As costs rise, does it make sense for entrepreneurs to keep prices low?

When Lloyds Bank spoke to around 1,500 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.

Seen from one perspective, that could be considered a low number. Virtually all businesses in the UK have been hit by high inflation, currently at 10.1 per cent, with higher energy prices, input costs and rising wage 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 the pockets of customers. If a company raises prices, even gently, some customers are likely to look for decent alternatives.

This represents a real dilemma for SMEs and start-up companies. Is it better to absorb rising costs and accept declining margins in an attempt to retain valuable customers? Or is it smarter to recognize that prices have to go up and communicate that fact as effectively as possible?

There has been a certain amount of pressure from the Government at first. Last year, newly appointed cost-of-living czar David Buttress urged businesses of all sizes to take action to lower prices for consumers. Speaking at a Confederation of British Industry conference, he asked delegates to come up with ideas to combat inflation.

But is it feasible to reduce or keep customer prices low?

Jolyon Bennett, owner of UK founder-owned consumer electronics company Juice, thinks so. And perhaps more importantly, he has bet that taking care of customers will pay dividends in the long run.

price fixing

It’s not every day that I get contacted by a company to proudly claim that their profits have fallen. There is a perhaps understandable tendency among entrepreneurs to accentuate the positive. However, as Bennett points out, the decline in profitability was directly related to a decision to set 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 past decade their brand has become quietly familiar in the UK market. At first, it focused on producing brightly colored charging cables for smartphones and tablets. That’s still the core part of the business, but it also sells products like DAB radios and smart speakers.

The first cables were sold through retail chain John Lewis, with 3,000 of the initial order of 5,000 units sold in a matter of days. “Consumers liked the fun and design,” says Bennett. “They were giving away chargers.” The fledgling brand expanded rapidly and today the company’s products can be bought at 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 continue to buy.

Customer prioritization

But as Bennett acknowledges, the post-pandemic landscape has been difficult. Costs have risen, the company made a profit of over £1m in 2022 compared to the previous year due to currency fluctuations and rising costs. Sales also fell by around 6.7%. Inevitably, the company was faced with the question of whether or not to raise prices. Bennett decided to put customers first.

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

The way he sees it, passing on the increased cost Juice faces would have resulted in a £2.50-£3.00 price increase on a charging cable. “That may not sound like a lot of money to me. But it’s a lot for some people.”

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

But won’t there have to be a readjustment at some point? Bennett’s view is that Juice can afford to see a drop in profit to help struggling customers. That seems fine to me. But while 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 point?

“Our plan is to grow,” says Bennett. “And to be more efficient. The goal is to be better at what we do.” That will mean, he says, selling into new markets, including the US.

Meanwhile, sales are up 15 percent this year and the company is also claiming a 4 percent increase in market share.

In that sense, there is business logic to pricing and environmental furrowing, especially when the customer base is price sensitive. Both strategies help build customer loyalty. But it is clear that this is 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 upsetting other shareholders. It is also much easier to take a hit in profits if the business is in good shape.

But serving customers is part of the equation when enterprising companies weigh prices against inflationary pressures. A short-term success could be a long-term investment.

Leave a Comment