A bearded man sits on a cream-colored sofa and looks at a creased piece of paper with a worried expression.
Customers are never happy to receive news of a price increase, so it's important to communicate any changes thoughtfully and in advance. — Getty Images/Antonio_Diaz

It’s a touchy subject: Price increases. Rising costs from supply chain shortages, wage increases, inflation or the cost of raw materials can sometimes force you to raise your prices. The way you communicate a price increase to your customers can make the difference between outrage and understanding (just look to Netflix for a prime example).

How do you determine if a price increase is necessary? What’s the best way to communicate this change to your customers? Here are some suggestions and best practices you can put to use.

Determine if you need a price increase

If you’re considering a price increase, it’s likely that you’ve been keeping a close eye on your profit margin and noticing that costs are starting to eat into your revenue. Determine if these cost increases are long-term or short-term before you commit to a price hike. Ideally, your CFO should be running regular inflation-based scenarios of how profits will shift based on various price points to help decide if a price increase is needed. If the answer is yes, you have some decisions to make.

Inflation and wage increases are costs that are unlikely to go away anytime soon. But the higher cost of a key ingredient may be avoidable by working with a new supplier, for instance. Eliminate other options for improving your profit margin before turning to a price increase.

Structure the price increase

You have a few options when it comes to price increases:

  1. Raise prices across the board to everyone at the same rate.
  2. Create a regular schedule. An annual hike, for instance, is usually perceived as part of a contract or standard policy.
  3. Only raise prices to certain customers.
  4. Offer choices like pricing tiers or packages. Give customers the option of a larger increase paid over a longer period of time, or a shorter, one-time price increase.
  5. Get creative: There are infinite ways you can structure a price increase, using variables like terms, billing, rates and incentives.

Remember, finding a new customer costs more than keeping one you’ve already got.

The option you choose will depend on a few factors. Consider how much additional revenue you need to ensure a healthy profit margin and cash flow. Investigate what your competitors are charging and if you’re at risk of losing customers to other businesses.

Break the news

Once you’ve figured out your price increase structure, alert your entire company as to when you plan to break the news and how your employees should deal with an unhappy customer.

Next, tell your customers. Contact them directly with a letter, email or phone call, or all of the above. Explain the reasoning for the price increase, whether it is due to maintaining product quality or passing on rising material costs. Emphasize the benefit for the customers (continued quality, the same service levels, availability) to get them on board. Being transparent makes your communication more trustworthy and authentic and makes it easier for a customer to justify paying the higher price.

[Read more: Touchy Subjects and How to Communicate Them to Customers]

Give plenty of advance warning

According to Hubspot, there are marketing and sales advantages to announcing a price increase well in advance. Not only does it give customers time to adjust their own budgets, but you can use it as an opportunity for upselling. Consider:

  1. Offering to extend contracts at the current rate.
  2. Encouraging on-the-fence prospects to sign before the increase.
  3. Running an end-of-year “sale” based on the lower prices.

For some companies, a simple “your contract will be renewed next year, please review” message may be enough, especially if you’ve always increased prices year over year. If customers object, listen to why they aren’t happy about a price increase. Letting them vent may help you to resolve the issue so you are both happy with the outcome.

Remember, finding a new customer costs more than keeping one you’ve already got. The decision to raise prices is something to be considered carefully and communicated with thoughtfulness. By running scenarios that justify your price increases, planning your message and communicating well ahead of time, you should be able to keep your customers happy.

[Read more: How to Communicate With Customers About Supply Chain Problems]

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

Follow us on Instagram for more expert tips & business owners’ stories.

To stay on top of all the news impacting your small business, go here for all of our latest small business news and updates.

CO—is committed to helping you start, run and grow your small business. Learn more about the benefits of small business membership in the U.S. Chamber of Commerce, here.

Interested in a small business membership?

Find out how the U.S. Chamber of Commerce can help your company grow and thrive in today's rapidly-evolving business environment. Connect with our team to learn how a small business membership can benefit your bottom line and help you achieve your goals.

Published January 12, 2022