A beginners guide to managing a price increase
Price increases. Like trips to the dentist or a colonoscopy, they’re something many people avoid until they become an even bigger problem. The health of your business is based on being able to manage costs, margin and pricing and its critical to tackle it as soon as you can rather than waiting for the tide of pain and red ink when drastic measures need to be taken. An inflation rate of 7.3% (second quarter 2022), by definition, means that there are a lot of company’s that have already put up prices in a significant way. For product manufacturers this is especially felt in the early parts of the value-chain from freight & shipping, to local couriers (reflecting fuel increases) and flowing through to ingredients, packaging and now labour rates. If you’ve been avoiding taking a price increase and just hoping that you’ll be able to ride it through, then the time is now to put in place the price change you need to keep your business healthy and sustainable for the future.
Once you’ve worked out how much you need to increase your prices by (and hint… it shouldn’t be a flat rate across your entire range unless every product is identical), then its time to work out a detailed plan to put it into place. Regardless of whether you sell direct to consumers through your website, or to larger wholesales and retailers, its important that you think about how to execute it to avoid potential issues. Unexpected increases can cause negative backlash that far outweighs the scale of change, and by being proactive and following the steps below, you can communicate the change with confidence.
How to communicate a price change
Be honest.
Brand loyalty takes a long time & investment to build, but can be quickly ruined if you’re sneaky about things as important as price. Suddenly reducing your pack size overnight but keeping the price the same is a price increase by another name, and you risk being ‘called out’ for this if you’ve tried to hide it from retail customers and consumers. If you’re dealing with wholesalers or Retailers, don’t hide your price increase in SKU size reductions or making alterations to price lists, trading terms or other areas. Instead, be open and explicit about the move. Have a clear new recommended retail price (RRP) and give them clear reasons for the facts driving change. This could be explaining how much your transport costs have increased, the fact that you’ve adjusted wages to align with cost of living increases, or that you’ve had to make a change to new (more expensive) raw material supply in order to maintain the quality of your product. Whatever the reason, make sure you have one and are honest about how it is impacting the business, and the quality of the end product.
Be clear.
Use language that your Retailers and customers can understand. If it’s a price increase, then simply state ‘we’re increasing our prices’, or ‘we’re taking a price increase’. Euphamisms like ‘managing pricing to adjust for new economic conditions’ or even ‘price adjustment’ don’t lessen customer disappointment – if anything they make them worse as you can be seen as trying to hide the reality of what’s changing. Being clear and open also applies to WHY you’re taking the increase. Don’t dodge the issue of why prices are going up or use generic management speak to blur the explanation. Instead, create a short, specific explanation that cites the actual reasons for the price increase.
Kokako coffee took a price increase in March 2022, and clearly explained why. “Covid-19 has caused massive disruptions all through the supply chain, climate change is causing crazy weather that’s wreaking havoc on crops and shipping prices are through the roof. Because of all this cost of green beans (unroasted coffee) is higher than it's been in a decade. Coffee suppliers and cafés don't have much choice but to put their prices up. But when you think about what a glass of wine that's grown in NZ costs, a cup of coffee that's been grown across the world and prepared exactly to your taste doesn’t sound too bad, does it?” https://www.instagram.com/p/Cbv3FWcPWSP/
Remind customers of the value of your brand
Now is when many consumers are reevaluating the products that they buy, and particularly for your lighter users, this is when you need to remind them of the value your brand offers to them. This could be about your ethics in always choosing sustainable ingredients, your standards related to product quality and consistency, or even link back to how you treat your staff by giving them a positive living wage. Think about WHY people buy from you, WHAT they tell you is most important about your brand and product and the VALUE that you want to keep giving them. We are all human and sometimes a little reminder helps reassure us that its not the finance department weilding a calculator that has driven the increase. Take care not to make it all about you though… this isn’t a time to claim ‘poor me’ about how tough it is to run a business. Its hard for many people right now and unless you are operating a social good or charity, then you need to be sure to make it reasons that link back to what you give THEM. Your brand is a promise of value, and if you’ve built a trusted brand, then you can remind the people who buy from you, what makes you worth their investment.
