Rising costs lead to lower margins for business owners. And to counteract this increased pressure, companies usually have to raise their prices – which, if done month after month, can be tough on customers.
Customers are suffering from “price increase fatigue,” says Kirk Jackisch, president of consulting firm Iris Pricing Solutions. “They’re at their limits. They can’t take it anymore – just across-the-board price increases. So we have to look for more surgical solutions.”
When price increases are planned carefully and communicated clearly, it can make things easier for customers, Jackisch says. Here’s how to proceed — and what to avoid as U.S. lawmakers focus on fees and surcharges.
Offset price increases with new deals
Matthew Heaggans is co-owner of Preston’s: A Burger Joint, a restaurant in Columbus, Ohio. When the price of sambal, an ingredient they used in their special sauce, more than doubled, Preston’s began buying chili peppers to make their own – only to see their prices triple as well.
Given these rising costs, Heaggans says Preston has increased prices by about 7% on average. But that doesn’t mean they’ve increased all prices by 7%.
For example, while a burger may be more expensive than it used to be, sides are now cheaper if you buy them as part of a combo meal.
“In our market, people are very price-conscious,” says Heaggans, so it’s vital for Preston’s to keep prices competitive.
If you’re concerned about the long-term impact of price increases, you may choose to temporarily adjust them to account for cost shocks. For example, when egg prices skyrocketed in 2023, some restaurants temporarily raised the prices of dishes that included eggs. Shipping companies have a long history of adjusting their fuel surcharges as gasoline prices rise and fall.
Despite all the “agony” he put into the price changes, fortunately customers didn’t mind, says Heaggans.
“My constant appeal to consumers is that if they really, really like something, they should support it, otherwise it will disappear,” says Heaggans.
Do not increase your fees to avoid an increase in list prices
Customers often feel cheated by last-minute charges or opaque fees – and they too are targeted by regulators.
At the federal level, the Biden administration has announced plans to crack down on junk fees on everything from event tickets to college textbooks. And as of July 1, California banned drip pricing, the practice of advertising a price that does not include mandatory additional fees and surcharges.
The California law aims to target short-term, expensive service fees for products and services such as concert tickets and hotel rooms, says David W. Wright, an attorney at Pillsbury Winthrop Shaw Pittman LLP in Los Angeles.
The law “doesn’t necessarily prevent companies from trying to recoup these costs, but it is intended to force companies to disclose these costs up front so consumers know what they’re getting into,” Wright says.
California regulations require handling fees to be included as part of the advertised price, but “reasonable” shipping fees and taxes are not required to be included.
“The safest way to protect yourself is to include all prices in the list price,” says Wright.
Other states restrict their pricing in other ways. For example, some businesses pass credit card fees on to their customers to offset their payment processing costs. However, several states restrict this practice. In New York, for example, you must include these fees in your posted prices, but can charge a lower price to customers who pay with cash. And in Colorado, credit card surcharges are capped at 2%.
Offer your customers fee-free alternatives if possible
Jackisch also recommends raising prices to target those customers whose service is most expensive—such as those who request rush orders or last-minute changes.
For example, if your business normally ships orders within four weeks and a customer requests a two-week turnaround time, you can charge a rush fee. Ultimately, your business must bear the cost of interrupting your normal operations to meet that customer’s needs.
Most customers perceive fees on their bills as “punitive,” Jackisch says. The key is to make sure there is a way to avoid these fees and explain what it is.
The fee-free alternative in this case: The customer has to wait the usual four weeks.
Sellers should be able to explain customer requests: “We’re happy to accommodate them. But be aware that we incur costs and we pass some of them on to you,” says Jackisch. “This conveys the value and fairness of the fee.”
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Rosalie Murphy writes for NerdWallet. Email: [email protected].
The article “How to Raise Prices Without Losing Customers” originally appeared on NerdWallet.
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