Every time I speak about revenue strategy at a manufacturing event and bring up price increases, I get pushback. Most of the business leaders in the room tell me they are in a cutthroat market and there is no way they can implement price increases and maintain sales.
However, my experience comes from a variety of industries, and outside of manufacturing, price increases are mandatory and frequent. In the past, forgoing price increases impacted profits but wasn’t a major blow to the business. Today, facing inflation unseen for more than 30 years, neglecting to manage your pricing as costs increase poses more risk to your business than losing a customer.
Here are some insights I’ve learned over the past 25 years—and specifically in the past 18 months of supporting my clients, and my own business, through this process.
The “what” of managing prices
Price increases directly reflect cost increases a company has incurred over a specific time period. They are not arbitrary, they are necessary, and all of us experience them in most aspects of our lives.
I’m always surprised at an owner who is nervous about passing on price increases when he is paying more for gas, groceries, real estate taxes, and pretty much everything else he purchases. I can’t negotiate the price of a gallon of milk at the store, so why should it be any different in our own businesses?
A price increase is not taking advantage of a customer to get more margin. It is protecting the company from margin erosion so you can maintain a premium level of quality, service, and delivery.
The “who” of managing prices
The who is really two different individuals: someone in the business and a customer representative.
Typically pricing conversations take place with decision-makers. In a large company, that may be buyers and purchasing agents. In a small company, it may be the owner.
If you have a sales team, I recommend relying on them to deliver increases. In my experience, that is a function of sales. They are well-versed on handling tough conversations, and they have the best relationships with customers. Anyone who has had a career in sales has delivered and defended price increases.
In addition, let your salespeople determine which customers get increases. Sometimes, it’s all of them. But sometimes, there are specific customers that have low or negative margins, and they need to be independently addressed.
The “when” of managing prices
How often increases are implemented depends on how often the business itself receives them.
An annual price increase addresses the overall cost of doing business going up. This is usually a smaller percentage—around 3% to 5%. It is typically implemented at the same time every year.
For commodities such as steel, for which the market fluctuates frequently, you may track that cost separately and adjust up and down on a quarterly basis with market changes. In this example, there are indices you can reference to help determine and justify adjustments.
Another strategy is to increase prices as extreme events occur, such as the current inflation situation. I have one client that has implemented an overall increase three times over the past 18 months—sometimes as high as 9%.
The reality is that a business must make money to be a good supplier. This client is receiving increases almost monthly from various suppliers. We monitor the overall change to cost of goods and services, and when the company can’t absorb anymore margin erosion, we recommend an increase.
The “where” of managing prices
Like the timing conversation, you may have parts of the business that need adjusting more frequently or at higher amounts than other areas. You need to constantly analyze your financials and dig into where you are seeing the most margin erosion. This data will help determine where increases need to happen. Maybe it’s an overall increase, maybe it’s a specific product or service. Having this data is valuable in justifying changes to customers.
The “how” of managing prices
I recommend putting it in writing. I send a letter communicating the increase with some talking points about the drivers behind it.
I would also suggest you email the letter with the contact information of a person (a sales representative, if possible) your customer can call with questions. A follow-up phone call may be needed, depending on the size of the increase. If a large increase is coming, a phone call or visit to give the customer a heads-up is a good idea.
Customers do not love price increases. However, they are accepting them more now than ever. They see the news. They are experiencing cost increases in their own lives, and they aren’t surprised.
High-quality domestic suppliers that deliver on time are more critical than they’ve been in 30 years. The cost of changing suppliers is significantly higher than a 5% price increase. Doing business at a loss, or small margin, doesn’t make sense when there is a backlog of manufacturing needs.