If your business is anything like some of the businesses I’ve worked with, you might recognize the following scenario:
- 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.
- Your engineering, manufacturing and service people can’t keep up with the cost reductions required to maintain let alone increase margins.
- 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.
- 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.
- 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?
- 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.
- 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.
- 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.
- 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.
- 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.