Answer me this, when was the last time your checked inflation rates? Didn’t think so. Let me explain why you should. We understand that the economy hasn’t been great, especially in certain areas of the United States. Additionally, prices are currently at a dip in many sectors of the market. Oil prices and interest rates for instance, are at a fairly low point in recent years.
Despite this, It’s still important to continue to raise prices following inflation. Let me explain why.
Let’s look at the math
Let’s assume that for the next 3 years, inflation increases annually by 2%. Let’s also assume that you don’t do nothing about this and keep your prices how they are. I’ll let Evergreen Small Business Explain the graph-
“Assume for purposes of illustration that you run a business with $200,000 in revenue. Further, assume half of that revenue, or $100,000, goes to pay the expenses of running your business. The remaining half represents your profits.
The table below shows what happens if over three years inflation runs 2% (so hardly enough to worry about) but you don’t bump your prices by 2% annually.”
Description Year 1 Year 2 Year 3 Year 4
Revenues $200,000 $200,000 $200,000 $200,000
Expenses $100,000 $102,000 $104,000 $106,000
Profits $100,000 $98,000 $96,000 $94,000
As you can see, this behavior can hurt your business more than you might think.
Now, you may look at this graph and think “this doesn’t apply to me, my expenses haven’t gone up in years!”. Please don’t make this mistake. It’s very unlikely that this is the case, and most likely that your expenses have increased by a rather gradual rate. However as a service industry business, your biggest cost will be payroll. Out of all components, cost-of-living experiences the largest increase due to inflation. This means you will need to pay yourself and your employees more, even if other business expenses have barely gone up.
Insurance, Health Care and why you have a good excuse.
Perhaps the biggest factor in increasing cost of business operations is the ever-rising cost of insurance and health care plans. By law, you are required to provide these items for your employees. Consumers often forget this fact but you should have no issue reminding them that your health care and insurance provider don’t care how much you charge your clients, they just want their money.
Therefore, you have a perfectly acceptable reason outside of those I mentioned earlier, to increase your prices. If your clients don’t understand this, you may just need some new clients.