Make it Your Business: The Do’s and Don’ts of Raising Prices
When you absolutely, positively ... need more money
With the ongoing growth in the economy and some companies in the sign and digital graphics industry reporting their best full-year sales in recent history, many businesses are contemplating raising their prices. Is it time for you to do the same? Are your salespeople up to the challenge? Most important, will such an increase fly? Or flop?
Recently, I had the chance to eavesdrop on one end of a very interesting, albeit disappointing, telephone conversation-an accomplished sales veteran’s carefully-timed call to one of his best customers, following up on a price-increase announcement that had just hit the decision-maker’s desk. What I found disappointing were the many unfinished thoughts and sentences, along with considerable backpedaling and apologizing. When he hung up the phone, this erstwhile sales warrior was muttering to himself about being such a dope, and was reduced to wallowing in a stew of defeat like a beaten dog. Very sad. But what I found interesting was that the damage was mostly self-inflicted.
Considering the skill and grace necessary to successfully deliver a price increase-and the infrequency with which your sales team may be asked to perform the task-perhaps it’s a good time to review, refine and rehearse your plan of action before sending your troops out with the news.
Planning the price increase
Obviously, if left up to your customers, there would never be a good time for you to raise prices. Take it for granted that you, as the business owner, know best when a price increase is imperative to the overall health of the enterprise. And we’re not talking greed here. We’re talking survival and growth.
Maybe you’ve held off raising prices in the last 12 months for fear of losing too much business to hungrier competitors willing to take an order at or below cost just to keep their operation running. If this is the case, haven’t you too been sacrificing gross margin to stay busy? When your products or services have experienced a gradual-but-sustained increase or a significant short-term jump in cost-of-goods-sold (COGS), you have to raise your prices. Period.
And if you have to raise prices, you needn’t be timid about it! When you raise prices only the amount COGS have gone up, you are actually taking a de facto price cut. Trust me: Back in 2001, when the U.S. Postal Service raised the price of first-class postage by one penny twice in the same year, it infuriated the American public, mainly because of the inconvenience of having to use up the stamps they had and adding those annoying one-centers. But then, in 2002, the USPS raised first-class stamps by three cents, and heard barely a whimper by comparison. Any wonder why we now have non-value indicated “forever stamps”?
When thinking about raising your prices, consider these Do’s and Don’ts:
- DO provide your customers with enough advance notice that they’re able to take advantage of placing advance orders before the onset of the new prices and/or adjust the amounts in their operating budgets to avoid overspending on certain line items. A good rule of thumb is to afford at least 30 to 60 days warning before raising prices. Fewer things cause the hair on the back of a customer’s neck to stand up more than reading the words “Effective immediately … “
- DO use the price increase as a chance to get some customers that have been receiving deeper discounts than they deserve back in line. Every business with which I’ve ever worked has certain “special customers” that, for some often-forgotten reason, are afforded volume discounts even if when the volume does not warrant it. If everyone is getting an unearned discount, sometimes just getting every customer back on book price constitutes an overall price increase.
- DON‘T apologize for having to raise prices. If you do not do it when it needs to be done, you may find the company profit-and-loss statement dripping with red ink.
- DO be ready to handle resistance to the increase, but DON‘T invite an opportunity to negotiate its size or how or when it’ll be implemented. Be firm in your resolve.
Explain the “why”
As a consumer, I’ve received notices of price increases that remind me of smash-and-grab robberies. Somehow, the bill from my former cable and internet provider comes to mind. When you sit down to compose the price-increase announcement letter, take time to clearly explain the reason behind the increase. See if you can correlate the rise in your COGS to a well-publicized economic index, such as the CPI, the cost of energy-since many of our industry’s products depend on gas, petroleum or electricity, to be made-the Producer Price Index or Employment Cost Index. The US Labor Department’s Bureau of Labor Statistics is a good resource for this kind of information (www.bls.gov). Keep the explanation succinct but relevant.
When you use sound reasoning in explaining the price increase, you are actually planting seeds of logic in your customers’ minds. Whether you realize it or not, you are educating them into becoming themselves better business people. The smarter ones will appreciate the pragmatic method you’ve incorporated and will borrow the approach when it comes time to “sell” the price increase to their customers.
