Is there ever a good time to do a price increase?

price-rise-blog-2-cartoon



The short answer: NEVER and ALWAYS!

The longer answer:

A price increase is always difficult to achieve successfully and yet doing nothing is a gradual recipe for financial disaster. Why? Your costs are never static, so within 5 years your profit margin could easily be ZERO.

Cost Inflation Impact on Profit without Price Increase



Of course good cost and supplier management can counteract this trend and is a very common and effective strategy BUT, ultimately you cannot “cut” your way out of a profit gap without damaging the long term viability of the business.

 

Price Increase Cartoon

 

Price increases are difficult because no one believes it’s easy to implement, neither are they acceptable to the customer nor seen as competitively achievable.

It is certainly not easy to analyse and think through the various implications of a price increase; OK 10 customers and 10 products might be easy enough (10×10 = 100 customer price combinations), but since most businesses are dealing with 100,000’s price combinations the implementation complexity is usually very significant.

Also the taboo of communicating a price rise usually raises strong emotions and outright fear by sales reps. “What will the client say”, “I’m going to be crucified by procurement”, “I’m going to lose the contract (and my bonus)”…

The internal resistance, especially by the front line, is therefore understandable and real, often leading to internal political lobbying to neutralize or partially counteract a price initiative. All this can become quite heated and damaging if left unresolved.

Of course both camps of the argument, to increase prices or not, are both partially right. The competitor angle especially tends to be the key argument against any price increase – “we are going to lose share”, “the competitive alternative is better value at that price”. And, while this is obviously very true, it is also a common and dangerous excuse. This rational argument about a competitive threat can become a slogan around which all the other reasons and resisting stakeholders attach their defensive flag to the “no price increase” mast.

As always the issue is to find the right balance and truly understand where the price increase opportunities lie. Of course the high volume product items (SKUs) are candidates that need extreme caution since they are typically the headline product from which most clients and competitors can compare and undercut. But, in that complex mire of the product detail are typically interesting opportunities and pricing nuggets.

Looking at the pricing increase challenge from the point of view of mining the data complexity usually offers up some interesting and tactically defensible opportunities. These will vary in rationale, for example: legacy product, servicing opportunities, supply chain performance, product or customer tail, volume commitments etc. Thinking through a range of business rules and criteria and positioning these correctly will offer a number of on-going reasons for increasing prices that are both defensible and sustainable.

Taking such a granular and more targeted approach to price increases will offer a multitude of small incremental options. The approach will typically leverage a multi-segmentation approach and can typically lead quite easily to 2-3 margin increase to add to that bottom line. By managing a tailored, adaptive and structured approach to pricing that uses complexity to its advantage you can avoid many of the pitfalls of reckless price increase initiatives.

In short, the best approach to pricing is finding opportunities in the difficulties and constraints that others prefer to avoid. A business’s capability to navigate complexity will also avoid the trap of a top down reactive edict that compels the business to increase prices or drive effort towards premium segments without a sound approach and rationale.

So yes there is NEVER a good time to do a price increase but equally you ALWAYS need to consider doing so despite the difficulties and reasons not to!

Author: Patrick Mosimann

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