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How to Raise Prices Without Losing Customers

There's no good time to raise prices.

But these days, if you're in the food business, it's unavoidable.

At the recent Consumer Analyst Group of New York conference, Kraft (KFT) announced it would be upping prices or lowering discounts on 90% of its products.

The reason?

The company's expenses for supplies such as wheat, soybean oil and cocoa rose about 9% last year, and are expected to keep up that pace through 2008.

PepsiCo (PEP - Get Report), which expects its worldwide commodity costs to rise 6% this year, plans to raise prices accordingly. (It's also trying out a more creative solution: selling products in slightly smaller packages for the same price.)

European food companies such as Nestle ( NSRGY) and Cadbury Schweppes (CSG)are headed in the same direction.

The big players are counting on brand loyalty to keep customers coming back, even as prices head steadily upward.

But what about small businesses?

No one wants to raise prices when consumers are nervous about a possible recession. But for many food-related businesses, it's the only option.

According to the National Restaurant Association, 2007 saw the largest rise in wholesale-food prices in 27 years. Food costs make up one-third of the average restaurant check, and restaurants -- many of them small businesses -- are being forced to pass those soaring costs on to diners.

So how do you convince them to pay up?

Educate your customers. Explaining the reason behind a price hike lets them know it's more about breaking even than pulling in record profits.

Take the situation at local bakeries. They've been hit especially hard by rising food prices, says Susan Nicolais, executive vice president of the Retail Bakers of America, which represents 1,000 independent bakeries across the country.

"The cost of flour has tripled since August of last year, and doubled since the beginning of this year," she says. "Bakeries have also seen their costs rise for other ingredients, like eggs and butter, but flour has been the real killer."

What's to blame for the wheat inflation?

Global warming.

Farmers who used to grow wheat are now being paid more to plant corn, which is used to produce in-demand ethanol.

The weak dollar is another factor; American farmers can make more money exporting their wheat than selling it at home. Rising prices for gas and electricity also have made it more expensive to process wheat into flour.

But the average bakery customer doesn't think about global agricultural trends when they're stocking up on croissants or cookies. When rising ingredient costs became the most critical issue facing its members, Retail Bakers of America produced a customer-information letter that bakeries could use to explain the situation.

By clearly spelling out how larger economic forces have affected bakery costs, the letter shows shoppers exactly why a loaf of bread has gotten more pricey. Such consumer education is critical.

A small business might be able to take a short-term hit when the cost of supplies goes up temporarily, but food prices aren't expected to come down anytime soon. When the price of a key ingredient triples, that cost has to be passed on.

"Retail bakeries are always reluctant to raise prices," says Nicolais. "But if they're going to stay in business, they have to."

If you have a particularly devoted, affluent clientele, a price increase may go unnoticed. But most businesses should be ready to make their case to customers. Give them some credit: They know they're paying more at the grocery store. Explain that those high costs are hitting you, too.

Raising prices might mean losing a few customers. But for anyone in the food industry, it's the only way to avoid losing all of your customers -- which is what happens when you go out of business.
Elizabeth Blackwell is a freelance writer in Chicago.

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