Price increases: Overview, definition, and example
What is a price increase?
A price increase refers to the adjustment or rise in the cost of goods or services. It occurs when a business decides to raise the price of its products or services, typically due to factors such as higher production costs, increased demand, inflation, or changes in market conditions. Price increases can be temporary or permanent, and they are often included as terms in contracts to set clear expectations for both parties.
For example, a supplier might include a price increase clause in a contract to allow for price hikes if the cost of raw materials goes up. This ensures that the buyer understands the possibility of price changes over the term of the contract.
Why are price increases important?
Price increases are important because they allow businesses to adapt to changing market conditions, maintain profitability, and cover increased operating costs. For consumers and businesses entering into agreements, understanding when and how prices may increase helps manage expectations and avoid surprises. Clear terms around price increases can also protect both parties from disputes related to cost changes.
For businesses, price increases are a necessary tool for staying competitive and financially viable, but they must be handled carefully to avoid alienating customers or clients.
Understanding price increases through an example
Imagine a software company that offers a subscription service. In its contract, the company states that prices may increase annually based on inflation or operational costs. After one year, the company decides to raise subscription prices to cover increased server costs. Subscribers who signed the contract are aware of this potential increase and must pay the new rate.
In another example, a restaurant includes a clause in its supplier agreement that allows for price increases if the cost of ingredients rises. This ensures that the restaurant won’t be stuck paying outdated prices for products if the supplier experiences cost increases.
An example of a price increases clause
Here’s how a clause like this might appear in a contract:
“The prices for the goods or services provided under this Agreement may be increased by the Supplier at the beginning of each calendar year, based on changes in the Supplier's cost of materials or inflation. Any price increase will be communicated to the Buyer at least 30 days in advance.”
Conclusion
Price increases are a common and necessary part of doing business. By including a price increase clause in contracts, businesses can ensure transparency and avoid misunderstandings when costs rise. For customers or clients, understanding the terms around price increases helps to plan and manage expenses, ensuring that both sides have clear expectations about potential changes in costs.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.