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As households continue to feel the squeeze from inflation, businesses face a difficult balancing act: how do you raise prices without driving customers away?

From small businesses to household names, companies across the UK are under pressure from rising supply chain costs, volatile global markets and higher raw material prices. Yet simply passing those increases on to consumers is no longer straightforward in an economy where shoppers are increasingly selective about where they spend.

Experts say the answer lies not only in pricing strategy, but in psychology. Businesses that succeed in charging more without losing customers tend to focus on perceived value, timing and subtle adjustments that consumers are less likely to resist. For many firms, avoiding price rises altogether remains the first priority.

Sam Coyne, CEO Europe at financial network Currenxie, says geopolitical instability is creating fresh pressure on costs, particularly for small and medium-sized businesses (SMEs).

“Consumer prices are likely to further surge due to the ongoing Middle East conflict,” he says, adding that businesses able to “minimise or absorb costs” will emerge in a stronger position.

According to research from Currenxie, nearly a third of businesses have already passed rising costs on to customers due to global instability and disrupted supply chains.

Find savings before you touch prices

But Coyne argues that operational efficiencies can help soften the blow. One overlooked area, he says, is foreign exchange and cross-border payment fees. “A 1 per cent saving on foreign exchange fees is an extra 1 per cent that doesn’t need to be passed onto customers,” he explains.

That principle – finding savings elsewhere before touching headline prices – has become increasingly important as consumers grow more price conscious.

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In the grocery sector, where competition is fierce and margins are notoriously tight, retailers have become particularly careful about how they implement increases.

Lucy Rumbold, equity research analyst at Quilter Cheviot, says most supermarkets are moving prices “broadly in line with, or slightly behind, the market” in order to avoid losing customers. Yet price alone is no longer the decisive factor.

“Loyalty schemes, convenience, product quality and brand trust are just as important in shaping consumer behaviour,” she says.

Don’t assume consumers are all trading down

Consumers may still cut back overall, but many are becoming more selective rather than simply trading down. As households rein in spending on restaurants and takeaways, many are willing to spend slightly more on premium supermarket food instead.

Retailers such as Marks & Spencer have benefited from this dynamic, continuing to gain market share by positioning themselves as a higher-quality alternative.

Premium own-label ranges at supermarkets including Tesco and Sainsbury’s have also performed strongly despite broader pressure on household budgets.

The strategy reflects a wider consumer mindset: shoppers still want treats and quality purchases, but they are making more deliberate decisions about where to spend. Behind the scenes, many large businesses now rely heavily on sophisticated pricing models to determine exactly how far they can push consumers.

Be scientific about price rises

Chris Beckett, consumer staples analyst at Quilter Cheviot, says pricing power depends heavily on both brand strength and the type of product being sold.

“The best companies are very scientific about pricing,” he says.

Large multinational brands increasingly use systems known as revenue growth management and price pack architecture to analyse customer behaviour, testing which price points consumers will tolerate and where resistance begins.

One example is Coca-Cola, which charges dramatically different prices depending on where and how a product is sold. Consumers buying a bottle at an airport are often far less sensitive to price than supermarket shoppers stocking up at home.

That explains why a single 500ml bottle might cost £3 at a transport hub, while supermarkets simultaneously offer multi-buy deals on larger bottles.

In many cases, businesses also avoid obvious price increases by making subtler adjustments. Rather than dramatically increasing the shelf price, companies may reduce pack sizes, tweak promotional offers or shift customers toward loyalty discounts.

Known informally as shrinkflation, smaller packaging has become one of the most common ways brands preserve profit margins while limiting sticker shock. However, businesses do not always get the calculations right.

The sharp rise in chocolate prices over the past year has offered a clear example of how consumers react when psychological price thresholds are crossed. Higher cocoa costs forced manufacturers to raise prices, and many expected falling demand as a result. While consumers did buy fewer chocolate bars overall, higher prices largely offset the decline in volume.

But there were limits. For Mondelez International, owner of brands including Cadbury and Milka, some Northern European markets proved more sensitive than anticipated. Once certain price points were breached, sales volumes dropped sharply enough that the company was forced to lower some prices again.

The pace of increases matters too.

Tax might have a bigger impact than price

Consumers are often more willing to accept gradual rises than sudden jumps, even when the long-term outcome is similar. The tobacco industry has long relied on this principle, routinely increasing cigarette prices each year.

But abrupt tax hikes can change consumer behaviour far more dramatically. Beckett points to large tax increases in Bangladesh in recent years that have had an impact on sales for British American Tobacco.

Ultimately, experts say customers are willing to pay more when they feel the increase is justified – whether through quality, convenience, trust or experience.

In a fragile economic climate, businesses that simply raise prices without offering anything in return risk alienating increasingly cautious consumers. Those that communicate value effectively, however, may find customers are more willing to absorb higher costs than expected.