Entrepreneurs often find themselves squeezed by rising operating and raw material costs but are hesitant to raise prices because they fear losing customers. Businesses facing rapidly rising costs in their businesses should consider the following strategies:
- Communicate with customers. Let your customers know why you have to raise prices. Danny O’Neill, the owner of The Roasterie, a wholesale coffee business that sells to upscale restaurants, coffeehouses, and supermarkets, operates in a market in which the cost of raw material and supplies can fluctuate wildly because of forces beyond his control.
- Rather than raise the price of the good or service, include a surcharge. Price in- creases tend to be permanent, but if higher costs are the result of a particular event (e.g., a hurricane that disrupted the nation’s ability to process oil and resulted in rapidly rising fuel costs), a company can include a temporary surcharge.
- Eliminate customer discounts, coupons, and “freebies.” Eliminating discounts, coupons, and other freebies is an invisible way of raising prices that can add significantly to a small company’s profit margin.
- Offer products in smaller sizes or quantities. As food costs soared, many restaurants introduced “small plates,” reduced-portion items that enabled them to keep their prices in check. In the quick-service sector, miniburgers billed as “fun food” and offered in bundles became a popular item on many menus.
- Focus on improving efficiency everywhere in the company. Although raw materials costs may be beyond a business owner’s control, other costs within the company are not. One way to cope with the effects of a rapid increase in costs is to find ways to cut costs and to improve efficiency in other areas.
- Emphasize the value your company provides to customers. Unless a company reminds them, customers can forget the benefits and value its products offer. “If you provide great value to your customers, a little price increase isn’t going to scare them away,” says Elizabeth Gordon, a small business consultant.
- Raise prices incrementally and consistently rather than rely on large periodic increases. Companies that do so are less likely to experience resistance due to customers’ sticker shock.
- Shift to less expensive raw materials if possible. Some small businesses combat rising raw materials cost by adding new products that cost less to their lines. When seafood and beef prices increased, many restaurants revamped their menus to include dishes with less ex- pensive ingredients, such as chicken.
- Anticipate rising materials costs and try to lock in prices early. It pays to keep tabs on raw materials prices and be able to predict cycles of inflation. Entrepreneurs who can anticipate rising prices may be able to make purchases early or lock in long-term contracts be- fore prices take off.
- Differentiate your company and its products and services from the competition. Many retailers and restaurants struggle to wean customers off of the discounts they offered during a lingering recession and fragile economic recovery.
