In May of last year, we couldn’t escape the headlines: Inflation was the highest it’s been in 40 years, and Americans everywhere braced for impact. For the small business owners among us, who already faced and overcame so much upheaval during the pandemic, the news felt like another major blow. Despite an unpredictable period, inflation has decreased every month over the last six months. This has left many folks wondering where we stand now. Here’s a look at what small business owners in particular can expect in 2023.
The Effects of Inflation Adjustment
With the steep rise in inflation, and then the subsequent decreases since the summer of 2022, where do we go from here? Many business owners already adjusted their prices to account for inflation, only to wonder if they did so properly. Others may have waited to increase prices, and now are unsure if they still should.
Whichever camp you’re in, remember this: The Federal Open Market Committee (FOMC) determined that inflation around 2% is “most consistent with the Federal Reserve’s mandate for maximum employment and price stability.” Compare this to the 6.6% rate which was forecast for 2023. So, even though decreasing inflation is very positive, we still have a long way to go before we’re back to what most would consider normal or, better yet, optimal.
When Should You Increase Prices?
If you’ve been waiting to raise prices, there’s no time like the present to do so. No one knows how long the trickle effects of inflation are going to last, and you have every right to protect your business and your bottom line.
The Formula for Inflation Adjustment
Are you interested in raising prices, but not sure how to do so fairly? This is exactly why our team at Finli created a calculator for this very purpose, to help you figure out exactly how much you should be charging in 2023 to account for inflation.
How To Adjust Your Prices For Inflation
Raising Prices for Goods
If you sell physical products, you’re going to approach inflation differently than service providers. This is because you have to buy other goods in order to make your product, and it’s very probable those goods’ prices have increased. Make sure you’re factoring in the costs of your overhead, your materials and your labor when you determine how much to raise prices.
Raising Prices for Services
Owners of service-based businesses have a little less to account for when they’re figuring out how to increase their rates, since their time and labor is their product. Even so, make sure to consider how inflation has impacted any of the products you use to perform your services (e.g. cleaning supplies for a house cleaning company), the gas it takes to get to your clients’ house or business (if applicable) and any other area in which you’re paying more than you used to.
How to Communicate Price Increases to Your Customers
This is often the hardest part of raising prices, and why many entrepreneurs delay in doing so. They don’t want to seem greedy or burden their clients. Even more so, they don’t want to risk losing customers they’ve worked hard to get and keep. But, the reality of the situation is this: if you continue under-charging for your services, your business may have trouble surviving.
As with many things, the best policy in this case is honesty – and simplicity. Share that, due to inflation, it’s become necessary for you to raise your prices. Then, explain which services or goods are specifically being impacted and when the increase is going into effect. Remind your clients that they matter greatly to you, and you appreciate their business. That’s all you really need to say.
How is something like this best said? Well, it depends on your volume of customers and typical methods of communication. If you have a lot of customers and usually reach them via email, crafting a thoughtful email to explain the price increase is absolutely appropriate. But if you have only a few customers who are used to talking over the phone or face-to-face, try to have this conversation one of those ways too.
If you’re a small business owner and have been worrying about how to handle inflation, remember that you deserve to protect your business. By adjusting your prices to account for inflation, you’ll keep your company afloat and give yourself some peace of mind. Furthermore, most – if not all – of your customers will understand. After all, we’re all in this together.
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