Price increase: how to calculate and tell customers

Published Thursday 2 April 2026

Table of contents

• Reasons for increasing prices
• Risk of not increasing prices
• How to calculate a price increase
• Stages of making a price increase
• Alternatives to increasing prices
• Experiment with pricing
• Manage your pricing with Xero
• FAQs on increasing prices

Key takeaways

• Calculate your price increase using the formula: New Price = Current Price × (1 + Percentage Increase), and ensure it covers rising costs while maintaining your target profit margin.
• Implement smaller, regular price increases rather than waiting for large jumps, as customers find incremental changes easier to accept and you avoid damaging your reputation.
• Communicate price changes transparently by giving at least 30 days' notice, explaining your reasoning, and highlighting the ongoing value you provide to customers.
• Monitor key metrics after your price increase including sales volume, customer retention, and profit margins to confirm the change achieved its goals and adjust if needed.

Reasons for increasing prices

Price increases help businesses stay profitable as costs rise and value grows. Here are the most common reasons to raise your prices:

• Improve profit margins: raise prices once you've built a customer base and reputation to achieve sustainable earnings
• Reposition your strategy: increase prices to attract premium customers and shift your brand positioning upmarket
• Manufacturer RRP changes: adjust your prices when suppliers raise recommended retail prices, signalling increased market value
• Supply chain cost increases: pass on higher raw material or delivery costs to maintain your profit margin
• Adjust for inflation: raise prices to offset rising payroll, rent, and other operating expenses
• Added product value: charge more when you've enhanced your product or service with new features customers want. For example, one specialty-chemicals company successfully adopted this by pricing a new product based on the value it delivered, which improved productivity for customers by 5 to 10 percent.

Risk of not increasing prices

Delaying price increases creates bigger problems than implementing them strategically. If costs rise and prices stay flat, your profit margins shrink or disappear entirely. A 2024 McKinsey analysis of CPG companies found that even after raising prices, many saw a decline of 100 to 300 basis points in gross margins due to the squeeze from input costs.

When margins shrink, you face two options: cut costs or sell significantly more. For service businesses, selling more often isn't viable because your product is your time.

Waiting too long forces larger increases later. Big price jumps threaten customer retention and brand reputation, as they can make customers feel they are being treated unfairly. A survey of clients who defected from service firms found that two-thirds left because they wanted to feel more valued by their provider. Smaller, incremental increases are easier for customers to accept.

How to calculate a price increase

Calculating a price increase helps you determine how much to raise your prices based on your costs, margins, and market position. Use a simple formula to find the right increase amount.

Price increase formula

Calculate your new price using this formula:

New Price = Current Price × (1 + Percentage Increase)

For example, if your current price is $100 and you want a 10% increase:

• New Price = $100 × (1 + 0.10)
• New Price = $100 × 1.10
• New Price = $110

To calculate the percentage increase between two prices:

Percentage Increase = ((New Price - Old Price) ÷ Old Price) × 100

Calculate your price increase step by step

Follow these steps to determine your price increase:

1. Identify your current price: Note the existing price for each product or service you plan to adjust.
2. Calculate your cost increases: Add up how much your expenses have risen (materials, labour, overheads).
3. Determine your target margin: Decide what profit margin you need to maintain or achieve.
4. Apply the formula: Use the percentage increase formula to calculate your new price.
5. Round appropriately: Adjust to a market-appropriate price point (for example, $109 to $110 or $99).

Factor in your costs and margins

Your price increase should cover rising costs while maintaining healthy profit margins. Consider these factors:

• Direct cost increases: calculate how much your materials, supplies, or wholesale costs have risen
• Overhead changes: factor in increases to rent, utilities, insurance, and other fixed costs
• Labour cost growth: include wage increases, benefits changes, or additional staffing needs
• Target profit margin: ensure your new price achieves the margin you need for sustainable growth
• Competitive positioning: check that your new price remains competitive within your market

Stages of making a price increase

Businesses that successfully introduce price increases follow five stages: researching, developing strategy, timing, communicating, and measuring.

Research

Research gives you the data to make confident pricing decisions. Before setting new prices, gather information on your business history, financial position, and market conditions.

Key research steps:

• Review past price changes to understand how increases affected sales and customer retention
• Calculate your current profit margin and determine your target margin
• Survey customers to gauge loyalty and resistance to price increases
• Analyse competitor pricing for similar products and services

An accountant can help you understand your margins and set realistic targets.

