Published September 23, 2020
Supply shortages in higher demand and other pandemic-related expenses are causing some companies to raise prices during COVID-19. Should your business follow suit?
The COVID-19 pandemic has changed how businesses operate in many ways. To meet some of these changing needs, small business owners have responded by pouring money into safety shields, masks and social distancing messaging. Yet even with these added expenses, only a handful of business owners are passing the costs on to customers in the form of higher prices. Many are afraid they could lose even more business if they do so.
However, there is a small minority bucking that trend, tacking on coronavirus fees – and leaving other business owners wondering if they should join in.
"There are a lot of reasons to raise prices," Karin Hurt, co-founder of business consulting and leadership training firm Let's Grow Leaders, told business.com. "It really depends on the motive for doing it. If you're selling hand sanitizer and see an opportunity to price gouge, that's different. Customers will remember how you acted during the pandemic."
Is it illegal to inflate prices during a crisis?
Raising prices during a national crisis isn't illegal in and of itself, but price gouging is. That's true during the pandemic or any other natural disaster.
If consumers are forced to scramble to get necessities such as water, toilet paper, face masks, and medical supplies and a business significantly hikes up prices in response, that's price gouging. The violation falls under unfair or deceptive trade practices. A company found guilty of price gouging will typically face civil and criminal penalties – even jail time if the actions are outrageous. In August, New York Attorney General Letitia James filed a lawsuit against Hillandale Farms, a large producer and distributor of eggs, for illegally raising prices amid the pandemic. James' suit contends that Hillandale made $4 million during the pandemic by illegally raising its prices and seeks restitution for the consumers who were harmed by its actions.
Despite the legal risk, price gouging has been common amid the pandemic. Take the state of Michigan as an example: In May, Michigan Attorney General Dana Nessel said her office received more than 4,200 complaints about price gouging in the first few months of the pandemic.
Outside of price gouging, it is perfectly legal to raise prices. However, it takes some finesse to do it without alienating existing customers and turning off potential new ones.
"The question business owners have to ask themselves is, 'How do I price it in a way that builds a stronger customer?'" said Andrea Ames, certified mentor at SCORE. "As always, when you're setting and raising prices, you need to look at the market. What will customers bear in terms of pricing? What's normal for your competition in your particular industry?"
How do you raise prices during COVID-19 without losing customers?
There's a lot of good reasons for business owners to raise prices, with or without a pandemic, but it's all about the execution. Take a misstep and you could lose customers forever. Do it correctly and you may boost loyalty.
Before you make a move, consider these five ways to raise prices during COVID-19 without losing customers.
1. Consider your motivation for raising prices.
Raising prices is a normal course of business, but if you do it for the wrong reasons, any price hikes may backfire. That's why it's important to decide your motivation for raising prices in the first place. Doing it just to be opportunistic is not a good enough reason, but it makes perfect sense if it's in response to competitors doing it or an increase in supply chain costs.
2. Look at what your competitors are doing.
Whether you're thinking about increasing prices during a pandemic or in normal times, you must engage in market research before you make a move. That means gauging if customers could bear a price hike, what's normal pricing in your industry, and what your competitors are doing. The last thing you want to do is raise prices while all your rivals are lowering them.
"You have to think about your business and what your income situation looks like," said Ames. "If you are doing it for the right reasons from a business perspective, it's always better."
3. Make sure your customers can afford the price increases.
Small businesses aren't the only ones suffering during the pandemic. So are their customers, which is why raising prices now can be dangerous.
If you hike prices too much, you may lose some customers forever. Even a slight uptick in the amount you charge can turn off struggling customers. Before you institute a price increase, take the time to talk to your customers. You may find it is better to show compassion and shoulder the costs until later.
"Certain segments of the population are really struggling, so the right thing to do for humanity is to not raise prices," said Hurt. "That being said, you have a business to run. You need to have a balanced approach."
4. Find ways to upsell instead.
Raising prices is one way to cover some of your pandemic-related costs; another is to find ways to upsell. Take a software company that offers a subscription-based application in the cloud, for instance. Instead of raising the price by $5 a month, the company could add more features as optional upgrades to the software that customers are willing to pay extra for.
"Think about how to make existing customers want to pay more," said Ames.
5. Be transparent about your move.
If you decide to raise prices, it's essential to be transparent about the reasons why. If your restaurant institutes a 10% price hike, for example, hang a note on the door or inside the establishment laying out why prices have gone up. If you run an online store and shipping costs are on the rise, communicate that on your website. If the costs associated with masks and plastic shields is hurting your ability to buy supplies for your hair salon, spell that out for customers. Now isn't the time to tout your higher prices to new customers, but you should be upfront with your existing ones.
"It has to be really strategic," said Hurt. "There has to be a real business reason. Ground yourself in your values and play the long view."
Why are some companies raising prices during the pandemic?
The coronavirus pandemic has had a negative impact on most industries, but for restaurants, retailers, service providers and other small businesses, the pain has been profound.
Businesses were forced to shut down for months, and the ones that have reopened are operating with shortened hours, limited customers and other pandemic-induced rules. That has drastically hurt the bottom line, forcing many to shut their doors forever. In late July, the National Federation of Independent Business polled small business owners and found that 23% of respondents are at risk of closing forever if economic conditions don't improve in the next six months.
To try to survive, some businesses have slashed prices, offering COVID-19 discounts, with an eye toward raising prices once the economy recovers. Others are taking a different approach, opting to raise prices because of COVID-19.
Stories abound in the media about restaurants, medical practices and hair salons that have instituted coronavirus fees – for good reasons. The costs associated with face masks alone have surged during the pandemic. Then there are face shields for employees, improvements to air filtration systems, increases in sanitation and social distancing messaging. You also have to factor in any hazard pay, supply chain price increases or added transportation costs.
Consumers have reacted to the price hikes in varying degrees. Some support the move, while others reject it outright. A recent survey by Technomic found that 38% of customers think it's OK for restaurants to add a COVID-19 surcharge, while 32% said they would go elsewhere as a result.