It’s easy to lower prices. The sales team loves it because they see it as a simple way to create value in the potential customer’s eyes. The marketing team loves it because they can now deliver a “good news” message to the marketplace. And of course, the customers love it too.
Unfortunately, however, at some point the sales and marketing group must raise prices. That is not quite as much fun. In fact, it can be painful.
Raising prices and providing the business with a net gain can be tough whether you are selling a low-price commodity item or a high dollar product with a price over $10,000. But there are ways to increase prices for high dollar products that won’t crater your market or send customers streaming out the door.
Why raise prices? If raising prices is so gut wrenching, why do it?
Sometimes your company has no choice. You have a revenue or profit shortfall and must make it up in some way. The typical first reaction is that a price increase will result in losing business that will make the problem worse. That’s not necessarily the case. There are ways to successfully raise prices to increase revenue and profits without adversely impacting your customer base.
What makes a price increase successful?
A price increase is successful when the marketplace accepts it without changing their buying habits.
That means if a customer intended to buy 20 units before the price increase, then they would still purchase 20 units after the price increase and require no additional discount, no additional service, and no change in product configuration or options. When the commercial team accomplishes this, every dollar of additional revenue drops to the bottom line as net income.
For example, let’s assume a product line brings in $1 million of revenue per year. After subtracting cost of goods (COGS) and expenses the product line delivers 10 percent net income profit (Revenue minus COGS minus Expenses equals Income). The net income is, therefore, $100,000. If that product line has a price increase of 3 percent with no change in unit volume, COGS, or expenses, then the full 3 percent of the $1 million – $30,000 – drops directly to the bottom line and net income increases from $100,000 to $130,000.
A 3 percent price increase resulted in a 30 percent increase in net income.
This illustrates how vitally important it is for the commercial team to be able to execute a price increase with as little negative impact to product volumes, cost of goods, and expenses as possible.
The concept of price elasticity can have a severe negative impact on your price increase initiative. Price elasticity says that a relatively small change in the sell price can have a significant change in the volume of products that you can sell. If a price increase of 3 percent creates a volume decrease of 25 percent, you’re in a highly price elastic market. In my experience selling high dollar products over $10,000 each, price elasticity is fortunately not as severe as with commodity products.
When raising prices, you must predict whether the customers will react negatively. Do they know precisely what your current price is? Will the change be obvious? If you are unsure, assume a worst-case scenario.
Communicating the increase
Prepare a clear message justifying and explaining the change. Don’t let your sales staff, customers, partners, or worse, your competitors, invent their own reasons for your increase. Be prepared to respond to negative feedback from the marketplace. Develop scripts with short statements containing justifications for the increase that your sales, marketing, and service staff can refer to when questioned.
In cases where you are sure you will receive a negative reaction to a price increase – like with partners and key customers – communicate the increase before implementing. You might need to offer limited-time discounts to key customers who pose a flight risk.
Some government contracts and large corporations require a 90-day notice for any pricing changes.
Don’t make your announcement an apology. Instead explain and thank customers for their understanding. Note outside factors such as rising transportation and material costs, inflation, or the lack of an increase for a certain period of time.
Regardless of the risks, there are times when you must raise prices. Here are 5 ideas for minimizing the impact while still improving profitability.
1. 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 a general “price increase.”
2. Hold prices and reduce content
An indirect way of raising prices is to hold the price the same and reduce content. Through researching customer needs and watching your product being used by the customer you might find you are providing more content than necessary.
3. Increase prices on exclusive products
Value pricing is an important part of managing profit. If you are the only source for a product, the price 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 include a higher markup.
The opposite is true for commodities. If your customers can easily purchase replacement parts or add-on components from many sources for the system you provide –– then you must keep your prices consistent with your competitors.
4. Time your price increase carefully
Raise prices in sync with another significant change in the market. For example, implement the price increase 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 in sync with the start of a new year or business cycle.
5. Spiff the sales team to sell at higher prices
Provide a spiff or group reward to the sales team for selling at higher prices. The temporary spiff for the sales person might be a 20 percent bump in commission for any order X percent above the average. Or, the group reward might be moving the sales meeting to a more desirable location if the team brings in quarterly sales at X percent above the average. If you don’t publish a price list, then the sales team has the ability to quote at higher prices. If you do have a published price list, then the sales team might raise profitability by reducing discounting and giveaways.
Although a group reward or spiff may be temporary, it can have a lasting impact and permanently change selling behavior. The tactics the sales team devises to earn the spiff become part of their ongoing process. The result is a permanent increase in profitability.
Price increases, when executed well, are the fastest way to improve company profitability.