Write an annual inflation increase into a contract

1. Where the idea comes from

One real estate owner was talking about a proposed law that would have capped rent increases at 5 percent a year. He called it a law for the headline: most rent increases do not go that high in a year, and the average at the time was 3.18 percent a year. He pointed out how much more he would make if he raised rents 5 percent every year, and said the cap would barely touch the everyday renter.

The reasoning taken from that was simple. Nothing caps yearly price rises on services by law, on that reading, so maybe it was worth trying. Pricing data had also shown that companies which keep optimizing and testing their prices make far more money than companies that do not. So a right to raise rates every year went into the contracts, to get the same benefit the landlords had in a service business rather than in property.

2. Why it matters

The cost of doing business goes up. Inflation happens. You can watch your margins shrink every year, or you can get ahead of it. Most owners told about this say it will make no difference in their business. Except that they have not adjusted a price in five years, so it has already made a difference, only in the other direction.

3. The mechanism

Have customers sign contracts with a fixed price increase every year. Charge $100 a month and raise it 5 percent a year, and the next five years look like this:

	Start	After one year	After two	After three	After four
Monthly price	$100	$105	$110	$116	$122
Rise that year	5%	5%	5%	5%	5%
Total rise since the start	0%	5%	10%	16%	22%

That is a price 22 percent higher over the period. The same schedule at 12 percent a year shows how prices compound:

	Start	After one year	After two	After three	After four
Monthly price	$100	$112	$125	$140	$157
Rise that year	12%	12%	12%	12%	12%
Total rise since the start	0%	12%	25%	40%	57%

Flag: the last cell of the 12 percent table. The total rise after four years is given as 22 percent, the same as the 5 percent table. The price row, $157 against $100, gives 57 percent, and 57 percent is the long-term rise used in section 6. The table above uses 57 percent. This page does not settle which reading is right.

4. What standing still costs

On public inflation data, $100 in 2024 was worth $79 in 2017. Charge $100 in 2017, never change it, and you are working with 21 percent less spending power.

Take a service priced at $100 in 2017 that ended that year at a 20 percent margin. Leave the price alone, let normal inflation run through wages and the cost of goods, sell the same number of customers in 2024, and you would have no profit left seven years on. Adjusting prices is not only a way to make more money: for some businesses it is the difference between staying open and closing.

5. A long-run case

One owner of a candy business insisted on controlling a single thing in it: its prices. He sends the year's price list for every product himself. Prices there have been raised more than 50 times in the 51 years since he bought it, sometimes by as much as 17 percent in a single year, and the business has returned more than $1B to him over his lifetime. If that was the one thing he controlled, it probably mattered. Where the product is good and the customer base loyal, there is usually far more room on price than you think.

Flag: the size of the rises. In SOP 2, section 4, the same case runs thirty or forty years, with rises of 5 or 6 percent every year; in SOP 83, section 2, they average 10 percent. Take the 17 percent here as your guide and one year's step runs far larger than 5 or 6. This page does not settle which reading is right.

6. Doing it

Pick the percentage. Choose a reasonable one: 5 to 15 percent is a good place to start.

Put it in new contracts. Add it to new contracts and new customers. That is nearly all there is to it.

Give the reason. The line offered for a sales team runs like this, in your own words: to keep reinvesting in the quality of what we deliver, our prices move with the consumer price index, so we never have a reason to cut what you receive when our own costs go up.

Choose the moment. The increase is not raised during the sale. It can be brought up while the paperwork is being filled in.

Stay under the ceiling. Few people push back if the rise is under 15 percent, and over the long term a rise of 57 percent is enormous for any business.

Flag: 57 percent. The 57 percent is where the 12 percent schedule stands after four years. At the 15 percent ceiling, four years of rises compound to about 75 percent. This page does not settle which reading is right.

Flag: a fixed rise or the price index. The steps set a fixed percentage chosen in advance, and the worked schedules rise by the same percentage every year. The suggested reason for the customer ties the price to the consumer price index. Which one a contract should state is not established on this page.

Flag: 3 to 10 or 5 to 15. Where all ten plays are listed together, this one is put at 3 to 10 percent; the steps above start at 5 to 15 percent, and the list cannot decide between them. This page does not settle which reading is right.

No contract wording is given for the clause itself, and this page supplies none.

7. Why pricing well pays

Inflation happens in every economy and erodes profit over time; to survive you have to raise prices. Raise them only when you are forced to, though, and you give up every benefit of raising them when you choose. Price well and:

• you make more money without needing more customers;
• the right price helps draw in more buyers who are ready now;
• you take customers and market share from competitors;
• customers are more satisfied, because they feel they got a fair deal;
• things sell faster when the price matches what buyers will pay;
• people are more likely to come back when the price felt right;
• cash comes in more steadily, to reinvest or use;
• you need fewer discounts, sales and deals to attract buyers;
• the brand can look more premium or more trustworthy;
• each sale earns what the market will bear.

Price badly, or never change prices at all, and:

• you charge too little and miss the profit;
• prices that are too cheap send good buyers elsewhere;
• you end up discounting all the time, which hurts the brand and trains customers to negotiate;
• stock sits unsold and ties up cash;
• you risk undervaluing what you sell;
• competitors with better pricing overtake you;
• cash can run short when you need it most;
• it can keep you from reinvesting and growing.

8. What this page does not decide for you

• The percentage. 5 to 15 percent is offered as a starting range, and 3 to 10 percent elsewhere; this page gives no single figure for your business.
• Fixed or indexed. Whether the rise is a set percentage or follows the price index is left open.
• Existing customers. The steps cover new contracts and new customers. Moving current customers onto a yearly increase is not covered on this page.

9. The checklist

Question	The answer
What goes in the contract	A fixed yearly price increase
Who gets it	New contracts and new customers
How much	5 to 15 percent as a starting range; 3 to 10 percent in the list of all ten plays
The reason given	Reinvesting in quality; prices kept in step with the price index
When it is raised	While the paperwork is filled in, not in the sale
The ceiling	Few push back under 15 percent
The cost of not doing it	$100 in 2024 was $79 in 2017; a 20 percent margin gone in seven years

10. What this page does not cover

Raising prices as a signal of value, and a long-run account of raising prices every year faster than inflation, are SOP 2 — Set a price from the value gap, not from competitors. Billing periods and second cards are on SOP 78 — Switch to twenty-eight-day billing and collect a second card. The other pricing plays are SOP 77, the umbrella page for all ten. How often to test a price, and by how much to move it, is SOP 128 — Test price with a step size and a cadence.

Contract enforceability, notice rules for price changes and consumer-protection rules are not covered on this page.