One of the fastest ways to grow revenue and profit is to increase the price of your offering. Many businesses show resistance to price increases as convention dictates that it will put them at a competitive disadvantage, resulting in the loss of market share. However, a less common reason businesses are hesitant to take a price increase is because the price increases just don’t stick.
Price increases should be used as a tool to grow your revenue. However, sometimes, for several different reasons, they just don’t stick. Below we look at the five most common ways price increases fail and how your business can mitigate that failure for greater profitability.
Reason 1: Sales Team Discounts Offset Price Increase
When price increases are planned, their justifications are not communicated to customers, which then causes lots of push back. The sales team does not have the necessary tools and guidelines to address the concerns of the client, often leaving them ill-equipped to negotiate. Thus, to meet their sales targets, an ill-informed sales force may decide to bypass the increase by either charging customers the old price or just providing deeper discounts to match the old price.
The Importance of a Sell-Story
To mitigate this risk, it is essential to craft a written communication/sell-story that allows the salesperson to effectively explain the price increase to customers. Some of the key elements to include in the customer’s sell-story are:
- The price increase to the customer
- When the price increases will come into effect
- Justification for the price increase, including any analysis conducted on:
- willingness to pay of consumers
- competitive price movements
- operating costs
- costs of raw materials and any existing market realities (for example, COVID-19)
- Provide a potential financial impact story on how this price increase will impact the KPIs your customer cares about, ensuring your customer sees the inherent benefits of the increase
Key Elements of the Sales Team’s Sell-Story
Here are the key elements to include in the sales team’s sell-story:
- Identical information crafted for customers, along with the following:
- Retailer Funding/Margin guidelines
- Assortment, distribution and merchandising recommendations
- Promotional guideline(s) by customer segment, including:
- Discount thresholds
- Rebate policies
- Flyer Support
- Ad Spend etc.
Reason 2: Customers Buy Around the Price Increase
Customers know that price increases will occur periodically. To avoid paying more, customers usually embrace the following common approaches:
Tactic 1: Stock up in advance of an anticipated price increase to secure the lower price
Tactic 2: Purchase the majority of their inventory during promotion periods
Tactic 3: Migrate to cheaper but similar products
To mitigate the risk of customer’s stocking up in advance of a price increase, maximum order quantities should be enforced. This will ensure that all customers convert to the new pricing on your effective date.
Tactics 2 and 3 are related to optimizing discounts and the price gap between products and brands to ensure adequate trade-offs are in place.
Reason 3: Lack of Tools to Measure Impact of Price Increase
Price increases can be the result of a variety of factors including:
- General price increase
- Lower promotional depth / frequency
- Less pricing exceptions
- Higher priced channels / products becoming a larger portion of your sales
The list goes on…
To appropriately decompose the impact of a price increase, it is essential for the team to be able to granularly decompose results and attribute valuations to each driver. Without this clarity, you can never truly understand what price increase you actually realized.
Reason 4: Lack of Clear Structure on Who Owns Pricing
Pricing involves many different stakeholders who are often not in complete alignment with each other due to conflicting interests. For example, the finance team which tracks the bottom line would want to take a price increase, whereas the sales team concerned about sales volume would be against price increases. The lack of alignment and control with respect to pricing leads to disparate implementation of the price increase and results in a lack of visibility of the impact in the P&L.
To avoid this dilemma and align all stakeholders on a price increase:
- Set up a clear structure of roles and responsibilities on who owns pricing
- Consult all stakeholders during a price increase initiative to include market realities
- Change tracked metrics / KPIs to ensure buy-in from different stakeholders (for example, include a metric of margin to the sales target apart from just sales volume or revenue)
Reason 5: System Does Not Have the Updated Prices
As the adage goes, sometimes the simplest answer is the right one. Perhaps the reason a price increase is not sticking is that new prices are not being appropriately updated into your system, causing customer purchase orders to be invoiced at an older price. This issue can be caused by a variety of reasons:
Legacy System in Place
Non-sophisticated systems like Excel are used to track price and purchase order(s) leading to increased human errors when inputting new prices.
Multiple Data Sources in Silos
Usually, if the sales team uses a data source that does not talk to the source that contains updated pricing information, it can lead to inconsistent prices.
Lack of Control
Sales team override the prices displayed in the system or add their own discount structure for their customer.
Data is Incomplete
Customer / product information is missing in the system, thereby preventing prices and discount structures from being set.
There is no backup or version control built into the system in case of data corruption or damage.
Lack of Talent
Individuals not familiar with data management and analytics are responsible for updating the data, aggregation and reporting.
To ensure that price increases are reflected in your system, invest in appropriate technology and tools to track price changes and take orders effectively. However, merely having the systems set up is not enough; it is also imperative that you have the right people and structures in place to maintain these systems and drive analysis to garner insights.
Why Price Increases Can Be Effective
Warren Buffet once said. “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.”
While many businesses are resistant to price increases, when effectively executed, price increases are an excellent tool to grow your revenue. So, before you dismiss a price increase or jump to the conclusion that implementing one will be detrimental to your business, take a moment to stop and consider the upsides.
ABOUT THE AUTHOR Karthik Balaji is a Senior Consultant at Revenue Management Labs. Revenue Management Labs help companies develop and execute practical solutions to maximize long-term revenue and profitability. Connect with Karthik at [email protected]