Making A Positive Influence On Margin – Selling Price Increases
We are familiar with the situation that faces businesses when cost increases – whether labour costs or raw material – decisions need to be made and made smartly. Many businesses resist the need to pass on these increases – preferring to ‘swallow’ the margin hit themselves. But to have a successful business you must have the wherewithal and skill to ‘sell’ a price increase as and when you need to – not just because ‘your competition is doing it’ or because ‘we always do it this time of year’. If the need arises you must do it so learn the skills and sell those price increases with confidence.
True, you might be faced with a customer base that may not be too receptive and threaten with reciprocal actions, of various forms, if the you proceed with the increase but if you have some unique customer value elements in your business (which we hope you have because ‘best price’ is not one to build on), things like quality, service, reliability can play a huge part in gaining acceptance from customers where the alternative ‘cheaper’ price competitor may not give them the same assurances in these important areas.
While many major corporations have the skills within their Sales team to successfully negotiate tough price discussions, many SME’s do not, to their great cost. The value of adding these skills into their team, with the right training, specific to their market, cannot be underestimated.
Selling a price increase effectively requires considerable skill which if perfected can make a substantial and very positive difference to profitability. We highlight a few key factors below:
1. Ensure that you have justification for your price increase and be able to prove it – Things that help here are documents that illustrate the cost of raw material increase, inflation rates, exchange rate moves etc.
2. Prepare the ground before the meeting – a letter or e mail ‘setting the scene’ – Sending a note with the starting point of ‘I am sure that you will have seen on TV and heard and read about some of the additional costs businesses are accumulating as a result of….’ Then move on to say ‘I would just like some of your time to discuss these increases and their implications for our business’. This sets the scene nicely and now you just need to prepare yourself well for the meeting.
3. Understand the margins currently being made from the customer – What profit margin are you making from this customer? Is there any room for a concession if they are a top margin provider? Be fair and be consistent. You need to be clear about exactly what you can and cannot concede and have all this information studied and to hand before the call.
4. Anticipate the buyer’s objections and have some answers – Remember what the buyer says is not always as it really is! They are simply buying tactics to unsettle the seller. Be strong. To a buyer that says, ‘None of your competition are increasing their prices’ respond with something like ‘That may be the case at present, but they are subject to the same cost uplift as us and without price increases, pressure must be placed on other aspects of what they offer’. This creates uncertainty in the buyer’s mind because going with the cheapest price may not deliver consistent supply and quality etc.
5. Set realistic objectives by customer –Preparation for this starts with point (3) above – what is your position with this specific customer? Three real options…
- Retain whatever
- Allow some negotiating room – but know to exactly what level
- Full increase a must
6. Know when the price increase should start from and stick to it – Deferral of an increase will cost you and if you haven’t accounted for such an action, or built it into your planning, be strong and stay with your planned increase date. The fact is that your date is justified by the date the increased costs hit your business and you have nothing to hide by showing your buyer a letter from your supplier (for example) advising you of the price increase and shipment dates affected. With support information like this you have complete credibility.
7. Know your base position and next best alternative before you make the call – Taking point (5) a little further – this is the rub. If the customer refuses to accept any price increase what is the next best alternative – to concede or to walk away? What are the implications of walking away? Know the numbers, know the repercussions specifically and if ‘walk away’ is what you would do – make sure your plan without the customer concerned is robust.
As in all successful negotiations preparation is the key to success and most price increase ‘pitches’ founder not because they are not justifiable, but rather that the case has not been prepared thoroughly enough. Successful price increase implementation is one of the most dynamic ways of improving your profit – a 5% price increase on a £5 million business adds £250,000 in annual profit that goes straight to the bottom line.
Take a little time to review your price challenges – you could be paying a heavy price for not being in a position to increase your prices. Can you afford to miss the opportunity and how much more can you take before the margin pressure really starts to hurt?
Get in touch with us for a free, no obligation discussion at ignite@tinderboxbusinessdevelopment.co.uk. or call us on 01162325231
The Tinderbox Team
