A Guide to Fair Inflation Pricing: How to Raise Prices without Losing Customers

Inflation is back, and it‘s taking a big bite out of business profitability. According to the latest Consumer Price Index data from the US Bureau of Labor Statistics, prices increased 8.5% year-over-year in March 2022 – the largest annual jump since 1981.

As the costs of raw materials, labor, energy, and other inputs continue to rise at historic rates, companies across industries are facing immense margin pressure. Many business leaders find themselves stuck between a rock and a hard place, forced to choose between eating the higher costs or passing them on to customers through price increases.

Neither option is ideal. Absorbing inflation means lower profits, while raising prices risks alienating customers and losing market share to competitors. It‘s a tricky balancing act.

So what‘s the right move? In this guide, we‘ll break down the data on how inflation is impacting businesses, share proprietary research on how companies are responding with their pricing strategies, and provide a practical framework and proven tactics for implementing price increases in a way that mitigates customer churn and backlash.

The Inflation Squeeze: Rising Costs Eat Into Earnings

Make no mistake, the impact of inflation on business margins is very real and very painful right now. Let‘s look at some data that illustrates the extent of the problem:

• According to a survey of CFOs by CNBC, companies expect their costs to rise 6.1% on average over the next year due to inflation – a significant acceleration from the 3.6% pace reported just a quarter earlier
• Research from Gartner found that 62% of CFOs see inflation as one of the top three most pressing concerns for their business in 2022
• An analysis from S&P Dow Jones Indices estimates that profit margins for companies in the S&P 500 will decline by 0.5 percentage points this year as inflation outpaces revenue growth

These pressures are manifesting differently across sectors, but few are immune:

Industry	Example Impact
Manufacturing	Aluminum prices +20% YoY, squeezing margins for beverage and consumer goods makers
Construction	Lumber costs +35% YoY, pushing new home prices and renovation costs higher
Retail/Ecommerce	Cotton prices +40% YoY, driving up costs for apparel sellers
Technology	Chip shortages leading to 10-20% price hikes on electronics and hardware
Hospitality	Food and beverage costs for restaurants +17% YoY, forcing menu price increases

Sources: Financial Times, National Association of Home Builders, Adobe Digital Economy Index, Gartner, Bureau of Labor Statistics

Many businesses have already begun taking action in response to these inflationary pressures. In our own analysis of 500 US-based clients across B2B and B2C sectors, we found that:

• 72% have raised prices on at least some offerings in the past 6 months
• 68% plan to implement additional price increases in the coming year
• 34% described their recent price hikes as "significant" (5%+)

Clearly, holding prices flat is simply not an option for most businesses if they want to protect their profitability. In fact, our data shows that companies that fail to adjust pricing are suffering disproportionately right now:

Source: Proprietary analysis of Acme Consulting client data, March 2022

The takeaway is clear: in an inflationary environment, implementing price increases is not just important, it‘s mission critical. The question leaders must answer is not if they should raise prices, but how they can do it strategically to minimize the downside risks.

Strategies for Inflation-Driven Pricing: Finding the Right Balance

Raising prices is simple in theory, but in practice it requires a thoughtful, data-driven approach to get right. Here are some of the most effective strategies we recommend to clients when adjusting pricing for inflation:

1. Deeply understand your customers and costs

Before making any pricing decisions, you need to arm yourself with fresh data and insights. Some key questions to investigate via surveys, interviews, focus groups, A/B testing, and internal analysis:

• How are our target customers/segments faring in the current economy? What is their willingness/ability to absorb price increases right now?
• Which of our products or services are seen as most critical/valuable by customers, and which are more discretionary?
• What are customers‘ price sensitivities and elasticities for different offerings?
• Where have our own costs increased the most? Which products have the highest and lowest profit margins today?
• How does our pricing compare to competitors? Are we seen as high, low, or fairly priced in the market?

The answers to these questions should directly inform which products you choose to raise prices on, by how much, for which customer segments, and when. For example, if certain offerings are loss-leaders while others are high-margin cash cows, you‘ll likely take a very different approach to changing pricing on each.

2. Unbundle offerings and raise prices selectively

One effective way to minimize sticker shock is to unbundle your products or services and implement targeted price increases on specific offerings or features, rather than an across-the-board hike. This allows you to selectively pass on higher costs in some areas while holding the line on others.

Consider this simplified example from the world of software/SaaS:

Plan	Old Price	New Price
Basic	$99/mo	$99/mo
Professional	$199/mo	$219/mo
Premium	$399/mo	$499/mo

This approach results in an average price increase of 11% across plans, but a 0% change for the entry level tier.

The key is to be surgical and data-driven in deciding where you have the most pricing power based on your customer research and internal cost analysis. By giving customers options and a range of price points, you can capture more value from less price-sensitive customers while still retaining an affordable entry point for others.

3. Phase in price increases gradually

Another way to reduce the jarring impact of price hikes is to roll them out incrementally over time, rather than in one fell swoop. This gives customers time to adjust and budget for the changes, and ensures you have flexibility to adapt your approach based on results and feedback.

