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Category : How to Successfully Raise Prices Series

Who’s in charge of your pricing? You are!

Contrary to popular belief, the market does not set the price when it comes to highly differentiated, high-technology capital equipment. And a handful of professional buyers does not constitute a “market” in any event—especially when those buyers are trained to mislead and even lie to you.

Despite what these buyers tell you, your products are almost certainly different from your competitors’ products. And those differences make your products more valuable to a certain subset of customers.

If basic consumer products like soap, toothpaste, and cereal can be differentiated, high-tech products can be, too. You might argue that these consumers are not as sophisticated as professional buyers, which is true, but neither are these consumer products. The principle works the same way.

Higher prices are the fastest route to higher profits. A 1% increase in average prices can equal a 10% increase in net profit for a company that typically earns 10% net profit. In addition, higher prices can be implemented right away, with your very next quote.

The key to capturing higher prices is being able to explain and justify them based on what the customer gets in return. In other words, you need to be able to say something to the customer like, “For every dollar you spend with me, you’ll earn [or save] X additional dollars.” If you do this effectively, the decision to do business with you becomes easier and less risky.

Over the coming weeks, I’ll address the following pricing topics:

  1. How to talk to customers, senior executives, and supply-chain people about prices
  2. What to say when customers raise objections or challenge your prices
  3. When and how often to talk about price during the sales cycle
  4. How to price on the basis of value instead of cost
  5. How to create versions that allow customers to choose tradeoffs between price and value, long before negotiations take place
  6. How to price services
  7. How to determine what customers will pay before you invest time and money in product development and demos
  8. How to develop an effective pricing strategy
  9. How to successfully raise prices

We have a lot of important ground to cover, so stick with me—I think you’ll find it’s well worth it.

In the meantime, if you take nothing else away from today’s post, remember this one key point: You are not a passive victim when it comes to pricing. The power to set highly profitable prices is in your hands.

To Price Correctly, You Must Also Price the Customer

As I’ve mentioned before, effective pricing involves much more than simply adding up your costs and multiplying by some desired target margin.

Not only does this method fail to account for the value different customers can place on the same products, it also fails to address the level of profitability different customers deliver to your business.

Just as not all products and services are created equal, not all customers are created equal. And, as odd as it may sound, you need to take your customers into account when you set your prices—not just their ability to pay, but the costs involved in doing business with them.

Imagine that your company sells to two customers: A and B.

Customer A buys regularly and in high volumes. Her business is profitable for your company. A also has a partnership mentality and works with you to solve problems when they arise. A always pays on time and is very pleasant to deal with. The time and hassle expended on managing your relationship with A, in other words, is minimal.

Customer B, on the other hand, buys sporadically and in smaller quantities than A. The low prices he gets, along with his demands for high performance and free support, mean that your company earns little or no net profit from him.

B’s mentality is transactional—he is always threatening to jump ship for anyone who offers him a lower price. To make matters even worse, he pays late and has unrealistic performance expectations. You and your team spend a lot of time trying to keep B even moderately happy—to no avail.

This is an extreme example, of course, but you see what I’m getting at. Should these two customers be paying the same price for the same product or service?

Absolutely not!

Since Customer B is a far more expensive customer, B should be paying higher prices.

Ironically, the customers who pay less tend to be a lot more “Type B” than the customers who happily pay a premium to buy from you. The good news is that the better you get at pricing, the more you can afford to ditch Customer B and his ilk altogether.

But that’s a blog post for another day.

Why You Need a Holistic Pricing Strategy

The thought of sitting down and plotting out a comprehensive, holistic pricing strategy is daunting to many of my clients. So much so, in fact, that oftentimes they try to “fix” their pricing in bits and pieces over a period of time, figuring that doing something is better than doing nothing.

While this rationale may work for some things, pricing is unfortunately not one of them.

Most companies don’t have any kind of formal pricing strategy. Sure, they set list prices, but they almost never sell at those prices. Instead, they end up customizing prices for nearly every customer, product, and purchase. This leads to some costly and serious problems.

