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How to raise prices without alienating customers

Wednesday, February 01, 2023

It’s no secret that costs are up for restaurants and retail shops. Supply chain disruptions, labor shortages, demand upsurges and inflation are some of the factors that have contributed to higher prices — and you may need to adjust yours in response.

A rise in cost of goods sold (COGS) is a common reason for raising prices, but price increases can be a strategic move to protect margins and drive growth, too.

As you consider new pricing, you may be wondering how to introduce increases without alienating customers.

Price hikes aren’t unusual when inflation hits — but you may still get pushback from some patrons. As consumers face higher costs everywhere from the pump to the produce section, small business owners have to figure out how to keep price-sensitive shoppers satisfied.

If you’re struggling to keep up with the cost of doing business, read on to see if a new pricing strategy could be a smart move for your business. Plus get tips for doing so while keeping your customer base engaged.

Four steps to effectively raise prices in your restaurant or retail shop

Cashier helping a customer with a mobile purchase

Communicating proactively, demonstrating value and citing relevant data are key when telling patrons about pricing changes.

With excellent service, dishes or dresses they can’t resist and clear messaging about your price hike initiative, you’re likely to have most of your customers’ full support.

Use the information below to set your business up for success as you consider new pricing, then keep reading for questions you have that may pop up as you implement increases.

First research your market

First, research your market and competition

Global factors like pandemic-era supply shortages and rising energy and raw material costs have affected nearly every business, so it’s likely that your competitors have already increased their pricing or are considering it.

If the burger joint around the corner has recently adjusted their menu prices, it’s easier for you to make the leap. If your competitors haven’t budged, there may be less opportunity for a price increase.

Whether a restaurant or retail rival has raised their prices or not, be sure to consider how your customers will react: are they able and willing to pay more? Do they have viable alternatives to your products and/or services? Losing a significant amount of your customer base due to price hikes won’t do you any favors, so balance is key.

Then, determine the increase your business needs

There isn’t an exact formula to dictate how or when you should raise prices. Different industries have different margins, so making the decision to increase (or decrease) the price of what you sell depends on the specific threshold for your business.

Determine the increase your business needs

A news release from the Consumer Price Index reported the index for food away from home is up 8.5% compared to last year and the index for full-service meals rose 9% over the past 12 months. Though there may be initial sticker shock, new pricing most likely won’t surprise most customers.

If you are unable to make the same margins, have more demand than supply and have observed cost changes with your competitor, it’s probably a good time to update your pricing.

You can use a digital percentage increase calculator to help determine a specific price change amount that’s right for your business.

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Next, strategically apply the increase across your brand

As you start to release information about the upcoming changes in your restaurant or retail shop, share your value proposition and frame the importance of your product or service.

You’ll want to remind customers about the value you provide, but you might also want to see if there’s an opportunity to provide a service benefit or low-cost product to bolster customer loyalty and retention, even as the best-loved barbecue plate increases by $3.

For example, you can raise prices while gratifying customers by:

  • Creating product or service bundles (that don’t impact margins)

  • Extending your service hours

  • Sending digital thank-you notes to express appreciation for their patronage

  • Offering complimentary gift wrapping for purchases over a certain amount

Don’t forget about the power of customer consideration and loyalty initiatives, too. We’ll talk more about these concepts later in this article.

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Finally - update your menus or listings

This part will be fun! Or at least exciting. Once you’re ready to raise your prices, you can support your new pricing initiative with these menu updates:

  • Restructure your menu: anchor lower-priced items next to high-priced items on the menu, which allows diners to establish a price point and have a frame of reference for product valuation

  • Shorten the menu — fewer options means less purchasing, less waste and less labor

  • Think about recycling the majority of your paper menus in favor of QR code options. You’ll save on printing costs, plus making digital pricing updates will be a breeze

As you review and update your menu and pricing, take a moment to evaluate menu items in the “dog” category. If the meal doesn’t perform well and doesn’t make your business money, it may be time to drop it.

If you have a retail store, don’t forget to make pricing changes across your inventory, online listings and social media commerce platforms.

Two employees looking over pricing using a tablet

What should you consider when raising your prices?

Alright, so you think it may be time to raise prices in your business. You have the basic framework for going about it, but you may still have questions. Let’s dive in!

Sometimes, business decisions are easy to make. Yes, the front door would look inviting if it were painted yellow. No, new condiment holders aren’t a must-have right now. Yes, that recent interviewee seemed like a hard worker and would make a good hire.

Updating your pricing, on the other hand, directly affects your customers (who may also be experiencing financial hardship), so being equipped with pricing know-how can help as you determine next steps.

Is there a certain amount that COGS should increase before raising prices?

As you know, COGS tells you what your company spends to deliver a product or service to your customer. And it’s no surprise that prices for nearly everything have been on the rise.

The cost of eggs are up

According to the US Bureau of Labor Statistics’ Consumer Price Index, the cost of eggs has soared 39.8% (with the price of margarine not far behind) and garnishes like olives and pickles are up nearly 20%.

When considering the impact of COGS and the margin needs for your business, there isn’t a particular amount that has been defined. Rather, a price increase should be a reflection of your individual business and its financial needs.