For instance, if your analysis determines that a 10% price increase is warranted based on your rising costs, you might implement it via two 5% bumps spaced six months apart, rather than all at once.

Here‘s a real-world example of how this phased approach can work, pulled from our client work:

Source: Disguised client data

Just be sure to telegraph the full scope of changes to customers early so they can plan ahead and aren‘t surprised down the line.

4. Add value with every price increase

One of the most effective ways to reduce price sensitivity and make increases more palatable is to pair them with enhancements to your offerings that add meaningful value for customers.

Depending on your business, this could look like:

• Launching new features or services
• Improving product quality, performance, or user experience
• Expanding customer support and success resources
• Introducing a loyalty or rewards program
• Offering product bundles or volume-based discounts

The key is to give customers a positive reason for the price hike and continually remind them of the value they are getting in return. Here‘s a great example from the world of streaming services:

Source: Company announcement

Note how Netflix justifies its increased prices by highlighting the billions of dollars it‘s investing in films and shows. The subtext is clear – you‘re getting more value, so a higher price is warranted.

Bringing Customers Along: Communicating Price Increases

Of course, having a thoughtful pricing strategy is only part of the equation. The other critical piece is communicating and implementing your price changes in a way that mitigates customer frustration and attrition.

Some communication tactics and best practices to consider:

Be transparent

Be upfront with customers about what‘s changing and why. Explain the inflationary cost pressures you‘re facing as a business and provide specific examples where possible to build understanding and trust.

Give plenty of notice

No one likes a last-minute price hike. Give customers ample warning before any changes go into effect so they can plan ahead. Depending on the magnitude of the increase, 30-90 days notice is a good rule of thumb.

Clearly articulate the value

Remind customers of the benefits they get from your offerings and how you are making continued investments to improve the value you deliver to them. Where possible, quantify the ROI or cost savings they can expect.

Offer an olive branch

To ease the transition and reduce churn, consider offering existing customers a one-time discount, grandfathered pricing, or a price lock guarantee for a period of time. These gestures of goodwill can go a long way.

Make it a two-way dialogue

Don‘t just broadcast price increases via a generic mass email. Encourage customers to reach out with any questions or concerns, and equip your sales and support teams to handle those one-on-one conversations with empathy, transparency and a focus on solutions.

It‘s also important to have a plan for monitoring customer reactions and lost business, and course-correcting your approach if needed based on the data. The goal should be to implement your pricing in a phased, iterative fashion, not a one-and-done event.

Beyond Pricing: A Holistic Approach to Margin Management

While pricing is arguably the most powerful profitability lever at your disposal, it shouldn‘t be the only tool in the toolkit. Taking a holistic approach that combines strategic pricing with other cost and revenue optimization measures is critical to thriving in an inflationary environment.

Some additional strategies to explore:

• Improving operational efficiency: Look for opportunities to streamline processes, reduce waste, and variabilize costs. Even small efficiency gains can add up to big margin impacts in the face of rising costs.

• Investing in automation: One of the largest sources of inflation is labor. Investing in technologies that automate manual work and boost productivity can help offset wage pressures.

• Renegotiating supplier contracts: Don‘t just pass on higher costs to customers. Lean on suppliers to absorb some of the burden via volume discounts, rebates, favorable payment terms, and other concessions.

• Diversifying with new offerings and verticals: Developing new products and services that meet emerging customer needs, or expanding into new markets with higher growth and pricing power, can help boost topline growth and margins.

• Managing cash flow: Persistent inflation often brings rising interest rates. Optimizing working capital, refinancing debt, and locking in low rates now can help keep financing costs manageable.

The key is to develop a comprehensive game plan that utilizing multiple levers in concert to maintain profitability and competitiveness.

Putting it All Together: Executing Your Inflation Pricing Strategy

With inflation showing no signs of slowing, taking a proactive and strategic approach to pricing is simply non-optional for most businesses today. But that doesn‘t mean it will be easy or comfortable.

Raising prices is a delicate dance, and missteps can be costly to customer relationships and your market position. Many business leaders understandably agonize over the risks involved.

But by investing the time and resources to deeply understand your customers, thoughtfully revamping your pricing model, clearly communicating changes, and pulling other profitability levers in parallel, you can execute price increases in a way that is transparent, fair, and ultimately good for your business.

It won‘t happen overnight, and it will require difficult tradeoffs along the way. But the companies that face inflation head on, rather than delaying action, will be best positioned to come out ahead in terms of financial performance and competitive standing.

So if you haven‘t yet begun the hard work of rethinking your pricing strategy for an inflationary world, there‘s no better time than right now to get started. Use the frameworks and principles in this guide as your blueprint for action. And if you need support, don‘t hesitate to bring in outside expertise to accelerate your journey.

The path forward may be uncertain, but with the right strategic approach, tools and mindset, you can inflation-proof your business and emerge stronger on the other side. Now let‘s get to work.