How to increase prices in a B2B market
Previously we discussed the strategy to focus on incremental margin over volume in a market faced with comparable competitors, slowing demand, and increasing raw material costs.
In this post we are going to look at the process we have used in multiple industries and geographies to increase prices of B2B consumables.
We find that many B2B industries with long standing customer relationships and historically stable conditions are reluctant to increase prices when faced with rising costs. If there has been no clear strategy to increase prices, knowledge and experiences of the price increase process can fade, and a precedent of stable pricing regardless of economic factors becomes embedded in the client relationships. There is fear of upsetting the customer base, and of putting business at risk.
If there is raw material inflation there is no choice, it must be passed on through increased sales prices.
In a B2B market particularly where supply agreements are in place, the impact of a poorly implemented price increase can be a shift in market share for a new contract period which may last for several years, impacting the longer-term performance of the organization. There are a few points to consider when faced with a need to increase sales prices:
Contracts may restrict or prevent price increases
Contracts might determine notice periods being required, conditions to be met before increases can be implemented, limits on increases, mechanisms to calculate price movements, even clauses that may prevent an increase at all.
Customers may threaten to switch suppliers
If the market has comparable suppliers with generally comparable products and services and switching costs are lower than the cost of the increase, it is possible that customers choose to move their share to another supplier. However, if there is input cost or raw material inflation that is significant enough for you to be looking at increasing prices, more than likely your competitors are facing similar cost challenges.
Not all suppliers may react to raw material inflation
If there is a significant increase in raw material costs for a product with comparable suppliers, it is realistic to assume that all suppliers are facing similar increases in their raw material costs with timing being the only significant differentiation. When you are looking at comparable products with comparable raw material baskets it is very unlikely that one supplier will have a significant and sustainable benefit over another over the long term. In the short term however strategies on how to manage inflation may vary.
Convincing the stake holders
Once faced with a need to increase prices in a market, there are a number of audiences to the message:
- Your senior leadership peers: This should be the most straightforward. Senior teams are familiar with looking at P&L’s and the impact costs and margins have on the bottom line.
- Your sales team: Most salespeople do not embrace or enjoy any form of conflict with their customers. To go to those customers and ask for a price increase can cause hesitation. If your sales team is not bought in to the need for the price increase and then the process, you are not going to be successful getting them to implement the increases.
- Your customers: Depending on the market and the customer base, your customers may be very prepared to repel any requests for price increases. The sourcing teams of your customers will be trained and experienced in ensuring they extract the best value from their supply base.
Process steps
(We go in to more detail on these steps in our Price Increase Training, reach out here for more info)
(1) Convince yourselves and determine your strategy. Margins can be lost, maintained or grown when prices are on the move. What do you want to achieve? This needs to be at the start of your strategic thinking when it comes to price increase initiatives.
(2) Prepare an internal briefing pack. What is the impact, what is needed to achieve your margin strategy.
(3) Prepare the customer notification. It is important that there is a formal communication to the customer base. It should be consistent, clear in its message, and should go to all customers regardless of size, contract commitments and anticipated response. This is a critical step and frequently not followed. Depending on your strategy it may be preferred to include the percentage increase on the notification, or to leave it out and retain for the sales discussions in the days after the letter is issued.
(4) Prepare the customer facing briefing pack with your marketing and sales team. The Sales team will be the ones bringing this message to customers, allow them some input in to how the message will look and sound.
(5) Train your team in price increase negotiations. They may be skilled and experienced already at this, or they may be a little rusty and need some refresher training. Bring the sales team together in one place. Run through the process and the internal briefing pack. (We can help you with this training, contact us here)
(6) Prepare the tracking file. You need a clear tracking document that captures the status of each customer discussion, the target increase, the date of implementation, and recent comments.
(7) Issue the notification letter. All customers, same day, ideally at the same time. The sales team can give courtesy calls to customers in the hours beforehand to say that the letter is in its way and that they will speak again soon after to discuss the impact. This can help to diffuse some initial emotional responses, the courtesy call is worth the time to make.
(8) Have the sales team speak with each customer, agree a time and place to meet, then use that to go through the briefing pack and engage in a dialogue that leads to a rational price increase agreement.
(9) Run tracking calls using the tracking document prepared in step 6. Have the sales team report back on customer reactions, key responses, any market intel on the increase, how was the letter received and what the customer intends to do.
At this point, the message is out there and the process is running. The strategy is set, the price increase prepared, rehearsed, communicated consistently and the customer discussions have started. There will still be some tough customer discussions to come, however any emotional responses and confusion of message will have been overcome by the steps recommended here. How to negotiate and successfully conclude the price increase discussions is in our Price Increase Training, reach out here for more info
There is a lot more to the process of running a price increase initiative and many elements that are/are not relevant in each market. We can help you with formulating your own plan and even leading some of the steps in the process. Reach out here or using the link below for a discussion.
Julian Cass
September 2023
This blog post represents thoughts based upon our experience and observations. It is written to be thought provoking and not intended to be acted upon directly. If you would like to discuss your specific scenario or would like to know more about how we can help with a price increase process for your business contact us here
