4+ SAMPLE Price Increase Proposal
What Is a Price Increase Proposal?
A price increase proposal is a process of introducing new pricing charges or fees on commodities or services by the vendor supplier or business owner. It is usually done in a written documentation sent out through mail, or by way of announcement. Prices of commodity increase takes place due to the rising costs of either the material supply order or the labor associated with it. If there is a high customer demand, there is a tendency that this would cause a shortage to the material being produced and with the labor as well. In our example of John’s coffee shop, there are a lot of factors that drive the price increase, and it all starts from the costs coming from farmers suppliers to grow coffee beans. There are a lot of other factors that could drive price increases in products and services in the economy, such as the price of tariff for imported goods and ingredients, and logistics and transportation costs.
Nevertheless, introducing a price increase to the consumers will always be a daunting task. Some companies or business owners would subtly incorporate the price increase in their products without telling the consumers. One way they would do this is by maintaining the price of a certain product, yet reducing its volume or the quantity, in example, the grams or ounces, et cetera. Now, this would certainly not sit well with the consumers if they get hold of this kind of practice. Instead of damaging your business reputation and finding yourself at the hot seat through social media, doing a genuine and honest-to-goodness announcement will still be your best option when doing a price increase.
Price Increase, and the Art of Justifying it to Your Customers
One of the hurdles you have to go through as a business owner is announcing a price increase of the products that you are selling. By no means is this going to be an easy task, you just have to tighten your belt and get it over and done with. But, of course, you cannot just go out there and blurt out the fact that you’re increasing your prices. Aside from scaring away your most loyal patrons, you will probably also see a drop in your walk-in customers numbers. So, how do you go about in telling your customers without shocking them that there is a need for a price increase? Read on to find out more on some tips on how to inform your customers about the need to increase.
Make the announcement way ahead of the scheduled date for the increase: One of the surest ways to lose your customers is to shock them with an immediate price increase implementation. Like all kinds of transactions, everyone would like an advance notice on any kinds of changes taking place. Of course, there are some instances where price increase takes effect immediately, as in the case of the oil and gas industry where there are times their prices change right away, being much dependent upon the trade economy and the suppliers themselves, most of the time coming from overseas suppliers. As a business owner, as much as possible, try to give a head start in informing your customers. You would probably have an idea of when prices in stocks and labor changes, since part of being involved in the business industry is that you would monitor the trend in the economy. Give a week, or at the very least, a few days notice in informing your customers. Informing them in advance would help them also prepare their budget as necessary. That way, they’d feel very much valued for the patronage they provide to your business.Be honest and explain why there is a need to increase price: Honesty is always the best policy. Your customers would certainly want to know why there would be a price increase. Explain to them in layman’s terms. In our coffee shop example, not everyone is familiar with how a coffee trade works. So, make sure that the language you use in talking to them is something simple and easy to understand. Avoid using coffee-jargon words. Direct your words as if you’re talking to people of all ages, of all backgrounds, of all lifestyles. Explain to them simply, yet clearly, that the price increase is due to the fact that the suppliers of your materials and ingredients will be raising their costs, and because of this, unfortunately, you are pushed to raise your prices to continue your operation. Make your customers feel that it’s something that is totally out of your hand, that you’re not profiting out of it, and that you also feel bad about increasing the prices. Try to garner empathy through your choice of words. At any rate, your customers will appreciate you for your transparency in doing business with them.Create some added value to ease the impact of price increase: To sweeten the deal of increasing the price, add some promos or discounts or freebies as a reward for your customers’ continued patronage. This is also your way of saying thank you for understanding the need to increase the price. This could also lessen the impact upon your customers once the price increase takes place. As a way of giving promos, you could look to your other products that are not affected by the price increase. For example, in a coffee shop, aside from selling coffees, there are also food items to choose from, ranging from pastries, pastas, sandwiches, et cetera. Since the increase will only affect the coffee prices, you could maximize your other products. You could do something like “Buy a large size coffee and get a free slice of cake”. This is where you put on the hat of someone doing marketing strategy.Make the announcement through appropriate channels: Another challenge of announcing the price increase is how to get the word out there. Customers come in different shapes, sizes, and forms. Using a marketing plan concept, as a business owner, you should be aware of the demographics of your customers. One way of spreading the word is through various social media platforms. Another is through posting bulletin announcements inside your shop. You could also do newsletters or mail, digital or paper, to directly contact your most loyal customers. Make sure you use and exhaust similar media platforms that your customers also use to give them the heads up about the increase.
