How to Raise Prices – Part 1

How to Raise Prices – Part 1

Projects

How to Raise Prices in 2018

Raising prices seems like a no-brainer… Higher margins… quick implementation… What could go wrong?  Plenty. Find out how to implement the most powerful profit drivers known to business, without making the mistakes that have sunk so many others.

Should I Raise Prices?

Raising prices is certainly one of the very best things you can do for your company this year. There are not many silver bullets in business, but, when handled correctly, pricing increases come as close as possible to that ideal.

There are several reasons why a price increase in 2018 is critical for your business.

  1. The best defense… Price increases are absolutely essential in an environment where your costs are increasing, which is pretty much all the time, isn’t it? Without minimum price increases that keep pace with your cost increases, your company will suffer inevitable margin erosion.
  1. Margins drive profitability… As an offensive measure, price increases are a powerful way to increase your company’s margins. For those of us in the continuous improvement game, we know how hard it is to improve margins by squeezing cost savings from operations, especially when your processes are already fairly lean.
  1. Everybody’s Doin’ It… Well, maybe not everybody, but a surprising number of your customers will be expecting you to increase your prices each year. Don’t disappoint them! Price increases, when accepted by your customers, are almost too easy.

So, for all the reasons above, when your Board is demanding higher margins, one of the first strategies you should be considering is increasing your prices. And if you have already received a directive to raise your prices, it is critical that you do it the right way.

Not Without Risk

Increasing prices is of course not without risk. There is no free lunch in business as we know. And a lazy man’s price increase can definitely do more harm than good. Thinking about increasing all your items by 5% across the board? Think again.

The most immediate risk involved in a price increase is simply that the customer will not buy at your new price. The last thing we want to do with our price increase is to decrease sales. Your customers may love you, but they’re not interested in paying more for something they can get right down the proverbial street.

The secondary risk is that your customer may still buy today, but unbeknownst to you, he and his colleagues are starting to talk about looking at other suppliers. Loud, angry customers can be scary; quiet, angry customers can be lethal to your business.

This is why increasing prices is such a challenge. Simply said, we want smart price increases, not dumb ones.

Emotional Business

I don’t think there is any denying that there is often an organizational inertia around price increases. Getting a price increase implemented is rewarding, but it’s tough. If you want to get a quick gauge on the emotion that can be involved in price increases, just go to your front-line customer service and sales folks. I’m talking about the folks who are going to be on the phone when your customer calls after seeing that price increase.

Ask those folks what they think of the idea of a nice across the board price increase. I bet you they don’t love it! In fact, you will probably find your folks are pretty worried about it. And that is as it should be.

We once worked with one customer service manager that was very worried about corporate’s decree to increase parts prices by 5%. After avoiding several requests from his boss to get the parts price increase in place, he was finally cornered. He had to produce a plan and proof that he was increasing prices. So he scoured the division’s cost and sales history for several years and found every case he could where his company had lowered costs but maintained selling prices. He reported this up the chain as a price increase! Such are the irrationalities that are involved with this topic.

Our service manager’s reaction might be overboard, but a reasonable amount of worry from your customer service folks makes sense and is appropriate.

Healthy Conflict

In fact, when you really think this through, you see that there are multiple stakeholders in your organization who are involved in the price increase activity, and if you are doing things right, those folks are going to be in a state of healthy conflict.

Your finance folks should be aggressively pursuing price increases. They should be happily modeling your pricing increases and salivating over the positive effects those increases will have on company margins.

The customer service folks, speaking with the voice of the customer, should be pushing back. They should be particularly concerned with those customers who may walk away. They should also be pointing those items they just know customers won’t pay more for.

Your sales management team, properly incentivized with margin as well as volume, should be seeking the sweet spot between the two.

And senior management, God love them, they should be sitting back and enjoying it all, knowing the process is going to optimize profitability for the organization.

Where is Your Commitment?

Out of this healthy conflict, your organization needs to resolve to get this done. You generally need to believe in something to make it happen, and this is no different. If you feel you don’t deserve the same or better margins than last year, or you feel that your products are over-priced already, and that your customers deserve to earn higher profits instead of you, then forget this right now.

But if you refuse to let cost increases erode your margins, if you know you have high-value products that stand up well against your competition, and if you are driven to optimize your company’s profitability, then you need to be increasing your prices this year.