As you grab a pen and paper to compose the letter, consider this list of do’s and don’ts:
- DO personalize the announcement letter to each regular customer. If 80 percent of your revenue comes from 20 percent of your customers, the top fifth of your customer list deserve that extra courtesy. To the rest you can send a short, standard letter and new price list, if you like.
- DON‘T announce the price increase to prospects-unless you are sure they’ll become new customers in the next 90 days. And DON‘T feel the need to advertise the increase to customers from whom you’ve not heard in over a year.
- DO include the date of the last price increase . . . if it’s been a while. The fact that you haven’t raised prices in two years while your COGS have steadily increased can work to your advantage.
- DO explain the impact of the price increase from several different perspectives. At a minimum, you should share the overall percentage increase and/or price-per-unit increase. However, if you stop there, you will be leaving the magnitude of the price hike up to the interpretation of your client. Take the time to summarize what the customer spent with you last year and what it will likely spend in the upcoming year if its quality and quantity needs remain unchanged. The difference in the two figures is the true impact of the price increase. (More on the use of this information, in the hands of your salespeople, later.)
- DON‘T assume a price increase will be the “final straw” that causes the customer to shop elsewhere. If you have to raise prices because of escalating COGS, there’s a good chance your competitors will follow your lead … if they haven’t taken the lead already. Price is rarely the reason a customer fires you and switches vendors. Overwhelmingly, inconvenience in doing business and the loss of trust resulting from failure to deliver on time and/or other breaches of faith are the common reasons customers seek new suppliers.
Come out, come out, wherever you are
Most salespeople adopt an ostrich mentality when told they must deliver a price increase. Uh-huh. You salespeople reading this know what I’m talking about. Yet, the accomplished ones view it as a chance to strengthen-rather than threaten-the customer-supplier partnership.
Once you’ve decided to pull the trigger on raising prices, train your sales team-both inside and outside reps-to practice, rehearse and master this list of do’s and don’ts:
- DO take personal ownership of the price increase. Anyone whose compensation has a commission or bonus component to it will benefit from the additional revenue. So DON‘T slough it off as “management’s ill-conceived notion to become richer.” Remember, in the eyes of the customer, the sales representative is the company.
- DON‘T avoid or ignore discussion of the increase. DO be proactive rather than taking a defensive posture about the issue. Get on the same side of the desk as the customer-psychologically and emotionally-to work through the issue.
- As stated above, DON‘T assume customers will contemplate changing suppliers just because you are raising prices. In many cases, the transition of switching vendors-depleting the old supplier’s inventory and stocking new stuff, conducting training on the different way a new vendor’s product must be handled and used, setting up a new supplier in purchasing and materials-management systems-is costly, time-consuming and, generally, an unwanted headache.
- DO have a written pre-call sales plan on how you will address the price increase for your largest and/or most frequent customers. Consider delivering the price increase letter in person. Role-play the sales call with your sales manager or a colleague to practice various possible scenarios, objections and customer concerns.
- DO solicit and assess the customer’s reaction to the price increase immediately after it’s received. Obviously, no customer will be delighted at the news, but most will not be shocked by it either. If the customer accepts it outright, say thanks and assure her you’ll continue to do whatever it takes to earn her business.
- DO prepare yourself to offer the customer something that is of low cost to you (but of high value to him), to offset or soften the impact of the increase if/when you observe “push-back” or outright rejection of the price hike. For example, you may offer your assistance in helping them with their efforts to grow and prosper-introducing them to new prospects or business contacts or suggesting ways to maximize the visibility or impact of the graphics you produced, to name a few. Whatever the offer, work with your client to determine the value of it-expressed in real dollars, if possible-and then compare that figure to the true overall impact of the price increase that you calculated earlier. Obviously, you are looking to offset the price differential by providing a special added value that should result in continued customer satisfaction.
If you genuinely are committed to keeping the customer delighted-even at higher prices-your sincerity and actions should overshadow any adverse impact of a price increase. Good luck!