Many companies wanting to push through higher prices to cover higher purchasing costs have excellent prospects of success in 2018. Fear of putting customers off with price increases is rarely justified – provided that the right strategy, analysis, and arguments are adopted.
Martin Paukert (Partner)
Schuppar Consulting – Your Pricing Experts, Düsseldorf
Nobody likes talking about price increases. Nobody wants to risk alienating or losing customers. And yet manufacturers of industrial companies have been absorbing rising raw material costs for some time now. If the higher costs are not passed on to customers, corporate profits will suffer. That money will then be unavailable for any necessary future investments. Experience shows that higher prices are possible for 50-70% of sales.
How to get to higher prices
When customers switch suppliers, this rarely has anything to do with a price increase but is more a reflection of previous mistakes. After all, buyers look for alternatives every day. Price increases are therefore not necessarily a signal for them to start replacing suppliers. Nevertheless, buyers will always inform the vendor that higher prices will lead to loss of business straight away. Yes, price increases can cause volumes to shift to competitors, and so they are not entirely risk-free. But they can be implemented if the groundwork is done intelligently.
1. Strategy: Get support from top management
Top management must get behind the price increase initiative and set the targets. Everyone must understand that upcoming negotiations are not just about sales, but also about margins. Define the target price increase for each segment, product, and customer.
2. Incentive: Motivate your sales team
The price increase goal or margin improvement should be reflected in the variable salary component of the sales force. Alternatively, offer additional incentives (e.g., best percentage increase, best absolute increase or most creative price increase).
3. Analysis: Differentiate – Don’t use “one size fits all”
Vary your price increase goal according to the market segment, because segments have different competitors, customers in various segments often operate differently, and it is okay for a corporate strategy to differ across segments.
4. Benefit: Exploit added value
- Value Indicators: Analysis of value indicators reveals the level of customer willingness to pay based on a product. This willingness is influenced by various factors (price image in competition, product added value, market potential, product lifecycle, price psychology/price threshold). The evaluation reveals a potential for price increases. In general, the higher the value associated with a product, the higher the price can be.
- Pricing bands: In-house benchmarks too can be used for pricing comparisons. This works well with pricing bands which show actual price ranges.
Why was the price that low again? The realized sales price for this product is between under 20€ and under 30€. 21% of sales is made with a sales price between 25-26 €. For all sales with prices below this value there is a realistic potential to increase prices. (Source: Project example Schuppar Consulting)
- Customer Profile: Many companies base their price increase goals or potentials on customer classes and profitability. However, low margins do not always indicate scope for a high price increase. It may be that competitive pressure is also very high. You should develop differentiated strategic customer profiles: set a higher price for innovative, service-driven customers than for purely price-driven customers. Moreover, the potential for price increases is even greater in the case of customers who have a similar strategic orientation and who enjoy a longstanding relationship with those who influence buying (e.g., power buyers, user buyers). Of course, the customer’s relationship with the competition, and the market situation also play a role.
5. Timing: Wherever it makes sense
It is rarely possible to apply a single increase across the entire sales organization. According to a benchmark of Schuppar Consulting, 50-70% of sales are a realistic figure for price-increase projects. This is because some customers will have ongoing contracts. New customers should be exempted. It is important not to wait until the customer has started demanding a price reduction, as that places you on the defensive.
6. Preparation: Arguments for buyers
Buyers need to be able to understand the arguments for price increases and to justify them in-house. You should notify your customers of the increase by letter first. Advise your top customers by telephone beforehand. By informing buyers, you give them the feeling that the increase applies to every company (and not just theirs). What is more, the outcome of the negotiations can be sold more effectively in-house if buyers can manage to whittle away some of the notified increase. Send the notification to customers in ongoing contracts as well. This shows them how they are benefiting and makes it easier for you to raise prices at the end of the contract.
When it comes to preparing for negotiations: the person who does his homework wins!
- Market data/indices are more compelling than actual cost increases.
- Always change your argumentation from year to year.
- Adduce many facts. This makes it difficult for your arguments to be dissected.
- Price increases are a way of passing on cost increases from the past. That forms the basis of your line of argument.
- Your argumentation should reference how the customer’s business is performing, how your business with them is growing or shrinking and should include a risk assessment (competitive situation).
- Create a guideline for dealing with classic buyer objections.
7. Mindset: Ability and belief are crucial
Buyers usually come to the negotiating table with a whole truckload of demands. If you go along with only the price in mind, you will have a tough time. Every negotiator needs to present demands which the other side then has to dismantle – but it’s not really about these at all. The following are therefore important:
- Make further demands a part of the negotiations.
- Set three prices before negotiating: signal price, target price, limit (for international differences in meaningful negotiation entry levels).
- Do not drop the signal price too quickly.
- Do not give discounts without getting concessions.
- Always let the buyers feel that they have come off better from the negotiations.
- Stay self-confident and fair.
Global differences – What is your signal price in a negotiation? If you want to hit your price target (100%) in China, you’ll have to enter talks at an average price level of 188% (factor 1.88); in India, the factor is 1.95 (almost twice the price). In the USA, 133% is enough to start off with, while in Germany 135% will do. In southern Europe, you’ll need to start at around 150% to get the outcome you want.
Important: Simulate upcoming price negotiations with role-playing or put the negotiator in the “hot seat” (whereby the team confronts him/her with objections and demands). Experience shows that systematic training increases the likelihood of success. It, therefore, makes sense to hold training courses where you can share experiences and train up on new methods.
Conclusion: Negotiating is (like) a competitive sport. In addition to an intelligent strategy and meticulous preparation, you need a clear goal and a limit below which you will not go. Also, a positive mindset and a conviction that the desired objective (the price increase) is necessary and indispensable are crucial to the outcome.
Martin Paukert – Partner at Schuppar Consulting
Immermannstraße 19 | 40210 Düsseldorf
Office +49 211 – 83 68 05 03