Price Increases: Fear or Fortune?
Exploding commodity and energy prices have been giving headaches to manufacturers and distributors of food, agricultural and building products and many more industries. Supply shortages have turn headaches to sleepless nights. Finance is screaming at Sales to take a grip on Sales’ biggest fear: Price increases.
Undoubtedly, there is deep antipathy towards price increases: customers will be unhappy, there is uncertainty how competitors will react, extra work must be done to deal with their implementation, there is this feeling of lack of control. On top, it is not an activity one is regularly exposed to. A great deal of emotionalism is involved.
And a lot of procrastination. “Let us wait a bit more. They say inflation is transitory…”. And in between the profit margin gap increases, along with the sleepless nights.
If only we turn this negative emotion to positive!
As with all sales activities, price increases, if executed correctly, they can turn into a competitive advantage. All companies need to react to that. The champions / winners will do it better than their competitors. Great Sales leaders will face fear straight in the eyes and move to fight and win. They will choose Fight over Freeze. Not as a problem but as an opportunity to shine.
In the short term this challenge will require:
a) review of the value propositions towards the trade and the end user. What does the company offer more than merely a good price? Be sure every sales rep is totally clear about them.
I am always impressed, when accompanying sales reps, how few of them, know of the other dimensions of value creation, apart from a low price or a good offer. And this lack of knowledge is directly linked with low capabilities due to insufficient training.
b) a structured approach of how to segment products/services as well as customers and better match them to adjust prices differently. For example, customers will check products that constitute a big part of their costs (20/80 rule) but will not fight those which are considered as less important. However, some of these products constitute a big part of your company’s sales.
c) to brainstorm how to effectively use all levers to increase margin: price list increases, adjustment of trade terms, charge of services which are for free now, bundling value creating levers. For example, in very volatile industries, why not try to agree on prices and committed quantities for a quarter, capitalizing on customers’ desire to ensure product availability?
Do not forget to include promotions which are a back door for either net price erosion or increase.
d) an action plan of how to communicate the price increases. Will you write a carefully phrased letter to ensure the same message goes to all customers? It is also wise to create a set of FAQs for both the sales and customer service teams to help them respond effectively.
e) finally, put all these in a training to ensure all members of the sales function are well informed and capable to effectively communicate and implement the increases. Make sure to include a negotiation refresher to boost confidence.
The difficult task of increasing prices should also be an incentive to think long term. To think anew of the pricing capabilities of the whole organization. Sales are at a historic transitional time. They become more data driven, more technology supported. Pricing is increasingly becoming the center of sales’ digital transformation.
It is time to establish a pricing center of excellence. To allow for better monitoring of market prices and customer specific behaviors and introduce dynamic pricing (read here my article on this). It is not only price increases that make life difficult. It is also price transparency which increases, especially in B2B markets, due to the advance of marketplaces. Chemical companies, for example, see the growing importance of such marketplaces and this is a road of no return.
Equip your sales teams with the tools to prepare prices for each customer and negotiate effectively for all the items they sell, and which may fluctuate wildly. It is impossible for a sales rep to remember by heart all the prices for all the customers. Technology there is simple; you need to introduce a new process of preparation for the customer visit.
It may be time to establish multifunctional teams for key accounts to strengthen the value proposition to them. Anyway, in B2B the relational sales are coming to an end.
Consider serving the smaller accounts differently to reduce cost to serve and allow for margin to grow. It is difficult to imagine but an inside salesperson can serve up to 500 customers!!
A special note for distributors: as McKinsey has boldly stated: Pricing is Distributors’ most powerful value-creation lever. For a company with 18% gross profit, 1% increase in prices will yield 22 percent increase in EBITDA margins and has the same impact as 7.5% decrease in fixed costs or 5.9% increase in volume!
Also, research has shown that pricing comes after product range, product availability, customer service, sales rep relationship and same or next day delivery.
Finally, review the incentives for your sales team. Since margin is so important, then ensure that it is included in the bonus structure of the sales reps. But do not make the mistake to think too long term. Sales reps think maximum of quarter and tracking should be possible with maximum 1-2 days delay.
As a summary, pricing is the acid test for sales leaders!
As Warren Buffet said: “The single most important decision in evaluating a business is pricing power. If you've got the power to raise prices without losing business to a competitor, you've got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you've got a terrible business.”