First, salespeople learn that the list prices their employer gives them are only suggestions—starting points from which they can secure lower pricing if they work at it. Since this is much easier than trying to convince the customer to pay more, they default to negotiating for a lower price from their own  company. In essence, they start functioning as an agent for the customer. Clearly, this is not what you want.

Second, tremendous amounts of time and money are wasted when pricing is done in an ad hoc, opportunistic fashion. More and more people (who all believe they’re pricing experts) start to get involved in more and more quotations and proposals. They want to determine or influence the price, or keep track of every change in the pricing process.

If you were to sit down and calculate the amount of money (and time) your company is spending on this type of ad hoc pricing process—not to mention the opportunity costs of failing to get a single, effective system in place—I guarantee that you would be shocked, and strongly motivated to make an immediate change.

Now, don’t get me wrong—establishing a single company-wide pricing strategy requires time, resources, and a lot of hard thinking. It’s the polar opposite of a quick fix. But, as with so many things in life, the payoff of doing it once and doing it right pays dividends many times over. Once I start to show clients just how much more profitable their companies will become with a holistic pricing strategy in place, they become downright eager to get started!

Don’t Waste Your Time Trying To Figure Out Your Competitors’ Prices…Here’s Why

Almost across the board, companies spend a lot of time and energy trying to determine what their competitors are charging. Everyone believes that if they can obtain this information, they can then charge just a little bit less for their products—and win a lot of business.

This can be true in very specific situations. For companies that sell standard, relatively undifferentiated products whose prices rarely vary beyond a narrow range, it can sometimes be helpful to know what competitors are charging.

For everyone else, however, pursuing this information is a distraction at best.  In fact, worrying too much about what the competition is charging is not just a waste of time, but ultimately a practice that could potentially be very harmful to your business. Here’s why:

  1. You will start a price war—a race to the bottom—if you regularly undercut your competitors. You can only “win” by reducing or even eliminating your profit margin. (And, of course, if you can determine your competitors’ prices, they can most likely determine yours.)
  2. Pricing is dynamic. Knowing your competitors’ prices today tells you nothing about what they charged yesterday, or what they will be charging tomorrow. Your detective work is never over.
  3. Pricing is situational. Knowing what your competitor charged one customer tells you nothing about what it charged its other customers.
  4. Your sources for competitor pricing info are unreliable at best—who can you trust to tell you the entire, accurate truth? Not your customers’ professional buyers, that’s for sure! It may not even be legal for them to share this info with you—and, if they do, you can be sure they’re shopping your info around, too.
  5. Your competitors’ prices may be too low for the value they’re providing. You don’t want to base any part of your own pricing process on a misleading benchmark that leads you to undervalue your own products and services.
  6. Competitor price sleuthing requires a lot of time, effort, and money—all of which could almost certainly be put to more productive use elsewhere in your business. The opportunity cost, in other words, is extremely high.

Rather than worrying too much about the competition, focus on the unique value you provide to your customers, and price accordingly.

There is a big difference between setting and capturing better prices

It’s one thing to set prices from the coziness of the home office. It’s another thing entirely to capture those prices in the field, dealing with real customers and competitors.

If you’re interested in capturing higher prices, there are things you can do to improve your chances.

First, your marketing materials, customer presentations and sales process itself must be geared toward conveying value at every step. Value that’s clear and compelling and based on how your product or service helps customers make more money and/or save more money using your products relative to:

  • Your competitors’ products
  • Substitute products (such as multiple products currently used to perform the job that your one product will do).
  • Work-arounds
  • Doing nothing at all

Second, your salespeople must be trained not only in how to sell the products, but also in how to sell the products at desired prices. In other words, they have to be able to clearly articulate how products were priced, and why the prices make sense relative to the above.

Third, a company’s management style and culture must support higher pricing. Top down commands such as “close those orders now”, “don’t make the customer angry”, and “don’t lose any business because of price” send a clear message to salespeople that price just isn’t that important.

