For the last few years, we have been living in inflationary times. This past June 2022, the U.S. Bureau of Labor and Statistics reported its largest increase in 40 years, as consumer pricing (CPI) was up 9.1% over the year ended. Additionally, it was just reported that we had two consecutive quarters of negative GDP, indicating we are in a recession. July's 2022 CPI is expected to be released on August 10, 2022.
Now is a crucial time for businesses to utilize strategies to protect their cash flow and profits by making pricing adjustments to factor in inflation.
Importance of Price Adjustments During Inflation
Currently, costs for all U.S. businesses and consumers are increasing for just about everything. This means you should try to discover ways to cut costs or offset the rising costs with new pricing strategies; however, cutting costs is not always a feasible option for many businesses.
4 Helpful Steps to Adapt to Help Adjust a Service-Based Business's Pricing for Inflation
Making price adjustments for a service-based business can be much more challenging than for a product-based business, as the process is more complex. Since service-based businesses have existing clientele to deal with, clients at various service levels, contracts to uphold before renegotiation, and a balance of value offered in comparison to their pricing, it can be difficult to determine the proper procedure to put into place. Here are a few steps you can take to help simplify the process:
Step 1 - Evaluate Existing Contracts
It is essential to review all existing contracts and note how much every client is currently paying and for what level of services. Additionally, you should identify which customers are due to have their prices renegotiated now and note future dates of any potential negotiations.
Step 2 - Research Your Pricing Potential and Targets
In order to research your pricing potential, you will first need to run some financial reports to determine how much you will need to increase your pricing to make up for your increased expenses. Then you will need to decide on a fair price to increase your pricing to. Moreover, you may discover that your current pricing has been underpriced before inflation.
Step 3 - Separate Your Revenue Channels
Next, you must examine your revenue channels, as you most likely don't charge your clients blanket or uniform fees. You will first need to separate different client types and services to do this. Then you will need to rank them by how easy or difficult it will be to increase their prices. You will also need to organize existing categories by their current profitability. Less profitable categories should receive the most significant price increases. Alternatively, you may find that you could significantly improve your company's overall profit margins if you simply stop working with less-profitable clients or stop taking on less-profitable job types.
Step 4 - Continually Monitor Pricing Success
In order to maintain successful pricing structures, you will need to continuously track, monitor, and measure the success of your new pricing strategy.
How to Sell Your New Pricing to Existing Clients
It is common for service-based businesses to be afraid of increasing their prices to existing customers or selling services to new customers at higher price points. However, everyone is aware of inflation and should be expecting price increases; therefore, your price increases shouldn't surprise any of your existing customers or new prospects.
Moreover, it's vital to hold onto your business's unique value proposition, sincerely believe that this value sets you apart from competitors, and sell that value to clients. Finally, it never hurts to remind clients how valuable your services are in addition to what you offer that no one else can. Your clients who already understand the need to raise prices during inflation will readily accept their cost increases because they know the value they would be sacrificing if they were to stop doing business with you.
During tough financial times, you must keep close tabs on your numbers when the economy and your costs are constantly changing. Instead of looking at financial reports once a month, you may consider reviewing them weekly; so you can keep a close eye on expected revenue and expenses versus actual. This will allow you to quickly make adjustments to prevent unexpected cash flow shortages from occurring due to constantly changing costs.
It is imperative to keep your books up to date and accurate during inflation to ensure you can make wise business choices moving forward. Are you looking for a trustworthy accountant to manage your books? If so, contact me today; I would be happy to assist you! I am an Advanced Certified QuickBooks ProAdvisor and specialize in working with clients who have QuickBooks Online—located in Murrieta, CA, and servicing clients in Southern California and the greater Las Vegas, Nevada area!
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