The Three Greatest Mistakes in Increasing Prices
When our price consultants initially engage with a client in the manufacturing or distributing sector to improve profits through a new pricing strategy, we occasionally uncover a history of unsuccessful price increases. Increasing prices is a fact of doing business for most manufacturing and distribution companies and when handling price increases with finesse, there is nothing to fear. Your client-base will understand that as variable and fixed costs rise you are faced with the decision to adjust your prices in order to maintain profit margins. It’s no easy task – which is why we see so many companies realizing far less from their price increase initiatives than what they had originally planned.
Here are three key mistakes that many manufacturers and distributors make in increasing prices and how to correct them:
1) The Exception Becomes the Rule: Management sets plans to increase prices that typically apply to nearly all customers. But, as the plan is executed the sales team argues for exceptions among their customer base. One by one, customers who were originally targeted for increases are removed from the implementation list. The list grows without anyone tracking the exceptions and by the time the increase is actually implemented a significant population of the targeted customers never see the increase.
Exceptions become the rule.
Correcting the situation requires monitoring the exceptions and placing limits. Keep a list of which exceptions are allowed and set specific requirements for approval. And, limit the number of exceptions allowed. It’s OK to just say NO.
Arming your sales people with value based selling strategies laid out in our “Five Price Negotiation Back-up Strategies – Be Prepared!” will help them present the price increases in a manner to reduce push-back and successfully navigate through buyer resistance.
2) The Peanut Butter Approach: Most often companies will apply a uniform price increase amount across the entire line of business. While this approach is simple, it leaves money on the table. Instead, determine precisely which products have been impacted by which specific cost increases and adjust accordingly. It doesn’t mean a different amount for each product. Apply increases to product families or product groups that have similar cost structures. The more specific you are in determining price increase amounts the easier it will be to explain and negotiate with customers.
3) Invoicing Errors: We are surprised at the number of companies that work hard to sell price increases that never appear on invoices. One manufacturer failed to add the increase to 30% of their customers. When they discovered the mistake six months later it was too late to reclaim the lost increase and it required that they sell the increase to the customer again.
Managing price increases requires close attention and discipline. Assign someone to manage the details and be responsible for the outcome. Monitor net realized increase amounts and manage exceptions carefully.
Wondering if your business is ready to roll out price increases? We would be happy to provide a price analysis, or bring our One-Day Pricing Workshop pricing course to your team. Contact one of our pricing consultants and we’ll provide you with a free 30-minute consultation to help you determine the right path to pricing excellence.