Weighing up raising prices for your small business

Current landscape

Economic pressure

Rising operational costs are squeezing small businesses across the UK. We’ve already touched on the rise in minimum wage and national insurance, these changes, compounded by inflation and broader economic challenges, are leaving many SMEs grappling with the decision of how to remain sustainable while managing higher expenses.

Industry examples

Certain sectors are feeling the strain more acutely. A reported 20% of small businesses are spending significantly more on plant and equipment to stay competitive, with industries like trade and catering particularly affected.

For example, catering businesses face the dual challenge of increased ingredient costs and higher wages, while tradespeople must manage the rising prices of tools and materials. These additional expenses create a growing need for businesses to evaluate their pricing strategies carefully.

Customer sensitivity

In a cost-of-living crisis, balancing the need for price increases with customer affordability is a delicate task. Consumer behaviour has shifted, with many buyers becoming increasingly price-conscious, comparing options more rigorously, and cutting back on non-essential spending. However, research suggests that customers will pay more when they perceive value or feel a strong loyalty to a brand. Understanding the dynamic of perceived value is key for businesses looking to navigate the fine line between maintaining customer trust and covering rising costs.

Given the current economic challenges, it’s clear that many small businesses are navigating uncharted waters—but within these challenges lies an opportunity to reassess strategies and strengthen your business for the future.

One key consideration is whether raising prices could provide the stability needed to offset rising costs, maintain quality, and ensure long-term success. Of course, this decision comes with both advantages and potential risks, so let’s take a closer look at the pros and cons to help you make an informed choice.

The pros of raising prices

Covering increased costs

Raising prices is one of the most straightforward ways to offset increased expenses such as wages, taxes, and materials. Without these adjustments, many small businesses risk running at a loss, which can jeopardise their long-term survival. A carefully considered price increase allows you to absorb these costs while continuing to operate sustainably.

Maintaining profit margins

Preserving profit margins is vital for reinvestment and growth. Whether it’s upgrading equipment, expanding your team, or improving your services, healthy margins enable your business to thrive rather than simply survive. By proactively adjusting prices, you can maintain the financial stability needed to invest in your future.

Value perception

When paired with exceptional quality or improved offerings, higher prices can actually enhance how customers perceive your business. Many buyers equate higher costs with superior value, so positioning your price increase alongside clear improvements—such as better service or additional features—can turn a challenge into an opportunity.

Long-term viability

Adapting pricing to align with market realities is essential for business longevity. By staying ahead of rising costs and industry trends, you demonstrate adaptability and foresight, which are crucial in maintaining your position in a competitive marketplace.

The cons of raising prices

Customer backlash

One of the biggest risks of raising prices is alienating existing customers. If the increase feels unjustified or sudden, customers may feel undervalued and take their business elsewhere. Clear communication and transparency are essential to mitigate this risk.

Market competition

In highly competitive industries, even small price adjustments can make your offerings appear less attractive compared to cheaper alternatives. Competitors who don’t raise their prices may gain an advantage, so it’s important to monitor your market and differentiate your value.

Economic climate

The current economic climate is challenging for many consumers. Raising prices during a cost-of-living crisis may put additional pressure on your customers, potentially damaging your relationship with them. Balancing your financial needs with their ability to pay is crucial to maintaining loyalty.

Strategic considerations

When it comes to adjusting your pricing, strategy and understanding buyer psychology can make all the difference. It’s not just about crunching the numbers—it’s about knowing how your customers think and what motivates their decisions. By taking the time to assess your customers’ willingness to pay and how they perceive value, you can communicate price changes more effectively and even turn potential pushback into an opportunity to strengthen loyalty.

Thinking about what makes your customers tick might feel like stepping into unfamiliar territory, but it’s worth it. Insights into perceived value, loss aversion, and the importance of transparency can help you navigate the tricky waters of price increases with confidence and clarity. After all, a little psychology could be just the inspiration you need to shake things up and set your business up for long-term success.

