Price_Increases_body.jpgby Erin McDermott.

 

How do you break the news to customers that you’re raising prices—and still keep them on board?

 

It’s an uncomfortable task, coming after every margin has been squeezed, every cost has been absorbed, and all alternatives are exhausted—and it’s especially tough for small business owners who know all too well that every penny counts when it comes to going up against the competition.

 

Yet companies of all sizes have had a lot of practice with this lately. Forecasters are predicting an increase of 3.5 percent in food prices for American consumers this year, up from 1.4 percent in 2013. Among the reasons: water shortages in California that are anticipated to push fresh vegetable prices up an additional 3.5 percent on top of last year’s 4.7 percent increase, according to the U.S. Department of Agriculture. (And bad news for many sleep-deprived entrepreneurs: coffee futures have surged nearly 70 percent since the start of 2014, largely because of drought conditions in Brazil.)

 

Combined with the rise in other agricultural commodities, industrial metals, new taxes on gasoline in several states, and the ups and downs of fuel prices, there’s plenty of angst among small business owners about how much more clients are willing to pay.

 

Here are a few tips on how to handle the leap:

 

Explain why you’re doing it

First, think about who your audience is. Is this a B2B relationship, in which a client might already be well aware of market changes that are affecting prices? Or is this a B2C situation, where customers aren’t necessarily steeped in your industry’s trends and might need some extra consideration? In either case, your wording needs to be clear and concise: Costs to produce a product or service have gone up, and you are forced to raise your prices. Then shift the conversation: Remind customers that even though your price has increased, the value of your product or service justifies the higher cost.

 

Price_Increases_PQ.jpgBe careful with the details

The best thing you can do is be honest, but pass on only relevant information. Steer clear of touchy issues that may have contributed to the decision, particularly anything involving politics, government policies, cultural issues, or anything that might turn off customers with opposing beliefs, including the divisive implementation of the Affordable Care Act or taxes. But if the reasoning is unavoidable, use neutral statements that don’t blame, complain, or urge action. One good example: Leck Waste Services, a suburban Philadelphia garbage hauler, told customers that Pennsylvania’s new increase in gas and diesel taxes meant a surcharge would appear on quarterly bills starting in January. Its announcement listed every effort at efficiency the company had instituted, directed users to a website with the text of the legislation—and actually helped educate customers, too: Did you know garbage trucks get an average of only 4.2 miles per gallon?

 

Think about sales psychology

Give customers a few options. Maybe set a date for when prices will rise and offer the “deal” of a lower rate up until that time. Another: Offer to lock in prices for a year if customers buy a specific number of products or commit to a certain time period for your service. Or aim the increase at new customers only.

 

With technology, you can test what the market might bear with actual clients. Jared Lazaro and his girlfriend are using that approach at the yoga studio they operate together in Grand Rapids, Mich. For example, for a beginner’s level class, they tested two price points in an email to customers: $69 and $79. Using Leadpages.com’ landing-page generator, they showed half of their email list one price and the other half the alternate price. “The same number of people clicked on both offers in the test, so we went up to the $79 offer for everyone else who looked at the page. If we hadn't tried the more expensive option, we would've left several hundred dollars on the table for one class and not even known it,” Lazaro says. “So many small business owners undervalue their work and products, that a simple price shift for new customers can produce a huge boost to a company.”

 

Choose your method wisely

A note on the door or menu or an email notice may not always suffice when communicating the news. In January 2013, Royce Leather Gifts had to implement not one but two rounds of price increases in a single month after the cost of cowhides skyrocketed after the previous summer’s crippling drought across the Midwest and West. To try to help soften the blow, Billy Bauer, marketing director for the Secaucus, N.J.-based leather goods maker, says he got on the phone with his biggest accounts himself. “There was going to be a big change that might affect their bottom line and they needed to hear that from me,” he says, adding that he faced a pushback from some clients. Talking directly gave him a chance to communicate what they stood to gain from the situation (they’d still be getting the best quality hides), and express the company’s wish to cushion the blow to keep their business.

 

“No one wants to be cornered with a ‘Take it or leave it’ ultimatum,” Bauer says, noting that clients did come around in the end. “When you can build a personal relationship over the years, there’s a sense of trust where I hope they know I’m not trying to mislead them to increase profitability. People want to know that you are committed to their profitability, too.”

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