases on sleepers to attract customers, who might buy a couple of sleepers as well as five tonnes of soil from us," says Vinci.
If your business policy requires customers to sign contracts and retainers, be sure to write regular price increases into these documents.
"However, many customers want prices locked in for 24 to 36 months," says Reed, "so write into the retainer or contract that after two to three years prices will be reviewed."