How to communicate price change to your customers

The cost of doing business will inevitably increase. It could be because the price of energy prices, the landlord increases the rent on your warehouse, supplier costs increase or because you need to hire more employees to handle growth.

More than half of small businesses (54 per cent) absorb price rises themselves instead of passing the costs to customers, which impacts on profit margins.

Adjusting the price

Waste and recycling business Waster adjusts prices three times a year. Across the board, the price increase rose 1.5 per cent.

The business works with small businesses such as cafes, distribution companies, and retailers in major cities across Australia.

Some customers have certainly pushed back on the price adjustments, says founder Aodhan MacCathmhaoil.

“When we change rates, we indicate this via email a month in advance. Customers can cancel on one months’ notice, so this gives them the opportunity to seek a supplier elsewhere if they want to,” MacCathmhaoil explains.

Waster also quotes prices online, so if prices change, it means new customers also face those prices.

“We try to be fair but firm in the new rates, explaining why they have changed, suggest more recycling to decrease costs and highlight how other rates have reduced.”

To some extent, we try to alter prices to make customers make the right choices themselves. For example, we wanted to incentivise recycling, so we didn’t increase recycling rates at all. We also decreased prices across the board for Melbourne customers as we wanted to win more business.

“Where we did increase prices, such as Sydney, this was backed up with government information on landfill levies that we have to pass on.”

The cost of doing business

A price rise was inevitable for the founder of KX Pilates studios, Aaron Smith, who has built a successful network of more than 50 franchised studios across Australia.

Business expenses related to increased compliance costs was impacting profit margins, Smith says.

“We felt it was reasonable to increase prices given our operating costs were continuing to rise,” Smith says.

The price rise was also tied in with customer feedback from a survey that asked how KX Pilates could improve their experience, which uncovered that some of the class packs were not popular.

Smith increased session prices and monthly class packs by 7 per cent, which he felt his customers would be comfortable with. However, he didn’t communicate the price rise openly, which was a mistake, he admits.

The response overall was positive, though some clients expressed their disappointment via social media. “It was never our intention to do something in a negative way, but perhaps, in hindsight, offering some explanation up front would have addressed these issues straight away.”

In response, Smith sent an email to customers explaining that the price rise was small, outlining the reasons for the change.

How to communicate a price rise

Business owners should review their prices annually, and whenever significant changes in the environment in which the business operates occur, according to Australian pricing expert, Julia Bickerstaff, who works with small business owners seeking to make a healthy income.

When should you communicate a price rise?

If you work in an ongoing close relationship with your customer, it’s best to communicate a price rise directly to the customer, whether by email, phone or in person. If you have regular customers who know your pricing but with whom you have no ongoing working relationship, such as an ice cream shop, you can explain the rise in-store via a notice, she says.

“If you have one-time or occasional customers who are unlikely to know or remember your original product pricing, then there’s no need to communicate the price rise at all. Most people won’t remember the price they paid previously and communicating the price rise would just create questions in your customer’s mind where none existed before,” she says.

On the other hand, if there’s been an unusual event in your industry which has caused your costs to increase, then it’s helpful to explain this to your customers. For example, when Cyclone Debbie hit the banana crops in Queensland last year and the cost of bananas soared, it was helpful for the industry to explain the cyclone would impact on prices for a while, Bickerstaff says.

Small business owners should consider if you can turn a price rise into an interesting story, which can work well from a marketing point of view, she adds.

“For example, if you run an ice cream shop using local milk and have committed to paying your farmers extra to support them during the drought, this becomes a really good story for your business that you should tell,” Bickerstaff says.

If your customers are price sensitive, then justifying your price rise is useful, Sydney’s Bickerstaff says.

When contemplating a price rise, ask yourself these four questions:

1. How much profit is my business already making on this product or service? If the margins on the product are already tight, it will be imperative to pass the price on. If the margins are significant, but customers are sensitive to price, it might be worth absorbing the price increase.

2. How sensitive are my customers to price? Not all customers and products are equal. Some products are very ‘elastic’ in that when price increases, demand falls rapidly. Other products are quite inelastic, in other words an increase in price doesn’t cause much change in demand. If your customers are very sensitive to price, you’ll need to work out whether you think the increase in price will offset the fall in units sold.

3. What will my competitors do? If your product has readily available substitutes, then you’ll need to consider what actions your competitors will take with their pricing.

4. When did I last increase my prices? It’s usually easier for customers to swallow small regular price rises than occasional large ones.

Source: The Business Bakery, Julia Bickerstaff