Fourth, compensation must reward higher pricing and profitability, and not as one component in a sea of 10 or 20 other compensation components. For any company that wants higher prices, I would suggest that half of variable sales compensation be based on selling products and services at or very close to list prices as long as those list prices have been accurately and sensibly determined. And for sales below a certain percentage of list prices, I suggest that sales people earn next to nothing.

Fifth, compete where you can and should win. Identify target customers who truly need what only your products can provide. These customers are not only more likely to pay more, they’re also more likely to be satisfied with your product.

Finally, learn how to negotiate better agreements with your customers’ professional buyers. Please take a look at my previous blogs for more information regarding how to do this.

Capturing better pricing looks like a lot of work, but the results can be well worth it. Many companies can realistically increase average prices by 5% within a year or two, and those price increases go straight to the bottom line. I don’t know of any other marketing investment with that kind of payoff. Do you?

How to Successfully Raise Prices Series – Getting Buy-In from your Salespeople

Taking a price increase to customers is a very hard thing to do. Unless you know how your customer is likely to react, are prepared for that reaction with honest and straightforward reasons for the increase, and know that your own management is behind you, you’re going to have a problem delivering the message. Why?

  1. Salespeople dislike upsetting their customers, and a price increase might be the most upsetting message a salesperson can deliver. They can expect reactions ranging from “we’re not going to accept a price increase”, to “that’s too bad; from now on, we’re going to buy from your competitor”. Who wouldn’t get a little unsettled listening to a carefully cultivated customer talk like this?
  2. Salespeople are rarely given the tools to deal effectively with customers’ negative reactions to price increases. Reasons such as “the nano-widget division isn’t meeting its’ 50% gross margin target, so we’re raising prices by 15%” is not an effective tool to use.
  3. Salespeople know from experience that their own management might not always support them, especially when that management is dealing directly with an angry customer. Many of us have been in situations where a usually hard-nosed, desk-bound executive suddenly finds himself in front of a live, hot-headed customer and acquiesces completely, making us look insensitive and uncooperative in the process.

To help your company deal more effectively with these issues, I suggest the following:

  1. Take the time to talk with your people about all of the potential customer reactions they’re likely to hear. The less surprised and more prepared they are, the more likely your price increases will stick.
  2. A carefully constructed case that clearly explains how your products add more value than you’re charging for, or more value than your competitors can offer, at least softens the blow, and can turn a would-be argument into more of a conversation. Instead of a limp statement like “our costs are going up”, use data, logic, and customer testimonials to support your case.
  3. If you are an executive who regularly undermines your salespeople in negotiations or when confronted with angry customers, I strongly suggest that you take on the responsibility of informing customers of price increases. This will give you a taste of what your salespeople go through, and in the process, give you more of an appreciation for what they deal with on a regular basis. If that doesn’t sound like something you want to do, I suggest that you stay as far away as possible from difficult conversations with customers.

Here’s another thing you can do to get buy-in from your salespeople: show them how higher prices benefit them!

For example, higher prices allow your company to compensate employees better, and offer better career opportunities. Higher prices allow you to afford and provide better support for your customers. Higher prices usually translate to a higher stock price. And finally, higher prices help your business stay in business. And isn’t that best for everybody?

How to Successfully Raise Prices Series – Pricing your Competitive Advantages and Differentiators

Pricing Competitive Advantages and Differentiators should be based on one thing and one thing only: a percentage of the additional value your products deliver to your customers over and above what your competitors or substitute products can deliver. If you plan to use value as the foundation for higher prices, then you have to define and quantify that value.

In last week’s newsletter, I used an example of how additional yield could provide $1.2M per year in additional revenue to a customer. Of course, revenue isn’t profitability, so if your customer will realize a net profit of 10% on that $1.2M ($120,000), your price should be based on a percentage of $120,000.

I’ve helped my employers and consulting clients successfully raise prices between 5% and 25% of additional customer profit per year. However, an increase of 25% doesn’t come all at once. While a 5% price increase can usually be implemented immediately or within three months, a 25% increase should be introduced in increments over a year or even longer.

