Dec 9, 2022 | Hiring & Retention

How do I keep giving raises if I can’t increase my prices?

Q. Dear Zenagos, I run a landscaping business and it’s been tough to keep employees lately. I’ve had to give them a couple of raises just in 2022 alone. I’m not sure how much I can really pass along to my customer base. I pride myself on being an economical choice in the neighborhoods I serve. Is inflation here to stay? What should I do?
–Phillip

Raising prices is always nerve-wracking. Your customers have choices, and you don’t want them to go to a competitor because you raised your prices. However, unless you have a bright idea for how to reduce your costs, you have little choice but to raise your prices.

As a nation, we in the US are out of practice dealing with inflation. Since the Great Recession of 2007-2008, we have only seen inflation over 3% in one year (BLS, 2022). We did not always have low inflation. In the three-year period from 1978-1981, average inflation was higher than 10% each year, but that was a long time ago. The low interest rates and low inflation of the past 15 years have taught US consumers to expect stable prices. Over the past several years, the typical US small business owner has not raised prices much and has not had to provide employee raises above 3%. However, in 2022, inflation has hovered just above 6% all year (a dramatic change), and a tight labor market has enabled employees to command large raises. If you are feeling squeezed, you are not alone.

How companies respond to the pressure of inflation varies:

Raise Prices
Most companies simply raise their prices to cover their increased costs. Customers understand the environment. While they do not want to pay more, they may not have a choice. So, raising prices is the most common response to inflation.

Cut Costs
A company that can figure out a way to cut costs during a period of inflation may be able to win new customers, taking market share from competitors who have less flexibility. This belt-tightening approach is challenging, but if you are able to do it without reducing the quality of your offering, you may win in the long term, since the customers are likely to stay with you after inflation eases.

Shrink the Offering
Some consumer companies practice “shrinkflation,” keeping prices stable during a period of inflation by shrinking their offering a small amount, such that it doesn’t make a big difference to consumers. For example, a potato chip manufacturer might typically sell 8-ounce bags at the grocery store. In a time of inflation, that manufacturer might keep the same bag size, but put 6 or 7 ounces of potato chips in the bag for the same price. This may not matter a lot to customers; in fact, they may actually appreciate that the price remains stable. However, if customers do experience the change as a loss of value, this strategy could damage your company’s brand.

Buy in Bulk
One way to cut costs without damaging your brand is to get discounts by buying materials in bulk from your suppliers. You assume some risk this way, and you may incur some storage costs, so you need to look at the entire scope of your costs. However, if you have confidence that you will use the materials within their useful life, this tactic may enable your to keep your costs down without sacrificing quality .

Inflation is difficult for everyone, but at least you know that other companies are dealing with the same challenges. If you do need to raise prices, your customers will understand the circumstances. Treat your customers with respect, being as transparent and honest as possible, and you will get through this difficult time together.

References

US Bureau of Labor Statistics (BLS). (2022). CPI for all urban consumers (CPI-U) [Data set]. Retrieved on December 8, 2022, from https://data.bls.gov/timeseries/CUUR0000SA0L1E?output_view=pct_12mths

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