How to Raise Prices – Part 2

The next installment in our series will look at the mechanics of getting your price increase off the ground.

You Want What? When??

You Want What? When??

Projects

Help? Who needs help?

As a young professional, I was always skeptical when my company hired consultants. I always felt that they weren’t really part of the team, that they couldn’t possibly care about things the way we did. And, behind it all was my young man’s belief that I could get anything done, lift any load, climb any mountain.

“Not my job”

Over time, with greater work-loads, and broader responsibilities, I came to see a few things that led me to think a little differently. First, I saw that not all the young professionals working under me had the same willingness I did to regularly take on twice as much work as could be reasonably expected. Worse yet, some of these people actually said things like “that’s not my job”.

Help from outside

One of the first times I used an outside consultant was on a project related to the implementation of a new cost system. I was the Controller and, early in the project, I determined that the company’s chart of accounts was just plain unsuitable for what we needed to do. So, we needed a new chart of accounts. Fast.

Help in sand showing companies need help from consultants.

I had a great accounting staff, but they were AR & AP clerks, and a few general accountants, and their plates were more than full already. I was stuck. I knew exactly what I wanted done, but we just did not have the resources to do it. I had used temps for plenty of assignments before, but this was too important to take chances on a failure.

We hired an outside consultant with a strong background in cost accounting, an ability to focus, and a will to work. I provided him with very specific instructions on what we wanted done and how. Long story short, it was a great experience and it changed my view on working with outside consultants.

The right consultant

Since then, I have worked with outside consultants many times on all kinds of projects. While I have come to agree, enthusiastically in some cases, that the concept is sound, I have also seen that it is crucial that you get the right people for your projects. There are a lot of consultants out there, and many are very good. And many are not. There is no reason to settle for folks who are not really qualified for the job that you need completed.

The Day-Job

Stack of documents showing companies need consultants for help.

Today we see so many companies with forward-looking executive teams who know what they want to do, but are constrained by the lack of available manpower to get the job done. It is not that they do not have good people either.

The thing is, most companies are running very lean already, and most of the more talented folks at any given company have day-jobs that are already extremely challenging. Sometimes they just do not have the bandwidth to also focus on the continuous improvement or other special projects that senior management wants completed.

This is where the right outside resource can be a critical partner for your company. With a specialized skill-set that matches your requirements, and, perhaps most importantly, an ability to focus on the project you want completed, they can come in, get the job done, and get back out.

What about cost?

When it comes to cost, it certainly makes sense to work with people who will get the job done and done right. I have found that you can throw temps at a problem for months and get next to nowhere, while a highly qualified expert can help your company achieve its goals quickly. If your project is worth doing, it is worth doing right. If it is a worthy project, your return on investment will only be enhanced by using the best talent available.

Look at it this way, if you find the right consultant for a very important project, it is like making a great executive level hire; something that is always a challenge. However, with the consultant, you can un-hire him or her the moment your requirements change. No severance packages, no new org charts, no drama.

That being said, most mid-size businesses are not likely to be able to hire the McKinseys of the world. Fortunately, there are excellent consulting firms that specialize in this small to mid-size market. The key to choosing the right consulting group is to ensure that their capabilities align with what you want.

Generalist or Specialist?

Some consulting groups claim to do it all. Whether it is installing your next ERP system or revamping your purchasing practices, these folks do everything. We think it is probably a better idea to work with a consulting group that focuses on a few areas, and does them really well.

Experience and hands-on know-how are extremely valuable when it comes to the selection of a consulting firm. More than anything, you want someone who can hit the ground running and make an impact quickly.

At Hudson, we really only want to be involved in those areas where we excel. More than anything else, we want successful projects for our clients. We are not good at everything, but we think we are pretty great at what we do. We focus primarily on two areas: Business Analytics and Continuous Improvement projects.

One of our unique strengths is our background in both finance and operations. This allows us to fuse our business analytics and continuous improvement capabilities into a package of product and service offerings that most other small consulting firms cannot match.

Hudson can help

Let Hudson Business Analytics show you some of the exciting business analytics and continuous improvement projects with which we have had the good fortune to be involved. Learn more about the ways Hudson Business Analytics can help you improve your business.