Give some perspective on the scale of increase
This could be as simple as showing how your price compares to other alternatives or similar products that they might buy. The cost of a product for most fast-moving goods isn’t something that consumers think about a lot (if at all), until there is something that prompts them to relook at it. For someone selling a product like supplements that have a higher RRP, but are used daily, then consider linking to the cost of other vitamins/ supplements/ smoothies. If it’s going up by $5.00 but there is a month’s worth of supplements, then that’s an increase of only $0.16 a day to maintain health and wellbeing, or the price of a small cup of coffee from your favourite cafe. If you are a food product that has lots of ‘serves per pack’ then consider highlighting on pack the number of serves (keeping it simple). This could be ‘over 50 serves of delicious kimchi’ or ‘a whole week’s worth of snacks in every pack’.
Depending on how you’ve managed the price change across your range, you may even want to start promoting a ‘value pack’ offer that is a higher absolute RRP but a lower price per serve. This is called ‘pack price architecture’ and refers to having different offers and pricing for different products in your range.
GoTo Skincare took this approach when it came to the increases on their major skincare lines. They highlighted clearly the level of increase - often $2-$5 per unit - and also showed that they were decreasing the price on some of their brands as well. This helped not only demonstrate to consumers that this wasn’t a simple decision to lift all prices the same, but also that there was considerable time and effort put into managing the level of price change.
Give them time
Taking a knee-jerk response to increasing prices is the recipe for sticker-shock and negative backlash. Explain clearly when, well ahead of time, the increase will occur. There may be set notice periods for price changes with larger Retailers & Wholesalers, and you can be sure that they will hold you to these strictly. If you’re selling a daily product like coffee, then even a day’s notice is fine as customers can’t ‘stock up’ but you want to give them the TIME to make a decision about whether to come and buy from you,
Give YOURSELF time as well. When you know that you need to put in place a price increase, then use your calendar & work out a clear plan of communication and then implementing the increase. Price increases impact all parts of your business from website (updating price pages, free shipping levels and/or shipping costs) plus adjusting your promotional discounts (are you going to give the same $ discount or % discount - or is that changing as well?).
Make sure you have a clear plan, know when you’re going to communicate to consumers and how you’re going to do it, and follow the key points above - and you should be able to approach your price increase with more confidence. Its not nice, but like going for regular medical checkups, its a necessary part of maintaining the health and long-term viability of your business.
After the increase….
Don’t panic if volumes drop. There may be a short term ‘sticker shock’ and some consumers may not see the value (or be able to afford) your new price. This is a natural part of price: volume elasticity. If you’ve got a range of products then consider how you promote different products to maintain volume, and what kind of activity might be needed.
Remember, not every customer will love it - you might get negative feedback on social media or directly. Be prepared to respond with honesty and not defensiveness. If you’ve been upfront about it, and followed the steps above, then you can repeat this again to reinforce the reasons for the change.
Be prepared for some Retailers to buy-up stock before the price increase. While this costs you in having potential slower sales AFTER the increase, it should be included as part of your overall plan and conversations with retailers. Consider how you’ll manage this and what the impact will be on your cashflow and financials if this happens.
Keep close track of what is happening to your volume sales, turnover and product margins. It may take a few months to see the impact come through and patience is important so you don’t drop back too quickly. Competitors may be looking to see what happens and following - which takes time too. Talk to your accountant and set some clear measures to track performance.
EXAMPLES OF DOING IT WELL
Goto Skincare https://www.instagram.com/p/CcgsrQchFgv/ >> podcast explaining more >>https://www.mamamia.com.au/podcasts/lady-startup/guide-price-increase
Kokako Coffee https://www.instagram.com/p/Cbv3FWcPWSP/
