With the economy on the mend (maybe), the potential for raw material price inflation due to increasing demand is rearing its ugly head. In fact, with metals, energy, and agricultural inputs well above their lows from early 2009, inflation may already be a fact for many manufacturers. Therefore, it is time to consider recouping some of this lost margin through price increase actions. I’m not talking about the “wink-wind, nod-nod” type of price increase where your major customers know that a greater discount off of “list” will offset the list price increase. I’m talking about increases where you expect to see rising margins (or, at least margins that fall less quickly), and thus you have to implement the price change at a vast majority of your accounts.
Having had the experience of selling through price increases, there are several tips I’d offer as to how to be effective at getting your customers to understand the need and accept the realities of the situation. As in all business dealings, the right degree of openness and communication is key to successful negotiations.
- Try to avoid the appearance of a “regular” price increase schedule. If you pursue price increases at the same time every year, for example, you lose any credibility on efforts to tie the increase to specific inflationary pressures. Also, your customers become immune to the increases as such a procedure is typically associated with the practice of increasing list prices while maintaining prices for existing accounts.
- Provide the appropriate amount of notice. You should consult with legal counsel on what is appropriate for your business, as too much notice could be construed as “signaling”. However, providing some notice (typically 30 or 60 days) provides a window in which to negotiate with customers before the increases take effect, so that renewed contracts and agreements are set in time for the increase.
- Prepare a good defense of the rationale for the increase. While you are certainly entitled to price your products in whichever manner you choose (ideally, what the market will bear), it can be useful to help customers understand why you need to take the price actions you are implementing. This can take the form of a presentation showing (in a generic, indexed form) the impact of material cost inflation on your business, or the cost trends in critical raw materials. You need to be careful not to reveal confidential information of course, and to show data that supplements your decision without either contradicting it or exaggerating the point. Therefore, careful thought and preparation is required in preparing such a tool, but the impact can be significant.
- Consider in advance what tradeoffs are acceptable in negotiations. I don’t want to get into a significant discussion on negotiation best practices in this post, but suffice it to say that you should work out acceptable alternative scenarios (extending an existing contract with a guaranteed minimum volume, or delay an existing increase in return for more significant future ones, for example) prior to your discussions with customers. In this way, you are able to use the price increase as leverage for achieving other objectives in relationships with key customers.
The price increase process is tedious, but proper execution is absolutely critical to ensuring the ongoing profitability of your business – can you imagine a world in which you never increase prices? Therefore, taking the time to invest in tools to support the increase and identifying negotiation approaches is well spent, and can help to improve the effectiveness of your pricing strategies.
Does anyone else have best practices they have used or experienced in regards to price increases?
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