The current cost of living crisis is putting businesses in a difficult position. Of course, it isn’t just consumers who are feeling the bite of soaring fuel and energy inflation. These higher prices impact on businesses just as much.
When the cost of running your premises goes up, or transport and logistics gets more expensive, or suppliers raise their prices to offset their own rising expenditure, your margins quickly erode.
The less profitable your business, the more vulnerable it is. You might start to experience issues with cash flow. You might need financing to paper over cracks in your finances, which burdens the business with more liabilities. Growth becomes a distant dream. Instead, all you focus on is survival. Eventually, you start to look over your shoulder at the spectre of insolvency.
These are the reasons why, according to the British Chamber of Commerce, three quarters of businesses plan to put their prices up this year. Profitability is the raison d’être of running a business. There’s only so long you can allow cost increases to eat away at your margins.
A last resort?
Not that any business puts up its prices lightly. For many company bosses it is a last resort. Passing on cost increases to the customer is always a gamble because few people take kindly to having to pay more. The concern is always that customers will look for a cheaper alternative.
That’s a double-edged sword in the current economic climate. With absolutely everyone looking for ways to reduce costs, you may find that customers are prepared to sacrifice the quality you offer for a budget alternative. Raising your prices will only push customers already contemplating this towards the exit door.
More generally, there is the fear that putting up prices will sow ill feeling among your customer base. Even if they stick with you in the near term – perhaps because they can’t find a cheaper alternative, because everyone is hiking their prices – price increases weaken the bonds of loyalty. The first chance they get to jump ship further down the line, they will be off.
The cost of cutting
These are some of the reasons businesses do all they can to avoid price increases. They would rather focus on cutting costs to protect margins. But there is only so far that can go. Eventually, you cut so deep the health and stability of the business starts to suffer.
How do you know if you have reached this point? The truth is that it is better not to find out. Cutting costs from your business by, for example, laying off staff and shedding resources will eventually compromise your ability to sustain your service levels. The combination of letting standards start to slide because of cutbacks and then raising prices because you can’t cut any more could be disastrous. No customer will stick paying more for a poorer product.
It’s a lot safer to raise your prices from a position of strength, when your business is in good health and you have lots of happy, satisfied customers. Happy customers are much more likely to accept a price increase than those who have started to sense standards dwindling. This is even more the case if you haven’t put your prices up in some time.
Similarly, when customers are happy with the service you provide, their perception of value is different. They are more likely to continue thinking you provide good value even if you put your prices up. Plus, you can use pricing as a point of difference. If you’re providing a premium level of service, it’s something many customers will be happy to pay more for.
There’s security in knowing that you are getting a high standard of service. When putting up prices, you can use this to reassure your customers, emphasising that cheaper alternatives are unlikely to match what you can offer.
Wanting to protect your customers from cost increases is a noble sentiment from any business owner. But ultimately, if you want to protect the value they get from you, you also have to consider the need to protect your business. There comes a point where putting up prices is the only sensible option.
