It’s ok to put your prices up. Your customers can handle it.
Putting your prices up is one of the things small business owners dread. I know, because I've had the conversation hundreds of times. There's always a version of the same fear when a retailer asks, “What if my customers notice? Can they afford it? What if they go somewhere else? What if I lose the regulars I've worked so hard to build?”
Here's what you need to remind yourself, price increases are a normal, expected, and necessary part of running a retail business. Your customers know it. Your suppliers know it. And deep down, you know it too. The question isn't whether to increase your prices, it's how to do it in a way that protects your margin, maintains your customers' loyalty, and keeps your business profitable.
Let me ask you this. When did you last walk into a shop, notice that a price had gone up slightly, and walk straight back out again?
Probably never. Because that's not how customers actually behave.
Many consumers aren’t as price sensitive as you think they are. They might appear so if you read comments in the media, including social media, but often convenience and habit as well as just the enjoyment of shopping at their favourite local store trumps price. And anyway, they’ve been watching prices rise everywhere for years now, at the supermarket, the servo, the café down the road. They're not surprised when a small retailer adjusts their prices and they're probably expecting it. The anxiety about price increases is almost always greater on the retailer's side of the counter than the customer's.
“Protect your profit. It’s what keeps you in business. A price increase you never make is the profit you will never see.”
Which brings me to the point of this article. With several real cost pressures landing on Australian retailers right now, this is a good moment to think clearly about your pricing strategy and to have a practical plan for protecting your margin without drama.
Before I tell you my favourite trick to increasing your retail price (Tip 2), it’s important that you understand the term ‘maintain margin’ and more than that, you have to keep it front of mind whenever you’re reviewing prices or see a price rise come through from a supplier or external service.
TIP 1: ALWAYS MAINTAIN MARGIN
And by that I mean maintain margin percentage, not dollars. If your margin is 50%, then as your suppliers increase their prices, you should do the same, landing on a retail price that maintains that same 50%.
When a supplier puts their price up they are doing so to cover their increasing costs such as fuel and wages, the same increases that are impacting your business. So, when they increase their price to you, you should consider that the trigger for you to increase yours. They’re actually doing you a favour because they’re maintaining their margin and in doing so they’re reminding you to do the same.
Margin is the difference between what you pay for a product and what you sell it for, expressed as a percentage of your selling price. If you buy something for $5 and sell it for $10, your gross margin is 50%.
Maintaining margin means keeping that percentage intact even as your costs go up.
That is, if your cost goes from $5 to $6 but you keep the retail price at $10, your margin has dropped from 50% to 40%. You’ve not maintained margin and when that’s multiplied across several product lines and hundreds of transactions, your business quickly becomes less profitable.
However, if you work on the basis of maintaining margin, in the example above you would have increased your retail price to $12, giving you $6 profit.
You might feel a bit guilty and think that you will only put your price up to $11 because you’ve still got the original $5 you started with, but here’s the problem with that. You will have other costs going up too which aren’t accounted for in the COGs and you need that extra dollar to cover them. And anyway, think about the long term consequences if you stuck with that as your policy. The COGs will continue to creep up but you will still have your original $5 profit and eventually you will realise that your prices haven’t kept up and you only have two solutions - have a going-out-of-business sale or you have to jump your retail prices up significantly to catch up.
To demonstrate, let’s assume the information in the graph below. Both businesses start with the COG of $5 on a product and sell it at $10, a 50% margin. The supplier increases the price every six months by 75c. Business 1 maintains margin so every time the COGs increase they increase their price. Business 2 doesn’t increase their price and absorbs these increases, eventually ending the two years with a margin of 27.5% and lost opportunity of $5,400. Imagine the losses if this was their policy across several products, or worse, the whole store!
No one wins in the Business 1 scenario. You think you’re doing a nice thing for your customer but if they like you, they will want you to do well. They’re going to be very disappointed if one day you have to close because your business isn’t profitable.
THE HIDDEN COST OF DELAYING PRICE INCREASES
Assumes sales of 100 units per month
TIP 2: INCREASE YOUR PRICES LITTLE AND OFTEN - The best tip of all!
This is the advice I give every retail business owner I work with, and it's the one that makes the most practical difference. If there is only one thing you take away from this article, this has to be it.
It is far better to increase your retail prices little and often, in small increments that are hardly even noticeable to your customers or, if they are, they feel reasonable to them.
I've seen business owners hold off on a price increase for months, far longer than they should, because they're worried about the reaction. They absorb the cost, protect their margin by cutting corners elsewhere, and then one day they simply can't avoid it and they have to bump their prices up. The problem is, to catch up to what the rest of the market is charging and to make up for the lost ground of keeping prices low, the increase has to be quite significant. It’s not just an increase of a small percentage, it’s now such a big increase that it’s obvious.
