How to Raise Prices – Part 1
How to Raise Prices in 2018
Raising prices seems like a no-brainer… Higher margins… quick implementation… What could go wrong? Plenty. Find out how to implement the most powerful profit drivers known to business, without making the mistakes that have sunk so many others.
Should I Raise Prices?
Raising prices is certainly one of the very best things you can do for your company this year. There are not many silver bullets in business, but, when handled correctly, pricing increases come as close as possible to that ideal.
There are several reasons why a price increase in 2018 is critical for your business.
- The best defense… Price increases are absolutely essential in an environment where your costs are increasing, which is pretty much all the time, isn’t it? Without minimum price increases that keep pace with your cost increases, your company will suffer inevitable margin erosion.
- Margins drive profitability… As an offensive measure, price increases are a powerful way to increase your company’s margins. For those of us in the continuous improvement game, we know how hard it is to improve margins by squeezing cost savings from operations, especially when your processes are already fairly lean.
- Everybody’s Doin’ It… Well, maybe not everybody, but a surprising number of your customers will be expecting you to increase your prices each year. Don’t disappoint them! Price increases, when accepted by your customers, are almost too easy.
So, for all the reasons above, when your Board is demanding higher margins, one of the first strategies you should be considering is increasing your prices. And if you have already received a directive to raise your prices, it is critical that you do it the right way.
Not Without Risk
Increasing prices is of course not without risk. There is no free lunch in business as we know. And a lazy man’s price increase can definitely do more harm than good. Thinking about increasing all your items by 5% across the board? Think again.
The most immediate risk involved in a price increase is simply that the customer will not buy at your new price. The last thing we want to do with our price increase is to decrease sales. Your customers may love you, but they’re not interested in paying more for something they can get right down the proverbial street.
The secondary risk is that your customer may still buy today, but unbeknownst to you, he and his colleagues are starting to talk about looking at other suppliers. Loud, angry customers can be scary; quiet, angry customers can be lethal to your business.
This is why increasing prices is such a challenge. Simply said, we want smart price increases, not dumb ones.
I don’t think there is any denying that there is often an organizational inertia around price increases. Getting a price increase implemented is rewarding, but it’s tough. If you want to get a quick gauge on the emotion that can be involved in price increases, just go to your front-line customer service and sales folks. I’m talking about the folks who are going to be on the phone when your customer calls after seeing that price increase.
Ask those folks what they think of the idea of a nice across the board price increase. I bet you they don’t love it! In fact, you will probably find your folks are pretty worried about it. And that is as it should be.
We once worked with one customer service manager that was very worried about corporate’s decree to increase parts prices by 5%. After avoiding several requests from his boss to get the parts price increase in place, he was finally cornered. He had to produce a plan and proof that he was increasing prices. So he scoured the division’s cost and sales history for several years and found every case he could where his company had lowered costs but maintained selling prices. He reported this up the chain as a price increase! Such are the irrationalities that are involved with this topic.
Our service manager’s reaction might be overboard, but a reasonable amount of worry from your customer service folks makes sense and is appropriate.
In fact, when you really think this through, you see that there are multiple stakeholders in your organization who are involved in the price increase activity, and if you are doing things right, those folks are going to be in a state of healthy conflict.
Your finance folks should be aggressively pursuing price increases. They should be happily modeling your pricing increases and salivating over the positive effects those increases will have on company margins.
The customer service folks, speaking with the voice of the customer, should be pushing back. They should be particularly concerned with those customers who may walk away. They should also be pointing those items they just know customers won’t pay more for.
Your sales management team, properly incentivized with margin as well as volume, should be seeking the sweet spot between the two.
And senior management, God love them, they should be sitting back and enjoying it all, knowing the process is going to optimize profitability for the organization.
Where is Your Commitment?
Out of this healthy conflict, your organization needs to resolve to get this done. You generally need to believe in something to make it happen, and this is no different. If you feel you don’t deserve the same or better margins than last year, or you feel that your products are over-priced already, and that your customers deserve to earn higher profits instead of you, then forget this right now.
But if you refuse to let cost increases erode your margins, if you know you have high-value products that stand up well against your competition, and if you are driven to optimize your company’s profitability, then you need to be increasing your prices this year.
How to Raise Prices – Part 2
The next installment in our series will look at the mechanics of getting your price increase off the ground.