As Costs Rise, Does It Make Sense For Entrepreneurs To Hold Prices Down?

When Lloyds Bank spoke to around 1500 small and medium-sized business owners in December, 53 per cent of them said they had raised prices to customers in response to rising costs.

Viewed from one perspective, that could be considered a low number. Just about every business in the UK has been affected by high inflation – currently running at 10.1 percent – with energy prices, higher input costs and rising salary demands combining to create a perfect storm. The obvious way to respond to rising costs is to charge customers more.

But then again, not everyone is in a position to do that. High Inflation is also hitting customer pockets. If a business hikes prices – even gently – some customers are likely to shop around for decent alternatives.

This represents a real dilemma for SMEs and entrepreneurial businesses. Is it better to suck up the rising costs and accept reduced margins in a bid to hold on to valuable customers? Or is it wiser to acknowledge that prices have to rise and communicate that fact as effectively as possible?

There has been a certain amount of pressure from the Government to the former. Last year, the newly appointed Cost of Living Tsar David Buttress urged companies of all sizes to take action to bring down prices to consumers. Speaking at a Confederation of British Industry conference, he asked delegates to come forward with inflation-busing ideas.

But is it feasible to cut or hold down customer prices?

Jolyon Bennett, owner of U.K. founder-owned consumer electronics company, Juice believes it is. And perhaps more importantly he has bet that looking after customers will pay dividends in the long term.

Fixing Prices

It’s not every day that a business contacts me to assert proudly that its profits have fallen. There is a perhaps understandable tendency among entrepreneurs to accentuate the positive. However, as Bennett stresses the decline in profitability was directly related to a decision to fix prices and also maintain a commitment to sustainable environmental practices.

Juice – which is still wholly owned by Bennett – was established in 2012 and over the last decade its brand has become quietly familiar in the U.K. market. In the beginning, it focused on producing brightly-colored charging cables for smartphones and tablets. That remains the core part of the business but it also sells products such as DAB radios and smart speakers.

The first cables were sold through retail chain John Lewis, with 3,000 of the initial 5,000 unit order sold within days. “Consumers liked the fun and the design of it,” says Bennett. “They were giving chargers as gifts.” The nascent brand expanded quickly and today the company’s products can be bought in stores such as Tesco, Rymans and Argos Customers are mainly in the 15-30 age group, although many of the first customers are now in their 30s and continuing to buy.

Prioritizing Customers

But as Bennett acknowledges, the post-pandemic landscape has been tough. Costs have risen the company took a profits hit more than £1 million in 2022 when compared to the previous year due to foreign exchange fluctuations and rising costs. Sales also fell by about 6.7%. Inevitably, the company faced the question of whether or not to raise prices. Bennett decided to prioritize customers.

“I am very grateful to our customers and what they have done for me,” he says. “I wanted to do things in the right way to lessen the impact of the cost-of-living crisis.

As he sees it, passing on the increased cost facing Juice would have resulted in a price rise of £2.50-£3.00 in a charging cable. “That might not seem like a lot of money to me. But it is a lot to some people.”

In parallel, the company has also been investing in environment-friendly packaging, or to be more precise plastic that can be recycled. Again there is an impact on profits.

But won’t there at some stage have to be a readjustment? Bennett’s view is that Juice can afford to see a drop in profits to help customers that are struggling. Fair enough. But although the inflation rate will surely fall, business costs are likely to remain high. Won’t the prices charged to consumers have to jump at some stage?

“Our plan is to grow,” says Bennett. “And to become more efficient. The aim is to become better at what we do.” That will, he says, involve selling into new markets, including the U.S.

In the meantime, sales have increased by 15 per cent this year and the company also claims a 4 per cent rise in market share.

In that respect, there is a commercial logic to fixing prices and plowing an environmental furrow, especially when if the customer base is price sensitive. Both strategies help cement customer loyalty. But this is clearly not a strategy that all companies can undertake. As Bennett acknowledges, as a 100% owner he is in a position to make decisions without unduly disturbing other shareholders. It’s also a lot easier to take a hit on profits if the business is in a healthy condition.

But looking after customers is part of the equation when entrepreneurial companies weigh up prices in the face of inflationary pressures. A short-term hit might be an investment in the longer game.