Small Biz: How to Hike Prices

Most small businesses are feeling the pressure to raise prices. Here's how to do so without losing customers

Viktor Koen

Yes, hiking prices is risky, but now many business owners have little choice. The trick is to give yourself some breathing room without losing customers to lower-cost competitors. Here's how to make your price increases go down more smoothly.

FUEL FIRST
Start with the increases that customers will most readily accept. A fuel surcharge probably tops the list. "People will be more tolerant of an increase when they've also personally experienced the reason for it," says Jason Zickerman, president of the Alternative Board, a Westminster (Colo.) company that runs peer advisory groups.

Cyndi Nieto had to raise her prices because many of the 12 employees at her $3.5 million staffing business, Los Angeles-based Elite Placement Group, complained that gas costs were eating up too much of their pay. She gave her temporary workers a raise of $2 to $3 an hour, but then had to boost the rates she charges her clients. Most customers found it hard to object after hearing Nieto's reasons. "Here in L.A., everyone drives everywhere," she says. "The price of gas is all people talk about."

A HEADS-UP
Let your customers—especially the big ones—know what you're doing. When Jon Scoles, managing partner of Scoles Floorshine Industries, a janitorial supplies distributor in Wall, N.J., realized that delivery costs had risen about 20% in the past year, he knew he had to raise prices. But first he wrote a letter to his top clients giving them a heads-up. "I didn't want them to think I was trying to gouge them," says the owner of the 19-person, $5 million company. It could be worth visiting your most important customers in person, making sure that whoever has the best relationship with the account breaks the news. If you have a long lead time in your sales cycle, you might need to let customers know up to a year ahead. In other cases, a month or two will do, says Anirudh Kulkarni, president of Fairfax (Va.) consulting firm Customer Value Partners.

SELECTIVE INFLATION
Don't raise everyone's prices the same amount. The simplest tactic is to hike prices only for new customers. Another is to determine which are your lowest-margin clients—perhaps those who take up more of your time than is actually cost-effective—and pass price increases on to them. "If you're going to risk losing a customer, you'd rather it be a low-margin one," says Kulkarni. You can be more flexible with the better clients. Scoles, for example, often offers his best accounts alternatives to top-of-the-line items. "If they usually buy, say, an expensive high-quality towel, I'll suggest a substitute that costs less," he says.

ROADS LESS TRAVELED
Look for less obvious alternatives. Stop charging by the hour, for example, and move to a flat fee. Employees will have an incentive to get the job done faster, and you'll make more money. Or consider reducing the size of your product, shrinking your per unit costs. And don't forget to look at opportunities to become more efficient. Businesses are most profitable when they run at 80% to 90% of capacity, according to David Rudofsky, a management consultant in Sleepy Hollow, N.Y. If you run higher, you may not operate efficiently, while less activity burdens you with too much overhead.

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