What should you do with your prices when costs are increasing?

When your costs increase, the simplest answer is to raise your prices. Customers usually accept price rises if you can explain the reason. But over a long time, there are other ways to protect your business against rising costs and high inflation.

In this article we talk to business advisors Edwin Joosten (Joosten Organisatie & Participatie) and Pascale Petiet (oamkb), and economist Hugo Erken (Rabobank).

Causes and solutions

Firstly, let us consider the most common causes for high costs for businesses. Economist Hugo Erken: “The economy is creaking on all sides. On one hand, we have cost inflation. Prices are rising because, for example, raw materials are hard to get and transport from Asia is problematic. Transporting goods from China to Europe in sea containers has become very expensive. If you can find any containers at all. On the other hand, we have spending inflation. New spending patterns emerged after the relaxing of the coronavirus measures. But the market is struggling to meet demand in many sectors. When demand is higher than supply, prices rise.”

Increasing your prices

The problem is clear: high costs while business income is not increasing at the same speed. You can make up for this by raising your prices. This is not difficult for one-off sales, though you must pay attention to your competition. Price rises for regular customers can be more complicated, notes business advisor Edwin Joosten. So you need to be more careful.

A common mistake

“A common mistake many businesses make is thinking their price is obvious to their customers. They think customers will not understand it if you raise your price”, says Edwin Joosten. “But that is not so. Your customer must feel they are paying a fair price. Let them know what that fair price is. Figure out your cost price. Then you can justify it. Your price must fit with what you are selling.”

Paying more? No problem!

If you justify your price increase clearly, it is reasonable to think that your customer will accept it. How do you do that? According to Pascale Petiet, it is wise to use the Statistics Netherlands (CBS) inflation figures for services, consumers and producers. “These figures give you an idea of a normal increase for your market. You can even share the inflation figures with your customers to explain your higher prices.”

Be honest and to the point

Joosten agrees that an occasional increase based on the CBS inflation figures is reasonable. But are you suffering from quickly rising raw material or transport costs? This is also a good reason to raise your price. Regardless of official inflation figures.

“Again, you have to explain that choice clearly. Communication is important. Get straight to the point. The situation is what it is. If your costs increase because raw materials are more expensive, and if this causes you problems, say so. You need to have a good margin. If the customer feels they are paying a fair price, they will accept it. If they do not feel that way, because you did not explain your decision well, they will leave.”

Prevent surprises

Petiet also highlights the importance of openness. “When you have contracts with customers, it is important to be clear and announce price increases in time. For example, do you adjust your prices for inflation once per year? If so, include this in your terms and conditions, and your quotations for customers. This prevents surprises and discussions. Your customer will also be ready to respond to an increase.”

Discussions about money

“Keep in mind that if you raise your price, your customer will think more about your service or product,” warns Joosten. This may result in a discussion about the price. For example, because the competition is cheaper. “Apologising is the worst thing to do in this situation. Instead of focusing on the price, talk about the added value of your service or product. That is the reason customers choose you. When you let your customer see and feel what your added value is, you make space to set your price.”

A word of warning

As an economist at Rabobank, Erken looks at the big picture. From that way of seeing things too, raising your prices is a simple way to absorb higher costs. He does, however, have an important word of warning. “How well that works depends on the market in which you operate. If you increase your prices but your competitors do not, you risk losing market share. This is especially complicated if you work with high volumes and low margins. If your business has a very specific niche, it is usually easier to raise your prices. If you have a lot of competition it is more difficult. A lot depends on your situation as an entrepreneur.”

Strengthen your business with structural changes

Raising your prices offsets your costs. Erken points out that there are other, more systematic ways to protect against high costs and other setbacks. “The best way to prepare for problems is to strengthen your business’s market position in other ways. For example, by automating processes, or investing in innovation, talent, and good management. Companies must increase their margins in these ways. And be critical of their revenue model and strategy. Especially now that many government support measures are coming to an end.”

Reshoring

Companies will also have to think about reshoring their business activities. That means bringing them closer to home. Erken: “The advantage is that you are less dependent on transport chains. Or disruption of your global value chain. Entrepreneurs have experienced the risks of this throughout the coronavirus crisis. And even before that, due to the tensions between the USA and China. The disadvantage of reshoring is that it can mean you become more expensive. For example, if your competition continues to get their semi-finished products from Asia.”

Long term

Finally, should businesses get used to these high costs and rising inflation? Erken: “Not all economists agree. At Rabobank, we think the price increases are temporary and inflation will remain below 2%. Inflation will remain high only if demand remains high for a long time. With the easing of lockdown measures, consumers have more room to spend money in cafés, restaurants and on holidays. But structurally, this higher demand can only remain if wages increase to match.”