It’s impossible to check the news these days without seeing reports of rising inflation. Changes in the global economy, issues with supply chains, and shifts in consumer expectations have many business owners scratching their heads trying to figure out what it all means for their businesses. As costs rise across the board, service businesses face the challenge of adjusting their pricing while staying competitive. At times, it can feel like walking a tightrope of preserving profits without driving away customers. In this piece, we’ll explore strategies to begin navigating these tricky waters.
1. Benchmarking Against Competitors
One of the first steps in determining your ideal price point is to look outward. What are peers in the market doing? Are you over- or under-priced? There’s not always a hard and fast rule for where you should be. If you are a value-based provider that wants to succeed with high volume in a price-conscious market, the lower end of the spectrum might suit you. If you offer a more premium service, such as specializing in high-end residential customers, the higher end of the range might be appropriate.
In any case, it’s helpful to have a view into what the market pricing looks like and to refresh this data over time.
Some methods for gathering market data include:
- Manual collection: If competitors have their pricing listed online, this is a great place to start. However, you may have to call and ask for their rate sheet like a potential customer to get more specifics.
- Customer input: You can ask new customers how your pricing compares to others and why they chose your firm. This also provides a chance to get to know new clients and understand their needs, setting the stage for a strong relationship.
- Industry reporting: Industry associations or publications often cover broader price changes in the market. This information will also be useful when discussing a potential price increase with customers, as you’ll be able to demonstrate that an increase is part of a nationwide trend due to factors beyond your control.
2. Understanding Changes in Your Prime Cost
Rising costs can strain all parts of the business, but the most important area to monitor is your prime cost, or Cost of Goods Sold (COGS).
There are three main components of COGS to evaluate:
- Labor costs: Are wages rising in your business? Have you had to offer raises to retain talent or spend more to attract new hires? Tracking your average fully-loaded labor cost over time will help ensure you can adjust appropriately.
- Fuel: Gas prices are one of the most obvious places a business feels the pain of inflation. Fluctuations here can drastically affect the bottom line over time.
- Chemicals and other supplies: Often overlooked, these critical components of COGS can also see significant price fluctuations, especially when impacted by recent supply chain shortages.
Together, these factors can create substantial changes in COGS, which in turn can disrupt a business’s gross margin. Preserving gross margin is critical to maintaining your business’s health both in the short term and over the long haul. Consistent gross margins during challenging economic times also enhance your business’s marketability to potential buyers.
3. Creative Structuring to Minimize Customer Turnover
Reducing churn while preserving gross margin requires a thoughtful approach to structuring price increases. Once you’ve identified the underlying causes of cost increases, you can address them strategically. For example, if rising fuel costs are driving up your expenses, consider implementing a fuel surcharge for customers outside a certain radius.
Other strategies include:
- Offer a price break for long-term commitments: Encourage customers to lock in a lower rate by agreeing to a long-term contract. This reduces their costs while giving you more stability.
- Institute a grace period for existing customers: Offer loyal customers a temporary extension of their current rate, such as an extra three months. This provides short-term savings for them while giving them time to adjust to the upcoming change.
- Handle customer objections with care: For particularly upset customers, consider offering the old rate for a longer period. Often, customers will accept the increase as is, but those with issues can still be retained by showing flexibility.
4. Communicating Clearly to Customers
Implementing a price change requires proper notification to affected customers. This is often the most daunting part of the process, but avoiding price increases altogether due to fear of backlash is a mistake. Underpricing your services will erode profits and, eventually, the viability of your business.
Tips for effective communication:
- Send a direct, personalized note: A clear and concise message goes a long way in explaining the changes and the reasons behind them. Transparency is key (e.g., “Fuel costs are up X%, and supplies have increased Y% in the past six months”).
- Show empathy: Acknowledge that the increase may be difficult for customers and express gratitude for their continued loyalty.
- Segment your communication: Notify only the affected customers and tailor your message to different groups, such as existing customers versus new ones.
The goal is to minimize confusion while building trust and transparency. Thoughtful communication ensures customers understand the necessity of the change while maintaining loyalty.
Summary
Navigating the complexities of pricing in a high-inflation environment requires a proactive and thoughtful approach. By monitoring market trends, understanding your cost structure, and communicating clearly with customers, you can adjust prices in a way that sustains your business’s health while maintaining strong customer relationships. Transparency and empathy during these discussions will help customers accept necessary changes, enabling your business to weather the storm of inflation and position itself for long-term success.