How to Come Up with a Price Increase Proposal
A price increase proposal is usually done as a written document. This communication can take place between a vendor and a supplier, or between a business and the consumers or clients. Another instance where this takes place is between a building owner and its tenants, or a contractor and its clients. Wherever supply and demand relationships exist, a proposal of price increase can happen. As we’ve mentioned, making the announcement for a price increase can be done through different channels. If you wanted a more direct way of informing our customers, writing a letter directly to them would be an option. Below are the common steps taken when writing that proposal letter.
Step 1: Address the letter directly to the customer
Write the name of the customer on the letter. This gives the feeling of personalized and makes your customers feel valued. Be polite when addressing the customer, and make sure to use the right salutations.
Step 2: Greet them warmly, and introduce the need for price increase
Do not just go directly into announcing or stating that there will be a price increase; this would give you an impression as a cold and harsh business owner. Start by warmly greeting the customer, asking how their day is, and hoping that everything is going well with them. Next, transition gently into informing them that there will be an increase in price in the products or services that you are offering. Again, in layman’s terms, explain to them the reason for the increase. Describe to them the recent increase in costs in materials, supplies and labors, and that you, as a business owner, unfortunately, have no control over it. Garner a sense of empathy from your customers, make them feel that there is a real person who is writing the letter, and make them feel as if you truly valued their service, which you do, of course. No need to write long sentences when explaining. Short simple statements will do, but make sure that it’s clearly understood as much as possible. Again, avoid using jargon words as much as possible. Don’t go explain the state of the economy, how the stocks and trading works. It is enough that you went out of your way to inform them and justify the reason for the increase.
Step 3: Add the details of when the price increase takes effect
Your main purpose in writing this letter is to give your customers an advance notice of the increase. This would also allow them to consider and prepare their budget. Also, this is an important part of being transparent with you doing business with them. So, include in your letter the date of when the increase will take effect. And make sure that your letter reaches them way ahead of the scheduled date of the price increase.
Step 4: Introduce added-values
As a way of saying thank you for their understanding, include in the letter what you plan to offer for their continued patronage. You could come up with some promos or special discounts or freebies. This is also in a way a business plan for customer retention. In fact, once your customers feel that you have gone out of your way to maintain their business, they would probably give your business positive reviews and even invite new customers to come to your shop.
Step 5: Include contact information for feedback
Always include your business contact information when writing to your customers. This would give them an opportunity to raise any concerns about the price increase, or any other concerns, questions or feedback about your business. This open communication would establish a trusting relationship between your business and your customers. In any kind of trade, having customer relationship feedback is important since it helps in the growth, development, or improvement of the business.
What are the different types of pricing methods?
There are four types of pricing methods. They are the skimming method, market penetration method, premium method, and economy method. The skimming method is introducing a high price when a new product comes out, and slowly lowering it when there are more competitors joining the market. The market penetration method is the total opposite of the skimming method, wherein you introduce a lower price as a way to cut off your competitors. Then you increase the price once you have developed on your own loyal customer base. The premium method is usually pricing and marketing high quality products to targeted high income earner customers. Whereas the economy method involves pricing for a targeted market that usually looks into saving as much when buying goods or services.
What is a price discrimination?
It is a selling method wherein customers are charged a different range of prices for the same item, product or service, with the seller basing off what prices the customer can afford to pay or agree to pay. This is usually based upon a study of the demographics of the target market.
What is a reasonable level of percentage for a price increase?
An article from McKinsey consultant company shows that a price increase range of 2-4% reasonably increases profit by 15-25%. Nevertheless, there is no fixed number as to the exact percentage level for a price increase, since your business is affected by all dynamic factors affecting the economy as well. Also, to increase profit is to increase new customers and customer retention. You don’t want to scare them away with an unreasonable large percentage increase compared to your competitors.
What other factors could justify a price increase in commodities?
Having a new feature as an added value could be a reason to increase your prices. An example would be selling in bulk could give the customers a perception that they are getting more value for their money. Another could be that more than a year has passed, and there has been no changes in your prices. With the ever dynamic rise in inflation rate, this could be another reason to justify why you need to increase your price so that your business could keep up with the growing economy, most especially grow with the impact of the inflation.
What is the meaning of price testing?
Price testing is testing different prices for your products by letting the customer choose which is the best price and value for their money.
John Doe begins to put out the price increase proposal to his customers. He informs them, by way of letter, social media forums, and mail, that his coffee shop has a plan to increase its prices after a month. This way, John has given his customers sufficient time to receive and read the news and to be prepared for the eventual impact that the price increase will have. Because of this, John’s regular customers appreciate his transparency and personalized approach that made them feel valued as customers. In fact, John will probably be gaining more new customers due to his reputation of being candid and providing value-added service to his business. And this is because of an effective price increase proposal that he has made.
Don’t know how to present to your customers the price increase that your business badly needs? Worry no more. Download one of our price increase proposal templates, and let it assist you in drawing up that effective approach on how to inform your customers!