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Commercial Concepts

Raising prices

By Chip Burnham

This new series of articles offers ways to improve the commercial engine of small to mid-sized manufacturing companies.

FFJ 0718 commercial lead2July/August 2018 - The simplest way to increase profitability is to raise prices. Raising prices without a change in cost of goods (COGS) or expenses will deliver 100 percent of your price increase to the bottom line as net income. Of course, this wonderful result assumes your price increase does not drive any customers away or cause any to buy less from you.

You can probably think of a few of your products or services where you know you are undercharging. Customers find your quality and service are better than most competitors, but you have not raised prices in a long time even though your costs have risen. Why wait so long to raise prices? Most likely, it is the fear of price elasticity—where a small change in price has a large change in purchase volume.

Buying habits

So, how do you raise prices while retaining customers and order volumes? First of all, let’s define success. A price increase is successful when the marketplace accepts it without changing their buying habits. If the customer intended to purchase 1,000 steel plates before the price increase, then they will still purchase that steel after the price increase. When the commercial team accomplishes this, every dollar of additional revenue from the price hike becomes profit.

A successful price increase gives a huge impact. If you raise prices by 10 percent you raise your net income by more than 10 percent. Here’s the math.

Let’s say one of your product lines brings in $1 million in revenue and generates 10 percent net income, or $100,0000. A successful price increase of 3 percent will raise net income by $30,000. A 3 percent increase in price delivers a 30 percent increase in net income if you maintain customer buying habits.

External factors might be a rise in transportation costs, material costs, government regulations or taxes, or inflationary pressures generally.

Move the needle

Let’s get into the nuts and bolts of successfully raising your prices. If you put in the effort to create a strategy to successfully raise prices, make sure you do so on a scale that makes an impact.

Some manufacturers execute a general price increase, where every product and service will get the same percentage of increase. If your product pricing is tied to well-known factors such as fuel prices, transportation costs or raw material prices, you might be able to get away this shotgun approach. However, most manufacturers will have to analyze specific groups of products or services and raise prices on a selective basis. Regardless, make sure your price increase is high enough and spans enough offerings to improve the company’s financial performance.

Explain mitigating factors

When raising prices, you must predict whether the customers will react negatively. Will the change be obvious? Are you contractually obligated to inform customers of impending price increases? If you are unsure, talk to your customer-facing staff to anticipate market reaction and then assume a worst-case scenario.

When communicating to the marketplace, don’t apologize. Instead, explain and thank customers for their understanding. Explain the factors involved with the price increase. External factors might be a rise in transportation costs, material costs, government regulations or taxes, or inflation. Internal factors might be a change to the bill-of-materials, new technology release, new bundling of items, increased service or warranty, or lack of an increase in the past X number of years.

Some key customers might need special consideration. If necessary, offer a limited-time discount to key customers who pose a flight risk. Keep in mind that some government contracts and large corporations require a 90-day notice of any price changes.

Prepare your team

Before the outside world learns of the price increase, prepare  your sales, marketing and customer service employees. Don’t let them invent their own reasons for the increase. Instead, ask them to help you to prepare scripts or short statements containing the justification for the increase. Also, teach your team how to respond to negative feedback from the marketplace, including how to escalate issues to management.

Five tips

Make price adjustments, not increases. Consider lowering prices slightly on a few highly visible products while increasing prices more significantly on those products that are less visible. This approach can not only provide a net improvement to profit, but also allows you to announce “pricing adjustments” rather than “price increases.” Train your team to always mention the items where prices were reduced.

Hold prices and reduce content. An indirect way of raising prices is to hold the price the same and reduce the content. Through researching customer needs and watching your product being used by the customer, you might find you are providing more content than necessary in some cases.

Increase prices on exclusive products. Value pricing is an important part of managing profit. If you are the only source for a product, the markup should be higher than products that are commodities. For example, if you provide a product that includes patented components that wear out and need replacing, then these protected components should carry a high markup.

Time your price increase with an external factor. Raise prices with another significant change in the market. For example, implement the price hike at the same time as a competitor, preferably the market leader. If you are the market leader, then set the tone by being the first to launch the increase with the start of a new season, or with the announcement of a raw material increase such as oil or metal.

Spiff the sales team. Your sales teams have the greatest impact on selling price. Provide incentives to the sales team for selling at higher prices or reducing discounting. Make sure to include overall revenue in your incentive so that you don’t lose market share as they pursue selling at higher prices. The temporary incentive for the salesperson might be a bump in commission for any order 5 percent above the original price. Or you can consider a group reward for meeting sales targets. Although a group incentive may be temporary, it can have a lasting impact and permanently change your sales staff’s selling behavior. The result could be a permanent increase in profitability.

It is hoped this article sparks some ideas for your next price increase. Be sure to predict customer reactions and plan carefully. A well-executed price increase is the fastest way to improve company profitability. FFJ

Chip Burnham is author of “MarketMD Your Manufacturing Business” and is co-founder of Fairmont Concepts, which helps manufacturers maximize the performance of their commercial engine. Fairmont Concepts, Maple Valley, Washington, 833/667-7889, www.fairmontconcepts.com.

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