Successfully Increase Prices During a Time of Hyperinflation

It’s all over the news. INFLATION! JPMorgan’s recent Business Leaders Outlook Pulse survey results stated 100% of respondents were facing business challenges — 71% related to the higher cost of doing business. According to a recent report from the National Federation of Independent Businesses, roughly one third of small business owners said that inflation was the most important problem facing their business. The same report claimed that 72 percent of business owners raised their average selling prices in March 2022, the highest reading in the survey’s 48-year history.

It’s clear that hyperinflation is affecting businesses—and consumers—across the country. Almost no entity is immune to its detrimental effects. The last time hyperinflation occurred on par with what we are experiencing today was in the early 80s. At that time, businesses were forced to raise prices multiple times within a year!

Though it can be a tough pill to swallow—especially for middle market businesses—price increases are a necessity for every business right now. Your expenses will continue to rise, cutting into profits. So, if you do not take action quickly, profit margins will eventually drop to levels your business cannot sustain.

The process of successfully raising prices without losing customers can be a challenge. You need to find the right balance between keeping your business profitable while not scaring off customers with pricing they cannot afford.

Fortunately, you can be successful by taking these important steps:

1. Determine your real costs
2. Calculate what they likely will be in the future
3. Understand how the above affect your bottom line and ongoing business health
4. Determine the right levels of price increases to be tailored and communicated with each of your customers
5. Communicate the price increases in a meaningful way that justifies them so you face minimal resistance and complete acceptance without straining your customer relationships

Understand your real costs

Before you can know how to raise your pricing—or even know if your pricing is accurate in the first place—you need to understand your business costs. And when we say “business costs,” we mean all of them.

When trying to determine costs, many businesses think order to cash. But your costs start long before that. Your business development team costs money in the form of salaries, so you need to know what you are spending on prospecting. You also need to consider overhead. From there, you should look at the obvious: the costs of receiving orders, producing and fulfilling those orders, transportation and logistics, storage, collecting payment, and managing customers relationships over time. Even the seemingly smallest costs add up, so it is vital that you know the exact amounts of all the aspects of running your business.

Set new pricing that aligns with inflation

Next, you need to know how your costs have changed and will change during times of hyperinflation. This not only requires that you track massive amounts of data, but you need to analyze the advanced contribution margin and bottom line, preferably broken down by customer, product, geography, and manufacturing line.

Then, set your anchor point of where you were from the last price increase until now. Once you have an idea of how hyperinflation has affected all business costs, you need to set your pricing to cover those costs, as well as potential increases that might be coming in the near future. All of this needs to be done in a way that assures your company’s business health, cash flow, and profitability.

Communicate pricing to customers

No customer is going to be excited to hear you are increasing your prices. But during times like these, they will certainly understand. The key to increasing pricing without losing customers is thoughtful communication. An advanced price increase communication plan is personalized to each customer in ways that make common sense and business sense.

While an email may suffice for some customers, several may benefit from presenting price increases through an in-person meeting with your most valuable customers. And if any customer represents a large portion of your business, sharing new pricing may require more finesse. You will want to announce and justify your price increase with integrity and clarity, so you get little to no resistance and can successfully get the new pricing through quickly.

Bring in outside help

If you are feeling uncertain about your ability to accurately set new pricing and communicate it to customers, bring in outside help. The experts at FortéOne have decades of experience helping Middle Market companies determine real costs and how they have changed, set price increases at levels that are healthy for both owners and employees (and take future trends into account), and communicate those changes in a way that optimizes customer understanding, ensures the price increase amounts are based in fact with solid rationale, and maintains your important and carefully built positive relationships.

Contact us today to learn more about how to increase prices so your business stays afloat during this period of hyperinflation.

Contributor: George Lampros, Operating Partner