Twice, in less than a year, Chipotle Mexican Grill has raised the prices on its signature steak and barbacoa burritos due to increased costs of beef.
Depending on location, the hike is expected to be between 4 and 6 percent, which will result in costs of 30-40 cents more per item. Despite these increases, Chipotle expects customers will remain loyal to the burrito chain as they have in the past. In fact, when prices rose 6.5 percent, Chipotle saw its sales rise.
Every business owner eventually looks at whether or not to raise prices when costs increase. The important considerations are whether or not a business has a faithful customer base as Chipotle does, how well the hike is communicated, and what other options a business can offer in a comparable price range. There are ways to increase prices and still keep your customers satisfied.
1. Give Advance Notice
The worst surprise you can give a returning customer is a higher price for something they regularly purchase. To avoid this, let them know ahead of time any way possible. Communication is essential for any company, and people want to know when they are going to have to spend more. In addition to notifying your customers, make sure your employees are aware of the change and can answer the inevitable question of "Why am I paying more?"
2. Explain costs
Not only will customers appreciate the forewarning of price hikes, but they are more likely to pay the new cost if you explain why it happened in the first place. Whether it be supply, demand, manufacturing, delivery, or general expenses, let them know. Customers are far less likely to complain if you explain why prices have gone up, and will appreciate the time you spent laying out details.
3. Offer Choices
When customers frequent your business, they become accustomed to paying the same price over and over again. When you are forced to increase the price by a large margin, people will obviously become unhappy. To overcome this, a strategic business owner will increase the price of said product at a new rate, and offer a similar product at the previous price. For instance, if you offer a product at $4.99 and have to increase it to $7.99, offer customers a package they can continue to purchase at $4.99 with appropriate value. This will alleviate the focus on price increase and allow customers to focus on the value of the product they want to buy.
These suggestions hark back to Economics 101. An important measure for an entrepreneur to understand is the elasticity of his or her business. Elasticity refers to the impact on demand resulting from a change in price. If your service is relatively inelastic (commuter train fares), an increase will not result in much lower demand. However, in the quick service food business, an increase might cause a consumer to look for other options. So far this year, Chipotle has not had a significant decline in demand -- otherwise the company might not be upping prices again. Every entrepreneur should take into account his offering's elasticity before passing along an increase.