Pressured by higher operating expenses, more small-business owners plan to raise prices in 2012 than in recent years. But some could encounter resistance from frugal consumers.
A recent survey of small and medium-sized firms by PNC Financial Services found that 35 percent of business owners plan to raise prices, while only 7 percent expect to cut them. Of those intending to raise prices, 80 percent said they were doing so to avoid a "profit squeeze from higher costs."
But consumers have become accustomed to bargains in this still sluggish economy and will likely resist paying higher prices, small-business experts say. With consumer confidence slowly creeping back, people will "probably be buying more things as the year goes on," says Todd McCracken, president and CEO of the National Small Business Association, a nonpartisan advocacy group. "But they will be largely in the mindset of making prudent purchases and shopping around, which makes it really difficult to increase prices much."
Since the recession and financial crisis, many companies have been reluctant to boost prices. According to the PNC survey results, in October 2010, 24 percent of business owners planned to raise prices while 11 percent intended to lower them. And in April 2009, 19 percent of small businesses planned to increase prices--equal to the percentage that expected to reduce them.
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Chris Zane, the owner of Zane's Cylces, a bike shop in Branford, Conn.
Many businesses blame higher overhead, including steeper manufacturing costs and employee wages, for their planned price hikes. For example, Chris Zane, owner of Zane's Cycles, a bike shop in Branford, Conn., expects to raise prices between 6 percent and 7 percent in 2012, because of higher labor costs at manufacturing facilities in China.
But he says customers will likely complain because they don't buy bikes very often and remember when his prices were lower. "'Now I have to spend $500 plus to get something similar?' is a common objection we hear and have to overcome," he says.
Zane, who has raised prices numerous times in recent years, is upfront with his customers. "Gas prices, airline tickets, as well as bikes, have gone up over the past few years, and when we discuss that, it seems to sink in," he says. To cushion the impact of the price hike, he promises top-notch customer service--lifetime free service, a lifetime parts warranty and 90-day price protection. If a customer makes a purchase at Zane's Cycles and then finds the same item elsewhere at a lower price within 90 days, Zane's will refund the difference, plus an additional 10 percent of the price difference.
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Other businesses with a more affluent clientele may face less resistance. "Even if the unemployment rate is high and the economy is not moving very fast forward…people in the upper income bracket are actually doing very well," says Z. John Zhang, a marketing professor at the University of Pennsylvania, who does research on pricing strategies. "Their income is increasing very fast."
Some companies can raise prices because their services are in such high demand. For example, Ken Wisnefski, the founder of WebiMax, a digital marketing company in Mount Laurel, N.J., expects clients to accept price increases of 5 percent to 10 percent next year because they need his firm's help to adapt to the continuing shift of advertising to online media. Indeed, his business has thrived in the new media environment, growing from five to 165 employees since 2008.
"In our industry, our clients are focused on results, [and] if it costs more for success, they understand that," he says. Still, he plans to raise prices only for new customers or marketing campaigns. Existing clients will be "grandfathered" in at current rates, he said. His fees currently range from $500 to $30,000 a month.
To be sure, some businesses plan to keep prices stable in 2012. Some aren't willing to risk losing customers; others don't face higher operating costs. At the Yellow Deli in Chattanooga, Tenn., meat and cheese prices have edged up, but the cost of honey has dropped. "We just really did a cost analysis of everything we make, and overall, we don't see any need to raise our prices," says Jeremy Watters, the restaurant's manager. The deli is cooperatively owned by its 30 employees, and its profit goes toward paying their living expenses. "Unless something really dramatic happens with the food industry," Watters says, "I don't imagine we will change prices."