WELCOME TO THE WEEK
Today's SMB Manual looks at the cost of keeping prices unchanged for three years, why owners delay increases, and how to set a regular price-increase schedule.
— THE LEAD
The Price Increase
Your customer price list is dated September 2023. Since then, you've raised employee salaries twice, renewed insurance at a higher rate, and paid more for supplies. Each January, you planned to raise prices. But you postponed it because a major customer was renewing a contract or a competitor offered a discount. Three years later, your margins have shrunk, and a 20% increase seems necessary.
According to the Bureau of Labor Statistics, the Consumer Price Index increased about 9.5% between September 2023 and September 2026. Average hourly earnings for private sector workers rose 11.6%, from $33.88 to $37.81. Every dollar earned at your 2023 prices now has about 9% less purchasing power.
Consider a business generating $3 million in annual revenue with a 10% operating margin. That means $2.7 million in operating costs and $300,000 in profit. If costs rise 3% annually while prices stay the same, expenses reach about $2.95 million after three years. Annual profit drops to roughly $50,000.
In September, the National Federation of Independent Business reported that a net 31% of small business owners had increased their average selling prices. Another net 31% planned increases over the next three months. A Federal Reserve Bank of Richmond survey found that only 13% of businesses kept prices unchanged for a year, down from 27% before the pandemic.
The mistake is waiting too long and then making one large increase. Consider the same $3 million business. A 5% annual price increase would have generated an additional $150,000 in the first year, $307,500 in the second, and $472,875 in the third. That's about $930,000 in additional revenue over three years, assuming sales volume stayed constant. A 20% increase in year four won't recover that missed revenue. It only raises prices going forward, while customers face a much larger adjustment at once.
The solution begins with a regular pricing schedule. Before each year starts, decide when prices will change and how you'll calculate the increase. Review wages, insurance, materials, and rent. Include escalation clauses in contracts and quotes. These clauses allow prices to increase automatically, such as 5% annually or in line with inflation, whichever is higher. Nearly one-third of businesses in the Richmond Fed survey used pricing linked to inflation or another index.
Before raising prices, calculate how many customers you can afford to lose. At a 40% gross margin, a 5% price increase can offset an approximately 11% volume decline while maintaining the same gross profit. Give customers 30 to 60 days' written notice. Start with new customers, then introduce increases for existing accounts. Track customer losses after each round to understand how pricing changes affect revenue and profitability.
— WHAT WE’RE READING
The Bureau of Labor Statistics reported on November 3 that US job openings reached 7.52 million in September, up 333,000 from August. Hiring increased to 5.4 million, while layoffs and discharges totaled 1.64 million, the lowest level since March 2025. Voluntary quits rose to 3.37 million, suggesting more workers were willing to change jobs. Openings increased in professional services, manufacturing, and construction. Hiring conditions remain competitive for small business owners, particularly for skilled workers. Read →
The Institute for Supply Management reported on November 2 that its manufacturing index rose to 55.5 in October, from 54.5 in September. Readings above 50 indicate expansion. Production reached its highest level since November 2021, while new orders increased for the tenth consecutive month. However, the prices index remained elevated at 75.2, indicating continued increases in material costs. Supplier delivery times also increased. For small manufacturers and suppliers, demand is improving, but higher input costs and slower deliveries could continue to pressure margins. Read →