If there is a significant increase in certain COGS for your business, you can explain that rationale in your messaging to customers.

Should companies tell their customers about a price increase?

Whether you have regulars who know their chicken fried steak special is always $11 or you simply want to manage the messaging surrounding your new pricing strategy, it is a good idea to communicate to customers that costs have changed.

It’s not necessary to go into extensive detail. Give a basic explanation of why you are raising your prices with an emphasis on the benefits for the customer and the added value you’re providing.

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Is it better to raise prices incrementally or all at once?

It depends on the structure of your business, and the key is ensuring pricing changes are sustainable and optimized for the market you’re in.

For restaurateurs and retailers alike, you’ll want to run analytics reports to understand which categories are the most profitable, which items move the fastest or most often and what profit margins are needed to keep your business moving forward.

With most eateries, it makes sense to raise your prices all at once. Fountain drinks are bumped to $2.50, soup of the day jumps to $8 and a slice of pie is now $5.

Retail stores, on the other hand, can fluctuate pricing fairly easily. As new inventory comes in and clearance items move out, adjusting pricing is as easy as updating shelf tags and modifying pricing within your inventory management system.

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How can I get feedback about pricing changes once new pricing is in effect?

The easiest way to hear what customers think? Use the email marketing tools available through your customer intelligence platform to send out surveys requesting feedback and have your staff observe reactions at the table or around the fitting room. Keep an eye on online reviews, too, as consumers tend to share their thoughts on Google, Yelp and Facebook.

If you have an ecommerce site and list products there, you can also run A/B tests to observe consumer behavior as it pertains to new pricing.

Customer making a purchase at a food stand

How do you tell your customers you are raising your prices?

Because pricing quickly affects your bottom line, you won’t want to delay decisions about a price change. Still, you’ll want to make sure that you have thoroughly researched and considered the best approach — happy customers and healthy margins are at stake, after all.

Be mindful of timing

There probably isn’t a perfect time to announce and execute new prices, but it’s worth examining how customers are currently interacting with your business.

Restaurants who have recently received a slew of poor reviews online may want to correct the issues first, and retailers whose customers may be low on funds after the holidays may not want to establish new pricing at the start of January.

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Experiment with methods without launching an official increase

With these tips, you can reach target profit margins for your restaurant. Consider:

  • Increasing only the items with the most margin room

  • Creating a fun seasonal menu with slightly higher prices, which creates novelty for your customers and allows you to see how diners react to higher costs

  • Reducing serving sizes (only if you are able to track and specify waste or underutilization)

While these methods may do the trick, a comprehensive price increase may still be necessary. However, there are a couple things to avoid with certainty: don’t reduce value or raise prices too quickly. It may work to replace a small portion of protein with carbs or greens on a popular dish, but it isn’t okay to dupe your guests with falsely-advertised menu descriptions. (If your ribeye is only three ounces, don’t call it four.)

Prepare your staff

As the owner or operator of your small business, you can’t be everywhere at once nor can you field every customer question or inquiry. Before debuting a price increase, prepare your staff.

Let your employees know what contributed to the new pricing, then demonstrate how to handle any unhappy customer interactions. Active listening and sincerity can go a long way!

Discuss changes with your customers

Clearly and succinctly communicate changes to your customers

The majority of the shoppers or diners who frequent your business may not think twice about new prices, but it’s important to talk about the price hike regardless. When introducing the change, be clear and direct and put your guests first. Explain how the change benefits them.

There’s no need to apologize in your statement, but specificity and transparency are essential.

If you run a restaurant or food truck, you can put a short note about the price change in the window. If you have an ecommerce site, you may want to write a brief blog post or send out an update in a newsletter.

Use smart tech and promotions

Use smart tech and promotional tools to reassure and reward customers

With the right POS and payments tech, you can continue building or retaining a satisfied customer base even as new prices are rolled out.

Coupons, markdowns and freebies can benefit your business through customer retention, but these tactics can be expensive to your bottom line, too. Instead, a customizable loyalty program lets you build a direct relationship with the customers who fill your booths and shop your sample sales, plus you can offer special perks without shelling out steep discounts.

Skip-the-line passes, early presale tickets, dedicated parking and limited merchandise or swag are just some of the ways you can show appreciation to loyal customers. Plus, you can boost frequency and grow check averages by creating challenges that help earn exclusive rewards.

Customer service rep in a retail setting handing a customer their purchase

So, what comes next?

Often, how a market ebbs and flows is out of a company’s control. But entrepreneurs like you do have the power to make changes to keep your business out of the red.

As you raise your prices, consider how you can continue improving the everyday customer experience while meeting heightened customer expectations in a costly era.

There may be a handful of customers who express dissatisfaction surrounding your new rates, though the majority will be happy to continue supporting your business — particularly if there are perks in it for them.

Disclaimer: The information provided in this document does not, and is not intended to constitute legal advice; instead, all information, content, and materials available are for general informational purposes only. Information provided may not constitute the most up-to-date legal or other information, and readers of this information should contact their attorney to obtain advice with respect to any particular legal matter, in the relevant jurisdiction. All liability with respect to actions taken or not taken based on the contents here are hereby expressly disclaimed.

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