Pricing Under Inflation: Protecting the Margin, Not Just Raising Prices
What makes inflation hard for a small business isn’t raising prices. It’s not knowing when, or by how much. Move too early and customers leave; move too late and you’ve quietly funded a discount out of your own pocket. The second one is more dangerous, because it happens while revenue is growing — sales look healthy while the margin erodes underneath.
First, separate revenue growth from growth
Under inflation, revenue rises on its own. You can sell the same number of units and still see revenue up 40%. That isn’t growth, it’s a price effect.
The real question is: how many units are you selling, and what do you earn per unit? If you aren’t tracking those two numbers, you will never see the business shrinking by looking at a revenue chart.
The four numbers to track
1. Unit cost. True cost per product or service: materials, labour, energy, transport. Update monthly.
2. Unit margin. Selling price minus unit cost. Keep it as a percentage too — under inflation the absolute figure lies.
3. Your cost basket. Pick your five largest expense lines and record their prices every month. That’s your own inflation index, and it’s far more accurate for decisions than the national one, because it’s your basket.
4. Payment terms. Under inflation, selling on 90-day terms is a discount that doesn’t appear on your price list. The longer the term, the lower your real price.
Cadence beats instinct
Updating prices “when necessary” means, in practice, “once it’s too late.” Set a fixed rhythm:
- Monthly: review the cost basket (a 30-minute job)
- Quarterly: update the price list
- Annually: review the product/service mix — which line has stopped earning
The biggest benefit of the rhythm is psychological. It moves the decision out of emotion and onto the calendar: instead of “should I raise prices?”, it becomes “the quarter is up, let’s look at the table.”
How to explain an increase
Three things work:
Give notice. “From this date next month” lands far better than a surprise on an invoice. In long relationships this alone defuses most of the reaction.
Talk in line items. “Raw material is up 35%” is much easier to accept than “we’ve raised prices.” Specifics don’t get argued with.
Offer an alternative. Leave a path that holds the price: a smaller pack, prompt-payment discount instead of extended terms, a narrower service tier. Customers who can choose tend to stay.
Price is not the only lever
When costs rise, a price increase is the first thing that comes to mind, but there are three other levers on the table, and usually two get pulled together.
Narrow the scope. Less work for the same price: longer lead times, fewer free revisions, delivery priced separately, support hours capped. It doesn’t land as hard as an increase because the price tag hasn’t moved — while the unit economics improve. One condition: the scope change must be in writing, or a customer expecting the old service ends up disappointed.
Change the terms. In an inflationary period, 60-day terms are a silent discount: the money you collect is worth less than the money you would have had on the day you did the work. Shortening terms, or offering a small discount for prepayment, raises real revenue without touching price, and eases the pressure described in receivables tracking.
Change the mix. Not every line earns the same margin. Decide the increase item by item: a steeper rise on low-margin lines, a gentler one where you’re strong, and some items deliberately held as entry products. A single flat percentage is easy, but it treats your best product and your weakest one identically.
In contracts, write the price clause up front
On long-running agreements the real protection is not having the increase conversation mid-year. It’s a price clause written at the start. A good clause says three things: when updates happen (say, every six months), what they’re tied to (a published index or a named cost line), and how they’re announced (written notice, how many days ahead). With those three in writing, an update is a mechanism rather than a negotiation; without them, every round starts from zero and wears the relationship down.
The same discipline applies to service contracts: if the renewal date isn’t in a calendar, the agreement usually rolls on quietly at the old price, and that silent renewal is one of the largest annual losses on the list.
Know your own costs before you talk about price
The most-skipped step before a price decision is knowing your costs line by line. In an inflationary period costs don’t rise at the same speed: materials jump within a month, rent moves once a year in one step, labour follows the wage calendar, energy swings seasonally, and software billed in another currency climbs quietly. An increase based on a single headline inflation figure lumps all those speeds together, so it either falls short or overshoots what the customer should carry.
The practical route: list your five largest cost lines, find how each has moved over six months, and calculate your own weighted cost increase. That number will differ from the published rate, and it is the right basis for the decision. It also shows where switching supplier or buying in volume would actually pay, because the source of the increase becomes visible. Run it quarterly, not annually — a cost table reviewed once a year always makes the increase late, and a late increase is the most expensive kind, since the gap comes out of your own margin.
What to measure afterwards
Whether an increase worked is read from four numbers, not from instinct. Unit profit, not revenue: if revenue held and profit rose, it worked. Volume: how far did order count fall? A small dip is normal and usually doesn’t dent profit; a sharp one says the rate or the explanation was wrong. Customer loss: how many left, and which ones? Losing low-margin, high-effort customers is often good news; losing your best ones needs immediate correction. Collection time: if payments start slipping after the increase, the problem isn’t your price but the customer’s cash, and that changes the next decision.
Read all four in the first two months after the change: sooner is noise, later is a missed chance to correct.
The invisible costs eat the most
The costs most often missed under inflation are the ones without an invoice. Your vehicle’s cost per mile, the life lost in a machine whose service you postponed, an empty rental unit, the financing weight of a late payment. None of them appear as a single line in any expense account, and all of them eat margin.
Which is why pricing work only makes sense alongside asset tracking. If you don’t know what something costs you, what exactly are you basing the new price on? I covered the foundation in the business asset inventory, and what happens when you leave it too late in 5 early signs of a cash flow squeeze.
The Sofft apps exist to close that gap: Odovo produces true cost per mile for a vehicle fleet, Duevo tracks customer equipment and service contracts, and RentMind shows income and expenses per rental unit. A pricing decision only becomes a decision once you have those numbers.
Note: this covers operational pricing. It isn’t investment, tax or financial advice — check your own situation with your accountant.
Frequently Asked Questions
How often should I raise prices? It depends on your sector and how volatile your costs are, but “when necessary” is the worst answer. A quarterly review is a balanced rhythm for most small businesses: frequent enough to protect margin, infrequent enough not to exhaust customers.
My competitor isn’t raising prices — how can I? You don’t know their costs. They may be burning their margin, buying differently, or heading for trouble. You have to price against your own costs. A competitor’s price is a data point, not a decision-maker.
Small frequent increases or one large one? Small and frequent is easier to accept. 7% every quarter lands more softly than 30% once a year — both for the customer and for your own cash flow.
Fuat Çakır — management consultant. He has worked in strategy, business development and general management in manufacturing and export, and now builds tracking apps for small businesses under the Sofft umbrella.