There are three important things to consider when pricing:

  1. How long will the customer enjoy the benefits you’ve quantified? If for more than one year, you can multiply $120,000 by two, three or even more years to quantify the potential benefit.
  2. How much can you realistically increase your prices over what period of time?
    If you decide that 20% of $120,000 ($24,000) is your target price increase, how will that play out when you visit your customer to break the news? If you’re discussing a product that currently sells for $1M, your proposed price increase of $24,000 is only 2.4%. Enough to upset the purchasing people (which is frequently the case with any price other than “free”), but defendable and not unrealistic by any means.

    On the other hand, if your product currently sells for $250,000, $24,000 is a 9.6% increase, which, if presented to most of the customers I’ve dealt with, would provoke some serious backlash. In this case, I would recommend that you break the 9.6% increase into increments, increasing prices over time perhaps by 3-5% within three months, another 3-5% in six or nine months, and the rest in a year or so.

  3. Who from your company will deliver the message to whom at your customers?
    For very large, very important customers, I would recommend that your CEO, Owner, President or a V-P level executive deliver the news in person to a person who holds the same or a similar level position at each customer. Why? Three reasons:

    1. It’s good business practice to have difficult conversations in person, and talking about a price increase is always a difficult conversation.

      Note: I’ve heard of companies that announce price increases by sending emails to customers that read something like: “Our prices are going up by 15% starting next Monday”. This type of impersonal announcement is a recipe for creating a very angry customer and starting him down the path to finding, selecting and qualifying a new supplier to replace you.

    2. It sends the message that you’re serious about raising prices.
    3. It prevents all of the back-and-forth complaining, escalating, negotiating and posturing you should expect if you send a salesperson to tell your most important customers that your prices are going up.

Finally, always keep in mind that your customers are pretty much like you. You’d probably be pretty ticked off if one of your trusted vendors suddenly presented you with a large and immediate price increase, so don’t expect your customers to react any differently. Spend some time thinking about ways to soften the message, and deliver it in a compassionate and understanding way; your chances of success will go up dramatically.

In the next post, I’ll address ways to get your marketing, product and salespeople to buy into and support price increases.

How to Successfully Raise Prices Series – Determining what your Competitive Advantages and Differentiators are worth to your customers

You know that the Yield, Speed, Reliability, and other competitive advantages your company and products offer are worth something to your customers. But how do you determine how much they’re worth?

Without knowing your current situation, including your advantages vs. those of your competitors, your customers and how they use your products, how your products are currently priced vs. their value, and many other variables, there is no way to be specific.  However, there are ways to develop ballpark estimates.

Yield, for example, is represented by the number of good products your customer can produce and sell using your products vs. those of your competitors’, over a given period of time.  If, for example, you sell a machine to a semiconductor manufacturer that enables that manufacturer to build and sell an additional 5,000 microchips per month, your could multiply the number of additional good chips (5,000) times the selling price of each chip ($20?) to get a general feel for the specific value you bring ($100,000 per month). If chip prices stay stable (a Big if), then all other things being equal, your machine could be estimated to deliver $1.2M per year in additional value to your customers.

Now, there are obviously many rebuttals your customers will make to this argument, including:

  1. The “Bottleneck” argument: “Your machine is never the gating or problem system in the manufacturing process, so additional yield from your tool doesn’t give us anything”.
  2. The “Your system has other problems that your competitors’ systems don’t have” argument, which may or may not be true, and may or may not matter. And of course the
  3. “You can’t look at it that way” argument, typically used by Purchasing Department people.

Regardless, I recommend that you go through this exercise with each and every advantage that your products bring to your customers, and try to estimate a value for each. In addition to building a case for raising prices, you’ll be building your own confidence in your products and their worth, which can only help you capture more sales in the process.

In the next post, we’ll look at ways to determine a price using your estimated competitive advantage value calculations.

