Warren Buffet once said: “If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10%, then you’ve got a terrible business.”
This daunting prospect is one that will be weighing heavily on the minds of finance leaders. More than half (55%) of the 4,800 UK businesses recently polled by the British Chambers of Commerce (BCC) said they expected to increase prices this year. Ever since Labour announced an increase in taxes related to employing people in the October budget, firms have been searching for ways to protect their balance sheet against the additional costs.
While pricing increases can be an effective way for businesses to manage rising costs or decreasing margins, that decision should be accompanied by a careful assessment of the implications that follow. Pushing up prices is the easy part – what happens afterwards is critical.
Protect key relationships
Once a price increase is in place, it can be easy to overlook the knock-on effect on supply chains or distribution channels, says Joseph Hollier, head of finance at skincare brand Dr Paw Paw. He stresses the importance of protecting important supplier relationships, reviewing contracts and confirming that these partners share the firm’s commitment to quality and will help avoid hidden costs or future conflicts. Documenting the factors leading to the price increase can make these conversations easier, he says.
“I’m actually increasing our travel budget this year to get more face-to-face time with our suppliers, manufacturers and distributors,” Hollier adds. “Building rapport has never been more important.”
From a legal standpoint, businesses can unintentionally breach terms because price hikes disrupt supply-chain commitments. Ensuring contract language accounts for variability and renegotiating terms in good faith can save finance leaders significant headaches – and potential litigation.
Re-examine your operations
There are a few areas that tend to be overlooked following a pricing change, according to Lauren Harvey, accounts manager at The Accountancy Partnership. One of these is what a new pricing structure will mean for profits.
Ideally, a price increase will see profits grow, but if this is not the case then it’s time to review where the business spends money. “Even if you’re putting prices up to cover your own increasing costs, it’s always worth managing spending and efficiency,” Harvey explains. “If the price increase is to try and mitigate the effects of fewer sales, then an in-depth review of what your competitors are doing, your marketing and other customer or market trends could help.”
Another often-overlooked factor is what a price increase can mean for VAT. Businesses must become VAT-registered if taxable turnover reaches the £90,000 registration threshold in a rolling 12-month period.
“Putting your prices up can sometimes be what tips you over the threshold,” Harvey says. The extra admin this brings is one consideration, but charging VAT on your sales can also impact the price the customer pays. “At this point you might need to think about whether you’re going to pass the VAT on to the customer (which they will see as another price increase), absorb it yourself by paying it out of your profits or something in the middle. Try to be as realistic about your financial projections as possible – it will help!”
Monitor key metrics
Xinrong Zhu is assistant professor of marketing at Imperial College Business School. She is currently studying how pricing strategies and policies can impact businesses in the retail industry. In her view, following a price change, companies should be monitoring key metrics: customer churn rates, sales volumes, market shares and customer-satisfaction scores.
“It’s important to keep assessing the elasticity of demand for your products or services and segment the customers by price sensitivity,” she says. “Any significant downward trends will require quick intervention.”
Finance leaders must also consider macroeconomic factors, such as exchange-rate fluctuations. So says Marc Harris, head of finance at Ickle Bubba, a baby product and pushchair retailer. Implementing an effective foreign-exchange policy, he says, allows businesses to stabilise input costs and maintain accurate margin forecasting.
Financial forecasting should also be adjusted, says Aleksei Gaidov, director of Uniwide Formations, a UK-based business service provider: “In my experience, companies can stumble by not revisiting their cash flow after raising prices. Successful finance leaders will track revenue at shorter intervals to ensure that higher prices do not push away key customers.”
Communication matters
Maintaining customer trust should be a top priority. Communicating the rationale behind the price rise – be it changes in the supply chain, inflation or product improvement – is key to cultivating loyalty, especially if businesses can offer extra value in return.
For example, at Dr Paw Paw, Hollier is thinking about how he can reinvest the additional revenue from the price increase into offering customers more options, such as through new lip balm ranges. Other strategies might include improving service levels or developing loyalty programs. Being vocal on these long-term changes can help sustain business growth, he says, making future price changes more justifiable.
Research shows that customers perceive a price rise as fairer when the company communicates the change directly, says Gaidov. The breadth of the explanation needs to match the significance of the price increase, he adds. A small price increase requires limited clarification, but a big increase demands more detail.
Getting the messaging right internally is just as important. According to Harris, CFOs need to act as strategic business partners, providing data-driven insights to guide decision-making across departments. Discussions with the sales team should focus on preparing them to communicate pricing changes effectively, including the rationale behind adjustments and the strategies in place to mitigate further increases. Similarly, close collaboration with the product development team is essential to anticipate macroeconomic factors that could influence the feasibility of new products.
“By working together, CFOs can ensure that everyone aligns on strategies that ensure both short-term resilience and long-term sustainability,” Harris says.
Raising prices is not a quick fix
Reacting impulsively to short-term pressures (by, for example, raising prices) can jeopardise long-term sustainability. A significant price increase could lead to a drop in sales volume, ultimately reducing overall revenue and profitability. Ultimately, CFOs are responsible for ensuring this doesn’t happen, constantly weighing short-term decisions against long-term business goals.
“Cost-cutting measures must be approached with caution; overzealous reductions could harm growth opportunities or disrupt plans for new product launches,” says Harris. “Balancing immediate challenges with a long-term perspective is essential to maintaining strategic momentum and avoiding unintended consequences.”
One such unexpected consequence, according to Zhu, is overlooking or underestimating competitor reactions. “A price increase may trigger rivals to adjust their prices, such as aggressive promotions, to steal market share. In such cases, companies should have a response strategy in place,” she says.
Warren Buffet once said: “If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10%, then you’ve got a terrible business.”
This daunting prospect is one that will be weighing heavily on the minds of finance leaders. More than half (55%) of the 4,800 UK businesses recently polled by the British Chambers of Commerce (BCC) said they expected to increase prices this year. Ever since Labour announced an increase in taxes related to employing people in the October budget, firms have been searching for ways to protect their balance sheet against the additional costs.
While pricing increases can be an effective way for businesses to manage rising costs or decreasing margins, that decision should be accompanied by a careful assessment of the implications that follow. Pushing up prices is the easy part – what happens afterwards is critical.