Perceived value matters most

Customers are unlikely to pay more for the same product. But if your customers feel they’re getting something extra—better quality, superior reliability, or an all-round more polished experience—they’re more likely to accept the increase. Think of it like buying a takeaway coffee: you could get a cheaper instant brew at home, but that expertly crafted latte from your local café, with its perfectly frothed milk and rich flavour, feels worth the extra spend.

Loss aversion

People tend to hate losing something more than they love gaining something. You can highlight the added value to prevent customers from feeling they are losing out. Flip the narrative. Show them what they’re gaining—be it better service, improved products, or the peace of mind that you’re still around because you’ve stayed sustainable.

The power of anchoring

Customers compare prices – fact. Whether it’s your competitors or what they paid last year, so pre-empting this with the right messaging can help them navigate to you.

To make a price jump feel less dramatic, anchor your increase to something concrete. Maybe it’s the rising costs of materials, higher wages for your amazing team, or a shiny new feature you’ve added. People like to feel there’s a logical reason behind a change.

Transparency builds trust

Honesty builds trust. Be upfront about why your prices are going up. Customers are more likely to accept changes when they understand the “why.” So, whether it’s inflation, supply chain issues, or the cost of keeping your standards high, customers appreciate knowing the story.

Alternatives to raising prices

Operational efficiency

Cutting costs without compromising quality is a powerful way to protect your margins without raising prices. Start by examining your current operations for inefficiencies. Are there processes that could be automated or streamlined? For example, using digital tools for inventory management or switching to cloud-based accounting software can save time and money.

Renegotiating supplier contracts can also lead to substantial savings, particularly if you’ve built a strong relationship over time. Don’t forget to review recurring expenses like energy bills—investing in energy-efficient equipment could reduce costs in the long term.

Diversifying income streams

Expanding your offerings can generate new revenue streams and reduce dependence on price increases. This could mean introducing complementary products or services, entering new markets, or even exploring partnerships with other businesses. For example, a café might start selling branded coffee beans or offering barista workshops, while a tradesperson could launch a consultancy or training service. Diversification not only boosts revenue but also helps protect your business against fluctuations in demand.

Value-added pricing models

Rather than a blanket price increase, consider offering tiered or subscription pricing. For example, a basic, standard, and premium tier allows customers to choose the level of service or features that best suit their needs. This approach provides flexibility for price-sensitive customers while encouraging others to pay more for enhanced value. Subscription models can also create consistent revenue streams while fostering customer loyalty. Think of it as offering options for everyone without alienating any segment of your audience.

For more details on pricing, take a look at Pricing your products for profit.

The bigger picture

Economic adaptability

Staying nimble is critical in today’s rapidly changing economic climate. Monitor industry trends, government policies, and market conditions regularly. For example, keep an eye on inflation rates, competitor strategies, and shifting consumer preferences.

Being proactive allows you to adjust your strategy before challenges arise. Whether that’s refining your product offerings, entering a niche market, or rethinking your marketing approach, adaptability can keep you ahead of the curve.

Benchmarking

Understanding where your pricing stands in relation to your competitors is vital. Research similar businesses in your industry to gauge whether your prices are competitive, undervalued, or premium.

Tools like industry reports, online reviews, and customer feedback can help you gather insights. Benchmarking isn’t just about comparing numbers; it’s also about identifying where you excel and how you can differentiate your value to justify your pricing.

Government support

Don’t overlook the potential benefits of government grants, loans, and relief programmes designed to support small businesses. For example, schemes focused on energy efficiency, workforce development, or innovation could help reduce costs or fund growth initiatives.

Local councils often have business support programmes, too, so check what’s available in your area. Taking advantage of these resources not only offsets rising costs but also allows you to invest in your business without relying solely on revenue increases.

And finally…

Navigating the decision to raise prices is complex, but with careful planning, clear communication, and a focus on value, it can be a strategic step toward sustaining and growing your business. Remember, you’re not alone—many small businesses are facing similar challenges, and by adapting thoughtfully, you can position your business for long-term success.

*Disclaimer – This blog has been created as general information and should not be taken as advice. Make sure you have the correct level of insurance for your requirements and always review policy documentation. Information is factually accurate at the time of publishing but may have become out of date.