How to Successfully Raise Prices Series – Competitive Advantages and Differentiators

Two weeks ago, I outlined five categories of actions necessary to successfully raise prices. This week, I’ll address the first step in category one: competitive advantages and differentiators.

Your ability to successfully raise prices is, to a degree, determined by the additional or special value your products and services deliver to your customers relative to the value of your competitors’ and substitute products.

Real, sustainable advantages and differentiators include the following:

Yield-all other things being equal, your products enable your customers to produce more good, saleable products.

Speed-your products help your customers produce more products faster.

Reliability-your products run more frequently and cause less hassle for your customers, allowing them to produce more products.

Ease of use-your products can be easily maintained and don’t require a high-level, one-of-a-kind expert to keep them running.

Cost of use-your product has lower operating costs

Lifetime-your product lasts longer and/or can be upgraded at a reasonable price

Delivery and start-up speed-is it worth something to your customers to get your system into production a day, week or month before your competitors can do it?

Support-your customers know that you will come to their rescue if they encounter problems that they can’t solve.

Product compatibility-your products work better together than a similar set of products from your competitors.

These are just a few of the many potential advantages your products and company might have. The idea is to point out and add up all of them, then go through them to determine which are real, exclusive to your product and company, valued by your customers, and sustainable.

In the next post, I’ll address ways to determine the monetary value for these advantages.

How to Successfully Raise Prices

If your business is anything like some of the businesses I’ve worked with, you might recognize the following scenario:

  1. You’re under tremendous pressure by a number of larger-than-you-are customers to continually decrease prices and improve performance, and your margins are really suffering in the process.
  2. Your engineering, manufacturing and service people can’t keep up with the cost reductions required to maintain let alone increase margins.
  3. Your CEO and CFO are starting to lecture anyone and everyone about how necessary it is to negotiate higher prices. However, the pressure on sales, marketing and product people to close business faster, and keep the customer happy (no complaining, no calls to management) in the process, always seems to take precedence over the longer negotiation period and additional customer irritation that usually accompanies the quest for higher prices.
  4. The result is that your average selling prices are falling. In addition, your profitability is taking a second hit because your people are giving away free services and support in an effort to slow the more visible product price erosion.
  5. You’re now thinking about implementing a 10% across-the-board price increase, but you know that your customers will furiously push back on this arbitrary approach to pricing. In fact, your own marketing and salespeople are against it, telling you that it won’t work and that you’ll lose a good portion of your business to the competition if you do it.

There are ways to successfully raise prices, but a reactive, arbitrary, one-size-fits-all price increase is not one of them.  Instead, how about trying something like the following?

  1. First, you invest in a Product Portfolio Analysis designed to determine what your products and services are really worth, to which customers, under what circumstances, and relative to your competitors and substitute products. This analysis would include identifying the real, sustainable competitive advantages and differentiators of your products and services, and lead you one step closer to putting a better, more accurate price on the value you deliver.
  2. Next, you conduct a Customer Analysis to determine which customers are underpaying relative to other customers, for which products and services, by how much, under what circumstances, and why. This analysis would include segmenting your customers by characteristics that affect their ability, need and willingness to pay.
  3. You work through a Pricing Analysis to determine how much you should increase prices, on which products and services, to which customers, under what circumstances, in what increments, and in what time frame. This would include modeling how various price increases could affect your net profit, now and in the future, along with realistically assessing any risks involved in raising prices.
  4. Next, you develop and implement a Training Plan that wins the support of your marketing, product and salespeople by providing the logic, reasons, justification and thinking behind new, higher pricing. At the end of the training, your people would understand why it’s in their best interests to raise prices, and know that they had managements’ support behind them.
  5. Finally, you develop an Implementation Plan designed to build the strongest possible case for increasing prices and eliminating, repackaging or reducing services that aren’t being paid for. This plan would include management’s role in delivering tough price increase messages to certain customers, as well as supporting salespeople who push for higher prices.

Over the coming months, I’ll use this blog to provide more details of our Raising Prices Program. In the meantime, if you’re interested in learning more, please contact us for a consultation.

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