Is it time to raise prices? It depends.
According to the Bureau of Labor Statistics, inflation was 5.4% in July–a 13-year high. Yet rising costs are uneven across industries. Supply chains are crippled by shortages of raw materials such as lumber and computer chips. Hotel https://www.bls.gov/news.release/pdf/cpi.pdfrates are up around 7%; cereal prices are only up 1%.
The ability to pass on a price increase is highly variable based on the industry and nature of the client relationship. Yet there may be some businesses, conditioned by 20 years of low inflation and price sensitivity, who are leaving money on the table. Here are some tips for passing on price increases:
Rationalize your business case.
A proportion of clients will arbitrarily oppose price increases. Data will disarm clients who resist solely because they don’t want to pay more. It’s hard to argue with evidence that raw material and labor are more expensive than they were before. Highlighting features and benefits you’ve added provides cover for professional procurement and buyers who view controlling costs as their purpose in life.
In consumer-packaged goods, providers often reduce size or pack-out instead of raising case costs. While this can be viewed as gamesmanship, reducing sizes is one way to cut costs without raising prices. This tactic is particularly effective if a provider can make a case that sizing results in waste or underutilization.
Providers can also offer price tiers, as commonly used in good/better/best models. By moving to tiers, some customers may reduce the service burden from your company by moving to a lower one, which could be advantageous.
Another option is to soften the blow of a price increase by enrolling the client in a VIP program based on their purchases and performance. By achieving certain benchmarks, you can rebate back to the client at the end of the year, reducing your total cost to serve them. Facing a price increase, clients may be willing to negotiate on other things such as cycle time or payment terms.
Cut through the noise.
Salespeople will be the first to sound the alarm for customer loss if you raise prices. Ask them to produce evidence that this is the case. In some industries, you could test what the actual price elasticity may be. Paying commission on margin instead of revenue is one way to ensure your sales team is taking ownership of pricing.
Make price increases a habit.
This may be the time to ingrain annual price increases into your strategy and thinking. Creating an annual process where you assess cost and customer performance is a good business practice. While vendors want to be viewed as fair, the reality is that some customers are more expensive to serve than others.
If customers are going to score vendors for performance, vendors could score customers on arbitrary returns, credits and delays–if for nothing more than their own consumption. Price riders are commonly included in contracts, assuming increases at regular intervals.
Vendors must be thoughtful about how they share bad news with clients. The sensitivity of such conversations requires tact. While a letter may suffice in channels like a wholesaler or dealer network, in others a peer-to-peer communication (such as CEO to CEO) may be necessary. Customers will have respect for providers who reinforce their values, such as paying talent competitive wages.
Consider dynamic pricing.
Algorithms are driving real-time price increases in many sectors of our economy. Most hotel and airline pricing today have shifted to real time driven by machine learning. Uber and Lyft price based on number of drivers, traffic conditions and other variables. The nature of such “auctions” incentivizes buyers to act.
Think about timing.
If you take incremental price increases on a regular cadence, you will condition clients to expect it. It’s important to provide adequate notice so clients can adjust their budgets and systems. You must also weigh customer success. It would be bad form to pass on a price increase at a time when satisfaction is low.
The key to price increases is to position them within a spirit of partnership. True partners will understand you have a business to run. Given the supply chain disruptions in the last year, they should be willing to have holistic conversations about how to deliver value and reduce cost.