When Should Small Businesses Raise Their Prices?

The current economic crisis of high inflation, interest rates, energy bills and food prices is causing a lack of confidence about trading prospects for many businesses.

The general mood of uncertainty is contributing to small business owners’ fears about how to keep profitable and resilient. While their own costs are increasing, many are reluctant to raise prices in case it deters customers from purchasing their products or services.

Keeping your business profitable is challenging at the best of times but staying afloat during the current trading conditions is something that requires careful financial planning.

Keep an eye on competitors

Check how your prices compare with your rivals and if you’re already more expensive, you’re likely to find customer resistance to further increases.

According to research by the Office for National Statistics, published on 21^st September 2023, 42% of UK businesses haven’t passed on rising costs to their customers. However, a price increase may be unavoidable to protect profit margins, or the business will eventually become unsustainable.

Hiring small business accountants can help SMEs in several ways, including providing sound strategic advice and helping you to make the most of your money.

How long ago did you last increase prices?

If you’re one of the 42% of UK businesses who haven’t passed on cost increases to customers, a price rise may not be too detrimental to your trade.

It is likely to be better received than if you have increased prices only a few weeks ago, as this could be seen as profiteering from the economic crisis.

Maybe look at other alternatives before going ahead. For example, can you slightly reduce the size, volume or weight of a product, but keep the price the same? While customers will recognise the product is smaller, being able to buy it at the same price may be better for their budget, so this change would be more appreciated.

Similarly, if you offer services, can you offer a reduced package, but keep the price the same? This is common practice during tough economic times and is known as “shrinkflation”. Companies often prefer to do this, rather than displeasing their customers with obvious price hikes.

How loyal are your customers?

Consider whether your customers are loyal or how likely they are to switch to a competitor if you put your prices up.

Companies selling essential goods such as healthcare, groceries or fuel usually find it easier to increase their prices in line with inflation or even above inflation. It tends to have less effect on their sales volume. However, if you sell non-essential and luxury goods and services, it can be more difficult to keep pace with inflation without reducing your sales volume.

This is something you can discuss with your accountant to determine how it is likely to impact your cashflow.

SMEs need to weigh up the pros and cons of losing money through not passing on cost increases to customers, or by bringing in a price increase that might drive some consumers to competitors.

Is there a light at the end of the tunnel? Analysts say maybe. While inflation is still high, it has fallen to some extent in recent months. After reaching an all-time high of 11.1% in October 2022, it currently stands at 6.7%.

Inflation is expected to drop to around 5% by the end of this year, giving business owners new hope that the economic crisis will start to alleviate soon. However, the Bank of England isn’t expecting to reach its inflation goal of 2% until the first half of 2025.