Develop the strategy

Developing your strategy turns your research into a pricing approach that fits your business model and customer base. Consider these pricing strategies:

• Raise prices quietly: update price tags without formal announcements, which works well for retail businesses
• Segment your increases: keep existing customers at current rates while charging new customers higher prices
• Add retention perks: introduce loyalty programmes or rewards to offset customer concerns about higher prices
• Offer strategic discounts: raise base prices but provide occasional deals that bring costs back to previous levels
• Schedule annual increases: raise prices by a set percentage each year, tied to inflation or cost of living
• Target specific products: increase prices on premium or high-volume items where small changes generate significant revenue
• Eliminate discounts: keep base prices unchanged but remove existing discount programmes
• Add surcharges: maintain base prices while adding fees for peak times or premium services

Timing of the increase

Timing affects how customers respond to price increases. Raise prices when customers see clear value or when demand supports higher rates.

Good times to increase prices:

• When you've added value: consider increases after upgrading your product, launching new features, or winning an industry award
• When demand is high: for service businesses, consider increases when you're booked at 75% to 80% capacity
• At natural business cycles: consider increases at the start of a new financial year, contract renewal period, or busy season
• When competitors increase: expect customers to accept the market to adjust when similar businesses raise prices

Communicate the increase

How you communicate determines whether customers accept your price increase or look elsewhere, as academic research shows that price increases can harm purchase quantities, particularly with B2B customers. Be transparent, give adequate notice, and explain your reasoning.

How to announce a price increase:

• Give advance notice: allow customers time to budget for the change, especially in service industries where contracts apply
• Use positive language: frame the change as an "adjustment" or "update" rather than an increase
• Provide clear details: share both the percentage increase and the new dollar amount
• Contact key customers first: reach out directly to major accounts before making general announcements
• Explain your reasoning: mention rising costs, added value, or the time since your last increase
• Highlight ongoing value: remind customers of the benefits your product or service provides

Communication channels to use:

• Direct emails to existing customers
• In-store signage for retail businesses
• One-on-one conversations with key accounts
• Website updates and social media announcements

Measure the results

Measuring results shows whether your price increase achieved its goals or needs adjustment. Track results and respond to customer feedback promptly.

Key metrics to monitor:

• Sales volume: watch for significant drops that may signal customer resistance
• Revenue and profit margins: confirm the increase improved your bottom line as expected
• Customer retention: track whether existing customers stay or leave after the change
• Customer feedback: collect and respond to comments, complaints, and survey responses

Xero accounting software provides real-time reports to track revenue changes and profit margins after your price increase.

Alternatives to increasing prices

Alternatives to price increases can improve profitability when raising prices isn't the right fit for your market or customer base. Consider these options:

• Add or raise fees: introduce shipping charges for orders below a minimum threshold or add service fees
• Consolidate pricing tiers: simplify your pricing structure by removing lower-margin options
• Reduce inventory costs: hold less stock if you can reorder quickly, lowering storage and carrying expenses
• Negotiate supplier terms: request volume discounts or better payment terms as your order quantities grow
• Adjust product sizing: reduce package sizes while maintaining price points, and communicate the change transparently to customers

Experiment with pricing

Experimenting with pricing helps you find the optimal price point before committing to a full rollout. Test different approaches in limited markets or customer segments to reduce risk.

Ways to experiment with pricing:

• A/B test price points: offer two different prices to similar customer groups and compare revenue results
• Test bundled pricing: package products together at a discount to see if bundles increase overall sales
• Trial in specific markets: introduce new prices in one region or customer segment before rolling out broadly
• Offer limited-time pricing: test higher prices as promotional rates to gauge customer response

Manage your pricing with Xero

Price increases are a normal part of running a healthy, profitable business. Success comes from making strategic decisions based on clear financial data.

Xero accounting software helps you track how pricing changes affect your revenue, monitor profit margins, and understand the real impact on your bottom line. With real-time reports and automated insights, you can confidently decide on pricing that supports your business growth.

Ready to take control of your business finances? Get one month free.

FAQs on increasing prices

Here are answers to common questions about implementing price increases.

How do I word a price increase notice to customers?

Use positive, straightforward language that explains the change and when it takes effect. For example: "Starting [date], our prices will increase by [percentage/amount] to reflect rising costs and continued investment in quality."

How much notice should I give customers before raising prices?

Give at least 30 days' notice for most businesses, or follow any contractual requirements. Service businesses with ongoing contracts may need 60 to 90 days' notice.

What's a reasonable percentage for a price increase?

Most businesses increase prices by 3% to 10% annually, depending on cost increases and market conditions. Larger increases may be necessary after extended periods without adjustment.

Should I raise prices for existing customers or only new ones?

Both approaches work depending on your business model. Keeping existing customers at their current rates builds loyalty, while universal increases maintain pricing simplicity and fairness.

How often should I review and adjust my pricing?

Review your pricing at least annually, or whenever your costs increase significantly. Adjusting prices regularly in small amounts is easier for customers to accept than making infrequent large increases.