Should You Raise Prices Now?

Inflation is taking a big bite out of your margins.  You want to raise prices, but there’s internal and external pressure to hold them steady.  What should you do?  For most companies, the best answer is to raise prices now.  Maybe a subset of products; maybe carefully executed, but the time is right.    

The driving factor is inflation.  Your costs are increasing.  You may know that costs shouldn’t drive pricing, but inflation influences your market’s willingness to pay.  Buyers now expect price increases.  They don’t want them or like them, but they expect them.  This makes raising prices just a little bit easier.  

Inflation has two opposing influences on buyers, depending on their situation.  One makes them likely to pay more, and the other makes them buy less.  Right now, buyers expect prices to go up.  They know your costs have increased, so their willingness to pay increases.  On the other hand, some buyers are constrained by budgets and must make trade-offs to survive.  The strength of these effects is a function of the buyer’s wealth and the products’ characteristics.  

Let’s divide customers into two categories, those who survive paycheck-to-paycheck and those with disposable income.  For the ease of this article, let’s name them the Struggling and the Comfortable.  These same classifications would exist in the B2B world.  You may think of companies that are not profitable as Struggling and the profitable ones as Comfortable. 

Similarly, let’s divide products into two categories: Necessities and Luxuries.  Necessities are items like food, gas, and health care.  Luxuries are products and experiences like Starbucks coffee, eating at Macaroni Grill, and new furniture.  Think of luxuries as anything a buyer could do without, if necessary.  

We now have a two-by-two matrix.  But the good news is that each of your products probably falls mainly into one quadrant.  Let’s look at each quadrant.

If you sell necessities to the struggling, you’re in for a tough time.  Households that survive paycheck-to-paycheck are budget-constrained and must now shift their buying habits. Some will make do with less.  For example, they’ll attempt to drive their car less to save money on gasoline.  Some will find lower-price substitutes.  Instead of brand-name products at the grocery, they may shift to store brands or buy pork instead of beef.  You must strive to hold your prices down because this market is very price-sensitive.  Price increases will likely result in significantly fewer sales.  

If you sell luxuries to the struggling, you should change your strategy.  I heard of a grandmother who borrowed money to buy school supplies for her grandchildren.  If she used to go to Starbucks, you can easily predict she cut that from her budget. Unit sales in this quadrant will plummet regardless of what you do with your price.  Luckily, not many products are in this quadrant.  

Now for the fun quadrants, selling to the comfortable. 

If you sell necessities to the comfortable, they can and will pay more.  You should plan on raising prices.  Your limiting factor is their ability to switch to a competitive product.  For this reason, you want to watch your competitor’s prices closely.  If they raise their prices, follow immediately.  This is not a time to try to steal market share.  If you don’t follow, they may bring their prices back down and you’ve missed your opportunity.  If they don’t lead the price increase, you may try leading.  Raise your price and watch your competitors’ prices closely.  You can reverse course if your competitors don’t follow.  When you and your competitors raise prices, industry profits will go up with little impact on unit sales.  

Important Note:  It is illegal to discuss prices with your competitors.  Just don’t.  The pricing actions described in the previous paragraph are often called “implicit collusion” and do not involve you illegally discussing prices with your rivals. Check with your legal department for the safest advice. 

If you sell luxuries to the comfortable, your strategy will be similar to selling necessities to the comfortable, but the results will be slightly different.  Regardless of whether or not you raise prices, you will sell fewer units.  Many of these buyers are worried about what will happen in the future.  Many feel guilty about buying when others can’t.  As a result, they cut back on spending on non-essentials.  These market conditions will drive down your unit sales.  But the good news is that your price increase isn’t causing it.  Like selling necessities, if you and your competitors raise prices, you will make more profit than if you don’t.  Unit sales will likely decline, but it’s probably due to market conditions and not your price increase. If the market will shrink regardless of industry prices, it makes sense to raise them.  

Most B2B companies sell to other profitable companies, so the comfortable strategy applies.  Try to raise prices.  You’re suffering from lower margins due to increased costs.  So are your competitors.  It’s a safe bet that they are also trying to figure out how to raise their prices.  It may feel risky, but raising prices has never had less risk.  

To summarize, if most of your customers are struggling to make ends meet, expect lower unit sales and hold your prices as low as possible.  Try to weather the storm.  However, if most of your customers are comfortable, start figuring out how to raise your prices, intelligently. You’re missing an opportunity if you’re not raising your prices now. 

Written by Mark Stiving, Ph.D.
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