MBA2326 Q&A Wednesday: Should I raise my prices with inflation?

0:09Heyo! Welcome to the$100 MBA show, powerful business lessons you can count on to help grow your business. I'm your host, your coach, your teacher, Omar Zinhome. I'm also the co-founder of Webinar Ninja, an independent software company I started back in 2014. And today's episode is Q &A Wednesday. On Q &A Wednesdays, we answer a question from one of you, one of our listeners. If you've got a question you want to ask, go ahead and email me over at omar at 100mba.net. Today's question is from Greg, and Greg asks, Hey Omar, as you know, around the world, inflation is going nuts. All my costs are going up, but my prices haven't.

0:44Should I raise my prices with inflation or will I upset my customers, especially because I have a reoccurring billing type of business where I charge my customers a fee every single month? Would love your take. Thanks so much, Greg. This is a great question, Greg, because I'm sure a lot of people listening are going through something similar. Inflation has gone nuts in the last few months. In fact, in the last year, some countries are seeing inflation as high 7, 8, 9, and 10%. in a single year, which is pretty bonkers. The inflation rate itself in the U.S. went from 4.9 to 8.2 in just one year.

1:23That means the rate of inflation has nearly doubled in just one year. This is causing a lot of companies to look at their balance sheet and say, hey, where can we save some money? Where can we reduce costs? That's why you see so many layoffs happening in big companies because labor is probably one of the biggest costs for them. But if you're not a Facebook or a Google, you don't have that many levers to pull. You don't have that much access to capital to shore up a tough time like now. But one of the levers you can pull is price, raising your prices to bridge the gap between the increased costs that you have and your margins.

2:00In today's episode, we're going to talk about this. Should you raise your prices? And if so, how do you do it properly? How do you do it the right way so that you don't upset your customers for the most part? Also, how to future proof your pricing so you don't have to raise your prices again in the near future. So let's get into it. Let's get down to business. Listen, I get it. This is uncomfortable. You don't want to raise prices on your customers. You're afraid of a backlash. You're afraid people are going to get upset. You're afraid people are going to cancel or stop paying you money or becoming new customers.

2:27And all these fears are valid, but I want to give you some perspective. You know your business very well. You know your pricing very well. You know the price of every product pretty much on your pricing page and in your online store or in your list of services. Your customers don't, and they don't actually know how much your margins are. They also don't know exactly how you compare to your competition pound for pound or for product per product or service per service. Yes, they might be comparing you to other people, but these prices are not always top of mind and the only factor. One of the things I learned about pricing and in business is that pricing is really emotional in a lot of ways.

3:04It's not as clinical and rational as we might think. For example, you might sell a product for$25. If you sold it for$29, it wouldn't make much of a difference in the customer's brain. $25 and$29 kind of lives or sits in the same place. It's not a deal breaker that it's$4 more. But for you,$4 per unit is a huge difference and nearly a 20 % increase from $25. If you're selling, let's say, a service for$1 ,499 and you decide to sell it for$1 ,799, the service is valuable and it's something that somebody needs. It's not a deal breaker for a lot of customers, especially if you're the best option for them.

3:43So I want to just put your mind at ease and realize that if you raise prices and you do it right, it's not really as confrontational as you might think it is. The second thing I want to mention is that you have to raise prices, not only just to stay afloat, but in order for you to be able to grow and invest in your business to make it a better product or service. This is just being a smart entrepreneur. Listen, if McDonald's sold burgers for 5 cents and 10 cents still, they would go out of business tomorrow. And we're talking about McDonald's, the cheapest food you could buy. So if they're going to raise their prices, so should you.

4:17But how do you do it? We're going to get into that. But before that, one more reason why you should seriously consider raising your prices in a time like this where you need to. You cannot function properly as an entrepreneur, as the owner of the business with that kind of pressure, that kind of financial pressure on top of you, where you're not sure if you're going to make ends meet. You got to look out for yourself. You got to look out for the leader of the business who's making all the decisions and helping everything stay afloat and stay running and stay growing, hopefully. You got to relieve yourself of that pressure, give yourself a little bit of wiggle room to breathe, and a chance to think clearly about the decisions you have to make in your business.

