Never a Greater Need For Strategic Price Increases

by Paul Hunt – President

As commodity costs skyrocket, there has never been a greater need for companies to implement strategic price increases. Unfortunately, many organizations are afflicted with Price Increase Rigor Mortis (PIRM), an insidious disease that paralyzes their ability to raise prices and ravages their bottom line.

Take, for example, a mid-size consumer packaged-goods company whose CEO recently said to me: “Paul, my sales team would rather get the swine flu than have to talk to their accounts about a price increase.” He was referring to the upcoming price increases he hoped his company would be implementing.

His concerns were understandable. His company had not successfully increased prices in more than four years. Every time the organization tried to raise its prices, it failed, and consequently, it had lost confidence in its ability to do so.

In other words, it had caught a bad case of PIRM.

It used to be simple for manufacturers to raise prices. Not anymore. In the past 10 years, pricing power has shifted to the buyer. Today’s buyers who know how to leverage their power within price-change negotiations expect to see suppliers fighting each other for their business.

There are many reasons for the PIRM epidemic. Buyers have intensified competition by reducing the number of suppliers they use. Globalization, the introduction of private-label products, and more aggressive negotiation tactics also contribute to the problem.

Adding salt to the wound is the fact that buyers tend to have much better information than the sales force that is trying to sell to them.

Clearly, the game is now stacked in the buyer’s favor, and suppliers have not adapted.

This can be extremely damaging to company profitability. In a previous article, I explained that a 1% increase in price translates to a 12.5% improvement in the bottom line for the average company. Implementing price increases is the ultimate 1% play: if you do it successfully, your company will consistently reap the benefits, but if you do not, you will be under constant pressure to reduce costs.

So how do you cure PIRM? You must follow a rigorous four-step process of price increases that will boost the confidence of the entire organization. The CEO of the packaged-goods company did just that.

Step 1.

First, the organization developed a clear message to explain why it was implementing price increases.

One caveat: Don’t make the mistake of taking across-the-board price increases based on rising raw-material costs. On the surface, this makes sense, but it fails to consider two important factors in determining whether or not to increase prices: the value and the margin of the product.

If, for example, you have an inferior product and a superior product, it makes much more sense to hold the price of the inferior product and raise the price of the superior one. It also makes more sense to raise the price of a low-margin product, since the amount of volume you can afford to lose is substantially higher than it is for a high-margin product.

Step 2.

Next, the company prepared an excellent presentation deck that equipped the sales force with vital information about costs, value and the overall strategy.

Steps 3 & 4.

Third, it trained the sales force on how to handle objections. Finally, senior management communicated its willingness to lose volume if necessary in order to capture and protect the price increase. If managers are not prepared to sacrifice some volume, the company will immediately relapse into PIRM.

After undergoing this comprehensive process, the sales team was pumped.

Salespeople started making calls and were very effective in communicating the strategy. Customers were much more receptive to this well-crafted message. Even so, they were not just going to roll over without a fight, and sure enough, they threatened to reduce the volume or move their business to another supplier. But this time, senior management stayed the course.

The impact on the sales force was immediate: Their confidence soared.

The results were dramatic. The company successfully implemented a price increase for the first time in four years, and it has now repeated that process in two consecutive years. The impact on profits has been enormous, so much so that the achievement is being touted as the global benchmark for executing price increases.

Good-bye PIRM … Hello profits!

Paul Hunt is president of Pricing Solutions Ltd. His pricing column appears monthly in the Financial Post. He can be reached at phunt@www.pricingsolutions.com