Customers notice and because it’s quite a big jump, they get annoyed. They think you’re price gouging or they feel that it’s unfair and in their annoyance, they start to shop around and you’ve lost that loyalty that you valued so much. You might know what caused it but it’s impossible to explain to customers that you had been trying to do them a favour by keeping your prices low. By trying to be too nice, you’ve caused your customers to go check out your competitor or to start price matching online.
Compare that to a business that nudged the same product up by tiny increments over that same period. Even if customers noticed, it’s only a small amount and they probably think it’s totally understandable in the current market. The end result is similar, but there was no single increase which was jarring to the customer. And here's the kicker, that first business spent months being underpaid for what it was selling and then when they did play catch up, they annoyed their customers. The other business got a little bit more profit over that period and still got to the same end point, and their customers would be far more understanding.
Don't wait. Small, regular adjustments are far less concerning to customers and far better for your cash flow.
TIP 3: BE STRATEGIC ABOUT WHICH PRODUCTS CARRY MORE MARGIN
Not every product needs to, or should, carry the same margin. It depends on the purpose of that product within your sales strategy and also whether it’s a high turnover product or not.
The trick is to set the margin percentage for each product or product category so that it still achieves the sales goals, but with the goal of having a healthy blended margin across your store.
This does take a bit of work as you have to calculate how much each category contributes to total sales but it does allow you to be more strategic in your pricing.
For example:
Core or staple products — the things customers come in specifically to buy, the ones they might price check elsewhere, can afford to carry a slightly tighter margin. These are your traffic drivers. You want to stay competitive on these without giving them away.
Impulse and discretionary products — these are the products customers didn't come in for but pick up while they're in your store, and these can carry a higher margin. These are often the products where price sensitivity is lowest, because the customer wasn't planning to buy one anyway. Impulse buys, accessories, seasonal purchases may fit into this category.
Niche or specialist products — things that are hard to find elsewhere, or that you're selling with a significant level of expertise and service behind them absolutely warrant a higher margin. You're not just selling a product, you're solving a problem. This has value and the margin can reflect that.
So, if you had a clothing store, tops and trousers might be 45%, belts and hats might be 55%, and jewellery might be 60%. Overall, you might be aiming for an across store margin of 50%.
TIP 4: A FEW CENTS ADDS UP FAST
This is an oldie but a goodie, and a great little tip I’ve used often with businesses. It’s surprising the impact it has and anyway, if you’ve read some of my other pages you would have seen me nagging on about ‘looking after the cents because the dollars take care of themselves’.
Here’s the tip. If you're selling a product at $2.95 then move it to $2.99 — that's 4 cents. Barely noticeable to anyone. But, if it’s a high turnover product, that soon adds up! If you sell 200 of those a week, that's $8 a week, $416 a year, just from one product without having to do anything!
And then start finding other prices that you can just nudge up a little bit more without putting it over a major price point. If you have products that are $5.50, move them to $5.75. Products that end with 20c can be moved to 25c. If you deal more in dollars, just move the decimal points in my examples. You get the drift.
Just be mindful of nudging prices over a significant psychological price point. I’m sure you already know this but it’s worth mentioning. Customers process prices in brackets — under $10, under $20, under $50 — and crossing one of those thresholds feels like a bigger leap than the numbers suggest. A product at $9.75 moved to $10.20 is only 45 cents, but it has crossed from "under ten dollars" to "over ten dollars" in the customer's mind, and that can register more than you'd expect. Where you can, with this tip keep your increases within the same bracket unless you’re following tip 1 about maintaining margin because the good thing there is that your competitors will probably be doing the same with supplier price increases and so you won’t be on your own.
With this tip, target the high turnover products first, the ones where just a few cents won’t make any difference to the customer, they may not even notice, but it will make a huge difference to you.
WHAT TO DO RIGHT NOW!
As I write this, retailers are about to get hit by some increased and additional costs but that’s not really so uncommon so before the next round of increases hits, take an hour and do the following:
Pull out your top 20 selling products by volume. Check the margin on each one. If your costs have gone up and your price hasn't moved, that's a gap that you're funding out of your own pocket. Adjust those prices now in small increases, nothing dramatic.
Then write a quick document (if you don’t have one already) that states what the margin is for each category in your business. If it’s not written down, it doesn’t exist. Keep it simple but make it profitable. This is your quick-glance guide next time you get a notification from a supplier.
Lastly, run a quick price report on your POS, and find any product where the last number of the price is a 5 and ask yourself if you can increase it to a 9.
Your margin doesn't maintain itself. But with a bit of discipline and a willingness to make small, regular adjustments, it doesn't have to be the constant source of stress it is for so many retail business owners.