In the beginning of the year many companies have a “tradition” of announcing price increases. In consumer goods it is the final consumer price going up, while in business-to-business it is first and foremost the list price. But how can you get the most out of price increases? Practices from some of Stratinis’ customers reveal many different best practices:
Establish internal transparency: Especially in B2B it is important to have internal transparency of the entire price waterfall, from list price to pocket price, including all discounts and rebates. If not, you will not be able to see where prices and discounts can be changed with least resistance.
Ensure simulation capabilities: Best practices include established price increase simulation capabilities, often combined with customer segmentation or product differentiation. When able to simulate impacts of prices on profits by segment, companies can better predict pain points, both external resistance and internal resistance.
International coordination: If prices go up in one country but the price for the same or similar product remains unchanged in a neighbouring country, grey market imports and upset customers are often the result. Large buying organisations have become very professional in comparing purchase prices across borders, and it is therefore important to manage price increases internationally, at least regionally if not globally.
Focus on the entire price waterfall (not just list price or pocket price): Some organisations have attempted to increase the list price for example, only to find that due to additional discounts and rebates the pocket price/net net price didn’t really go up. In other words a lot of internal and external hassle for little financial reward. Best-in-class companies focus on the full price waterfall when implementing price increases, ensuring that it is the profit that goes up as a result.
Segmentation: Not all products are in equal demand. Some products can demand premiums over others, due to factual benefits or emotional benefits. Similarly, some customers are willing to pay a higher net price than other customers are. Companies with strong pricing capabilities are able to segment their products and customer bases and apply price changes, as well as discount changes, where they are most likely to get through with least resistance. This requires a good segmentation approach and quick reaction to changes in segments or the market place in general.
People and culture: Price changes are often about people and communication. If the person, often in sales, communicating the price increase is full of conviction of the value of the offering, the likelihood of the price increase being accepted is much higher. On the other hand, if the sales force doesn’t feel that a price increase is justified, it becomes a struggle to implement an actual price increase. The best companies spend energy and efforts behind working with the argumentation from the sales force, highlighting customer value and product benefits, as well as general training in sales techniques and negotiation skills.
However, some companies do not increase prices. The stated reasons can be many: the competitive situation doesn’t allow it, customer will not accept price increases, contracts are long term and cannot be changed, etc. Especially competitive and customer arguments should be taken by senior management as a warning sign. If you are not able to change prices at least in line with inflation, does it mean your company’s image and product quality is not strong enough? Is there an issue with sales people not being able to or wanting to argue for higher value / price? If differentiated pricing is not possible (is there really nobody in the industry with higher prices than others?) does it mean that the industry is structurally unattractive? Not increasing prices is a clear warning sign for pricing people and senior management. Change it; now. Build your image. Build your price increase capabilities.