Navigating price increases – how much? By David Smith on Nov 10, 2023
Way back in the 1970s when there were Oil Shocks One and Two the inflation genie got out of the bottle and started to run wild with price increases everywhere. It was many years before it was corralled.
The 70s were the years of Current Cost Accounting – the attempt to value assets and liabilities at current market values – to adjust for inflation. It never took off except in some specific industries. It never enjoyed widespread adoption due to complexity, subjectivity, fear of volatility and cost of adoption to name just a few. Of course, as inflation died down the drive to adopt evaporated.
Now we have inflation again, although not as high as in the latter years of the 1970s and early years of the 1980s. Interestingly, there has been little discussion about Current Cost Accounting.
Inflation, however, has rightly driven all businesses including professional service firms like accountants, lawyers and financial planners to address the need for price increases more regularly and in larger increments. Few feel comfortable lifting prices with the potential for difficult client conversations. However, with labour shortage and rising salaries and other costs, there is little choice if margins are to be maintained. All too often we are seeing the gross profit margins of firms shrink.
So the question is – how can we raise our prices while keeping client satisfaction intact?
One of the strategies from the 1970s was to raise prices more often with smaller increments. Many firms in the 1970s started to lift their rates quarterly to reduce the shock of large increases.
The key is transparent communication. Advising clients in advance with a clear and detailed explanation of the reasons for the increase. Ideally, face-to-face or virtual meetings with clients will be a more personal and effective way to convey the message. It offers an opportunity to address any concerns or questions directly.
Whether in a world of high or low inflation, bundling services can be very effective in increasing the perceived value of services. Some services such as some compliance services may have a lower perceived value compared with advisory services. By bundling the services together the client is likely to perceive more value and be willing to incur a higher cost.
Of course, we also need to get better at articulating the value of what we deliver. Explain how your services have helped your clients achieve financial success, save money, or navigate complex tax regulations. Demonstrating the tangible benefits of your services can help justify the increase.
I’ve always had the mantra that clients should never be surprised on the downside (upside surprises are good). So lots of warnings of change should be given.
I also believe that clients should be given a choice. If they resist the price increase this should lead to a discussion about:
- How they can provide information to you and respond to queries on a more efficient basis
- The client could choose to reduce some services
- Provide an option for a different payment plan
The reality is that by giving clients choice you are empowering them rather than being pushed into a corner. More often than not they will stay with the status quo and accept the price increase.
The reality is that you have no choice but to raise your prices. Before doing so, work on your strategy to ensure you will successfully manage your client relationships. Ponder ways you can improve your client engagement. Staying close to clients is key.