Adjusting for Inflation: How to Increase Your Service Prices in 2022

Combating Inflation

It’s no secret that inflation rates have sharply risen and myriad industries across the globe continue to be affected. As a result, the cost of resources and tools required to provide services has skyrocketed. Experts predict the rate of the consumer price index to increase by 5.8% year-over-year by the end of Q4, 2022. This means that goods and services which cost $100 in 2018 will soon cost $110.15 next year. In order to combat inflation, you’ll need to take stock of your firm’s new expenses and adjust your pricing model accordingly. Because if your firm doesn’t raise its prices commensurately with inflation, you’ll be giving your clients an unintended discount, quickly destroying your profit margins. While your customers may not appreciate a price increase, they will understand your need to do so. Earning their understanding, while still adding new business, will hinge on 3 key areas:

1. How well you can minimize current business costs.
2. How strategic you are in creating your new pricing model.
3. How well you communicate the price increases.

How to Minimize Costs

Inflation is going to cause your operational costs to rise, so you’ll need to react strategically. Raising pricing is inevitable, but there are internal measures you can take to alleviate some of the impact to your customers. If you can efficiently cut costs without affecting quality or sales, it will pay off.

Follow the Data

We can’t repeat this enough: make data driven decisions. Billable hours should be at the forefront for you to track. Research shows that when employers at B2B firms are unable to keep track of their workers' billable hours, companies tend to lose billions of dollars each day. When employees aren't logging all of their time, you can’t accurately charge vendors. It's like letting money slip through your fingers. This makes it critical to establish a proper tracking system. To do this well, use an online time tracking platform, such as ClickTime. The honest reporting of time and activity will provide you with a single source of truth. Armed with trustworthy data, you'll find out which of your employees, projects, clients, and services are most profitable. Then, double down on your most lucrative initiatives. You’ll end up with the right people spending the right time on the right work — all leading to higher profit margins.

Repackage Services

Another preemptive strategy is to repackage your services. For instance, consider selectively removing services with low profit margins from your offerings. Keep current clients grandfathered in to these legacy services, but be more creative with new clients. All new service accounts should result in high return on investment (ROI) metrics. If they don’t, it’s time to rethink your offerings. Consider combining two or more similar services with a low operational cost and present that to customers as a service bundle. Service bundling is an effective strategy, as it can offer mutual benefits to you and your clients. Your customers can benefit from different services without paying separately for each, while you can adjust the prices to accommodate for healthy profit margins. Considering the impact of the global pandemic, your loyal customers may refuse to pay the elevated prices due to unaffordability. To cater to their needs, create a separate, low-priced package to retain such clients. For example, if the starter package for your SEO services costs around $50 and includes several services, reduce the number of services offered to accommodate the operational costs. For this new package, keep the initial prices, so your clients can continue paying the amount they are comfortable with.

Keep Your Best People Happy

High employee turnover can be devastating on internal operational costs. The resulting recruiting, onboarding, and training costs all result in performance dips before new employees begin to add value. Add this to the cost of raging inflation, and you can quickly find yourself under water. Organizations need to trust their best employees to provide consistent, high-quality work. When prices go up, your clients’ first instinct may be to run; therefore, it’s essential they understand paying extra will be worth their while. You’re going to need your best people in place to deliver on that promise.

How to Analyze Your Pricing Model

Increasing servicing prices is inescapable, so let’s talk about strategy. To get started, answer the questions below to help you determine what your new billing rates should be.

Are Your Services Unique?

You can increase the prices of specialized and exclusive services much easier than commodities. Commodities include items with a substitute or an alternative that your customers can easily switch over to. By raising prices on services exclusive to your brand, you’ll leave customers with no choice but to pay the higher price.

Are Your Customers Loyal?

Another factor to consider is customer loyalty. Research shows that 50% of customers are willing to pay more for a brand they are loyal to, regardless of its elevated prices. Let’s take the example of Apple products. While iMacs are not necessarily superior to PCs, they are greatly preferred by customers who are loyal to Apple. If your firm has better brand equity, your customers will be less likely to make the switch from your brand.

Are Your Competitors Providing Affordable Services?

Before curating your pricing strategy, carry out in-depth research of your competitor's pricing policies. Review the range of services your competitors offer and analyze the price-value relationship of their offerings. Compare this to your range and assess which services are unique to your brand. For instance, if you charge $250 for financial consultation, but your competitor offers the same service for $175, it would only make sense for you to raise prices if your firm houses in-demand resources that are exceptional at their job.

What Services Attract New Customers?

When devising your pricing, identify the specific services that attract the majority of your customer base. Avoid raising prices for items that attract new customers to your brand. Instead, wait to increase the costs of your add-on or upsell services. After a period of time, customers will become loyal to your brand and will have been nurtured by default. For example, if you're offering web hosting services, it would be wise to keep the base price consistent while increasing the cost of your added security.

Can you Reward Customer Loyalty?

Create different pricing strategies for current clients versus new customers. For instance, when you’re increasing the rates for customers with grandfathered contracts, intentionally keep your rates lower than current market prices. This enables legacy clients to still benefit from a good deal. That said, always sell to new customers at more competitive market rates.

Can You Add Low-Cost Improvements to Service Quality?

If you're adding a price increase to your existing services, consider adding low-cost improvements to the overall service quality. For example, let's say you are raising the prices of law consultation services. To overcome this cost, you can focus on enhancing clients' overall experience when they visit your website or your firm. Research shows that 86% of clients are willing to pay more for services that offer a better customer experience.

Pricing Mistakes to Avoid

Do your best to avoid sticker shock. If you elevate your prices drastically, you run the risk of losing customers. On the other hand, if you fail to raise prices, you miss out on making healthy profit margins. Do your best to avoid large increases in price all at once. If you make this mistake, their knee jerk reaction may be to search for a cheaper brand. Similarly, resist the urge to offer discounts. Firms often overcompensate for new pricing by offering unnecessary promotions to increase sales volume. This strategy can negatively impact brand image, as reputable service providers rarely offer discounts. The quality of their services should ultimately speak for itself.

How to Communicate Service Rate Increases

It may feel daunting, but there are effective ways you can positively communicate price increases with transparency and integrity. An honest and genuine approach will build trust with your customers and increase your brand equity. It’s critical to control the narrative. When done well, you’ll have the chance to gain more respect by modeling clear and relatable reasons for the change. For example, after Akagi Nyuguyo’s viral apology, the brand received an outpouring of support from customers. Loyal followers empathized with the brand, stating they would still be willing to purchase the popsicle even if the price was raised. The brand even attracted new customers as the audience was impressed by the apology's transparency and genuineness. Akagi Nyuguyo’s commercial also reminded customers about their relatively affordable rates, further encouraging sales.

The Bottom Line

Preparing your business for rising inflation doesn’t have to be a negative process. By using the techniques outlined above, you can help create a foundation for long-term success. Raising prices to hit your profit goals, without compromising client relationships, is an achievable goal.              

Source: Adjusting for Inflation: How to Increase Your Service Prices in 2022 | ClickTime