4:57All right, so how do we do this properly? Well, first of all, there's a lot of ways you could do this, but I wanna start with a very creative way that I've seen done that's really, really smart. And that's to raise your prices once a year. Just do it periodically. Now, when you raise your prices at the same time every year, this gives the perception to the customer that your product is valuable. It's a premium product because you keep putting prices up because you keep improving the product every single year. Now, some people do this on Black Friday or during the holidays or Cyber Monday or whatever it might be.

5:31But the point is that instead of discounting their product, they say, hey, this is the lowest price it will ever be. Prices are going up December 1st. This gets everybody to buy because they know the price is gonna be X, Y, Z. And you can say, hey, the price will be this on December 1st. And this allows you to, one, keep up with any kind of inflation, but also increase your margins when inflation is very slow. And then two, forces you to continue to add value to your product and services, be a better business because you have to keep up with the value. Prices have to reflect a great product and vice versa.

6:06So increasing your prices once a year, great idea. Just raise them and see this as a promotion opportunity where people are rushed to buy the product now because the price is going up tomorrow. Now, for a subscription service, whether you're a SaaS product like a software as a service or a membership or some sort of reoccurring billing kind of service, like Greg mentioned, you can do what's called a grandfathered discount. So say, for example, your service is$500 a month and you're raising it to$700 a month. What you could say to your customers is, hey, we have to raise prices, but because we love you as a customer, we respect your loyalty, we're going to keep your price for the first three months, for now the first three months.

6:45And then the next three months after that, we're going to only raise them to$600. We're going to give you a discount. That gives you six months of like a deep discount the first three months, which means no raising in prices, and then just a slight increase. And then after the six months, we'll go to the price of$700. This is also an opportunity to tell your current customers, it's a great time for you to lock in an annual deal. Instead of paying me month to month, you can actually lock in an annual deal at the current price, And then you'll only experience the increase after the annual deal is going to be renewed.

7:18And that kind of gives them 12 months at a great price. So grandfather discount is kind of saying, hey, giving them the bad news of like, hey, we got to raise prices. But hey, we've done X, Y, Z to improve the product. And this is why we're doing it. And because we respect you, we're giving you a discount. And here's an opportunity for you to lock in this price right now with an annual deal. This is one way to do it, which is very, very gentle touch and respectful to your customers. And then any new customer just buys at the new high price or higher price, I should say. That's$700 in this example.

7:47Now, another way is that they just do a blanket raising of prices. Starting this day, everybody's going to pay this new price for this plan or for this product or for the service. They give them a heads up. And on that day, they raise prices. Now, I'm not a big fan of this method because it doesn't really reward longevity or loyalty. I like to give them the option to go annual or give them some sort of grace period or some sort of grandfather discount because it sounds like a warning shot or like a call for them to switch to somebody else. But when you kind of ease them into it and say, hey, here's a discount for X amount of months and you catch it with while you're doing it, that's fine.

8:26Now, some companies, the raising of prices in one shot is just a smarter way to do this. This actually is the practice that most companies do that have low priced reoccurring fees, like Netflix, for example, when they went from$8 to$10. It's not a huge difference. And they're just saying, hey, I'm going to take that risk by doing it this way. It's okay. To sum up today's lesson, to sum up today's Q &A Wednesday's question from Greg, if you've got to raise prices, raise them. Don't wait. Do it properly. Give the reasons why. Make sure you're adding value. And don't be afraid to do this on a regular basis, like on a cadence, like whether it's once a year or once every two years.

9:04So you don't have to revisit this conversation again in the future. It's okay. Even a little increase in prices will make a huge difference for your business. Do the math. Run the spreadsheets and see the difference it will make based on how many customers you have. I guaranteed you'll be surprised by how much a little difference in price will make a big difference in your bottom line.

9:49subscribe to the show themselves. Before I go, I want to leave you with this. No one likes to upset their customers and they feel like raising prices will do that, but your customers want to see you win too. They want to see the product stay alive. They want to keep using your product or service. So if you let them know that this is in their best interest and this is what you're doing to help the company, they'll be more than willing to help out a little bit with a small increase or a small percentage of increase in the price. Thanks so much for listening and I'll check you in Friday's episode.

10:18I'll see you then. Take care.

10:24We'll be right back.