Have You Asked Santa For a Price Increase?

It’s that time of year again. We’re thinking about the Christmas break, and what we would like as a present. Perhaps it’s another woolly jumper, or a new pair of socks. Or perhaps it’s a price increase from 1st Jan to help your profitability.

The Timing of Price Increases

The first question is: is Jan 1st the best time to increase prices?

Well, doing so on Jan 1st (or any other regular specific day of the year, such as the start of your financial year) has one huge advantage… at least you are doing something about your prices!

Too often I speak to audiences where some of them haven’t increased prices for 3, 4 or even 5 years. I even talked to one company who was an industry supplier to a conference where I spoke, and who listened at the back of the room. 15 years previously they had launched an innovative solution for their industry which gained lots of customers. But then they had never changed their prices since. Why? Every year, the worry was “well, if we increase our prices then it’ll prompt our customers to look around the market. We’ll just let sleeping dogs lie. Why poke the tiger?”

But of course, over 15 years almost all their margin had eroded. And rather than face a 2% increase to cover inflation, they needed a 20% increase to get back to where they had been. Customers might not even notice 2%, but they would certainly notice 20%.

So regular, at least annual, price reviews are essential to ensure your pricing remains aligned with market conditions and you protect your margins.

Alternatively, consider increasing prices when you notice a surge in your success rate with new opportunities. Is demand for your product increasing? Are you getting and converting more leads for your service?

If your strategy is growth, then this is excellent. But satisfying a higher demand means recruiting more people, perhaps even moving to new premises or investing in new capital equipment. In which case, the smartest thing might be to moderate demand by increasing prices until it drops back to previous levels, but at a higher margin. This might mean price increases every few months.

Finally, in times of volatile input costs, more frequent price evaluations can help mitigate risks associated with sudden cost increases.

How Much to Increase Your Price?

The temptation is often to keep it simple. Inflation is 4.8%; so we’ll increase our prices by a nice round 5%.

But there are advantages to making the price increase precise. If it was 4.8%, or even better, 5.13% or 5.27%, then it looks like there is some science behind it. Customers are much more likely to simply accept it.

Another thing to consider is this – do you just have one across-the-board price increase, or apply different increases to different products or services? In the latter case, it allows you to ensure that variations in changes in input costs are properly covered to maintain margins for each product or service (I spoke to a business recently where some products are being sold at negative net margins because of always just applying a single price increase), and it is yet more evidence for the customer that there is science behind the increase.

Markets and Channels

Are there differences between price increases in a B2B market compared to a B2C market? Well yes. In B2B settings, price changes often require more negotiation and justification due to longer sales cycles and established relationships. B2C markets, on the other hand, may be more receptive to price changes due to the higher volume and lower individual transaction values.

It also makes a huge difference whether you rely on repeat sales or whether each sale is a new customer. In the former case you are constrained, to a certain amount, by the historic price, which is why the best time to get the right price with a client is with the very first sale, not a few years down the line when you realise you are under-charging them.

You also need to consider your channels. If you sell direct then you have greater control over pricing strategies and customer communication. However, if your products are sold through distributors or retailers, price increases need to be carefully coordinated to maintain consistency across the supply chain, and you need to consider the impact on margins for each step in the chain. If it’s difficult for the retailer to increase end-user prices then you are eating into their margins, and they will be incentivised to find an alternative supplier. If the price increase can be passed on then they can make higher margins, and are more likely to support you.

To Whom It May Concern

The final thought is how you communicate a price increase, particularly in a B2B or a channel context. Do you send the typical corporate speak letter?

“We have experienced a number of cost increases over the past year, and although we have absorbed as many as we could to hold our prices, it is with deep regret that we have reached the point where we must pass a price increase on etc etc blah blah”

Or do you do something different? Send a diagram illustrating which costs have increased on the product and by how much, but with a summary price increase – share the information. Send a personal video explaining what’s going on? Invite customers round to see what they are getting for their money? Remind them about the fabulous value they get which justifies the price? Introduce more value in the package to justify the price (but making sure you maintain margins)?

Whatever you do, please don’t just stick a finger in the air, guess a price, and hope for the best; nor stick your head in the ground and avoid thinking about price at all.

Good luck!