Communicating Price Increases to Your Customers
Copyright 2004, by Dave Kahle
Eek! Price increases from several of your suppliers! Your customers won't like that. How do you manage to pass on that price increase without losing business or giving away margin dollars?
This is becoming a major issue for distributors. The economic pendulum has inevitably reached its apex and begun to swing back in the other direction. In many industries the pressure to reduce prices is coming to an end, being replaced by upward pressure on prices. If you are like most segments of the economy, there have been more price increases announced in your industry in the last three months than in the last three years combined. Unfortunately, many sales forces are peopled with individuals who have never lived through a time of price increases. They have no frame of reference from which to view it, and no experience on which to draw.
Anxiety abounds: "Will the customer refuse to accept it? Or solicit prices from a competitor? Will I have to give away gross margin and absorb the price increase in order to keep the business?" These kinds of doubts lead to anxious and intimidated sales people, declining sales and shrinking margins.
Not a pretty picture. Yet, as in any sales problem, there are a set of proven practices and strategies that will make this process of managing and communicating price increases less threatening. Here's a series of seven specific ideas to help you effectively manage price increases.
- Set up the situation.
The announcement of an 8% price increase on a major product line shouldn't come unexpectedly out of the blue. Of course the customer is going to react strongly to the suddenness of the information. Nobody likes to receive price increases, and even worse, nobody likes to receive them without any indication that they are coming.
It's like the day I received a bill for health insurance which was 60% higher than the previous month was. No prior notice, no hint of the increase, no letter explaining it was on the way, no preparation - just a much higher premium. I reacted conventionally, and immediately picked up the phone to complain and solicit other sources. The sudden nature of the bad news fueled my negative reaction just as much as the details of the increase.
Don't let that happen to your customers. Don't wait until the price increase is a fait accompli to inform the customer. Weeks before, have a conversation with that customer about the trends in the economy toward more price increases. Share the big picture with him. Then mention other price increases that you have received in the past few months. Be specific with names of manufacturers and products to which he can relate. Mention the soaring price of oil and the inevitable downstream effect that has on all kinds of products. Mention that you are expecting an increase from XYZ component or manufacturer.
Build into your customer the general expectation that prices are going to go up, so that when the deal happens, he isn't blind sided by the information.
- Prepare with details and substance.
You don't want the customer thinking that it's just your word that the prices are going up. Bring the details. Have a copy of the letter from the manufacturer indicting the price increase. Be prepared to communicate specific details. Don't say, "Transportation charges have gone up about 20%." Instead say, "Due to the rising cost of fuel, our inbound freight charges have been increased by 19.1% from one truck line and 18.6% by another. Here's the letters from each of them informing us of the increase."
This is a great time to have the manufacturer's rep come with you. Let him/her communicate the bad news to the customer, while you look grave, concerned and sympathetic in the back ground.
It's always a good idea to have someone else, other than you and your company, as the source of the price increase information. This conveys to the customer the fact that you are not raising prices; you are reacting to your prices being raised. That is a significant message to get across.
- Try to inform your contact's boss of the price increase.
You want to avoid this scenario: You pass on a price increase to your key contact. He/she is fully aware of your need to pass along the increase. However, when he tells the boss about the price increase, the boss, who doesn't know all the details, reacts by directing your key contact to shop for a better price, or refuse to pay the higher price.
Instead, you be the bearer of the bad news to the boss. Handle the sales call in the same way that you did with your key contact - lots of detail, with a third party being the source of the price increase information.
The result may or may not be the same, but at least you haven't put your key contact in the difficult position of defending his decision to continue to buy the product from you.
Also, it may be that the boss is likely to be a bit older than your key contact. If that is the case, it's more likely that the boss has lived through a time of regular price increases. It will come as less of a trauma to him, because he has seen it before, then it will to the younger, less experienced contact who may have, like your many of your sales people, no experience with price increases.
- Give at least 30 days notice.
Don't ever communicate a price increase after the fact. And don't wait for an order to say, "Oh, by the way, the price of that is now...." Instead, give the customer 30 days to enter the information on their computers, to adjust their purchase orders, and to consider alternatives.
Be sympathetic to your customers' situation. This is a case when the golden rule, Do onto others as you would have them do unto you, should be your guiding principle.
- Take the initiative and offer alternatives.
If you sense that the price increase is going to prompt the customer to search for an alternative, take the initiative and offer an alternative. Do a little research. If the company is buying the high priced option, and that is going up by 6%, as you transmit the details of the price increase, suggest that he may want to review a less expensive alternative. Have the alternative product ready to discuss with the customer.
This does a number of things. It communicates to the customer that the price increase is a done deal - the only option is to buy a product of lesser quality. There is no option to beat down the price increase. So, you get the customer thinking of alternatives.
Secondly, it allows you to decipher the mind of the prospect. If given the option of considering a less expensive alternative, if the customer shows no interest in the option, it's a good indication that he's going to accept the price increase, and not shop around.
Third, if the customer bites on the less expensive alternative, then you are still in the game. It's better to retain the customer with a less expensive alternative, and maybe loss a little sales volume and gross margin dollars, then it is to lose the customer and walk away with nothing.
- Make it easy for the customer to implement the price increases.
Make it easy for him to input the new information on his computer, to adjust his purchase orders, to note his requisition cards. The easier it is for him to implement the mechanics of the price increase, the more likely he will do it. If the customer is buying 15 items in a line from you, don't just say the prices are going up by 6%. Instead, give him a spread sheet with each of the item numbers on it, the old price per unit, and the new price per unit.
If you make it difficult for him to implement -- he has to look up the item numbers that are affected by the increase, he has to figure out the new price of each item, he has to communicate it to the using department, etc. - you make it more likely that he'll balk at that effort and resist the price increase.
- Be confident and matter of fact.
Price increases are a fact of life at certain points in the economic cycle. Nobody likes them, but no one customer can stem the tide. So, your customer has to adjust to the fact of rising prices, just like you and your suppliers do.
Understand that. Be confident in it. If you are tentative, timid and intimidated by the price increase, you'll stimulate lots of push back from the customer. That push back is doomed to take up a lot of your time and the customer's time. You'd both be better off just accepting the fact of life that prices are going up, adjust, and go on with your business.
That should be your attitude. Convey it in your demeanor, in your attitude and in your conversation. Be confident and your customer will likely react in like manner to you.