For any business, the conversation around a price increase is rarely easy. In the manufacturing world, where tight margins and long standing relationships are the norm, it can feel especially daunting.
Virtually every industry is facing increased pressure – from rising supply chain costs, shortages of raw materials, to inflation, the ability to maintain profit margins while still providing the same level of service has put significant pressure on businesses in manufacturing.
Even when price adjustments are necessary, many businesses dread explaining a price increase to customers, fearing pushback from their customers, potentially even jeopardizing their partnerships.
But with the right price increase strategy, the inevitability of explaining price increases to customers doesn’t have to be a painful experience. Despite wide variation across the manufacturing industry, the need to address pricing, understand various pricing models, and practice financial literacy are common to all successful businesses.
At Manex, we’ve spent decades helping manufacturers in California overcome complex business hurdles, and price increase strategy and justification are common topics we address.
In this blog, we’ll walk you through how to tell customers about a price increase, while keeping a focus on maintaining a strong customer relationship.
Understanding Price Increase Strategy – Why Prices Are Rising
Prices aren’t increased on a whim – rather, they are raised as a direct response to a confluence of economic pressures that impact the cost of doing business. The manufacturing industry is no exception.
As Warren Buffett noted “The single most important decision in evaluating a business is pricing power”. The ability to raise prices without experiencing a significant drop in demand or loss of customers is what separates the most successful businesses from the also-rans.
Price has a higher leverage on profits because it directly affects the company’s top line. In fact, a price increase can be twice as effective in increasing profits vs. reducing costs, and three times as effective compared to an increase in sales volume.
On the other hand, lowering prices by even just a few percentage points can be devastating to Gross Profit. Addressing pricing strategically is about more than simply covering costs – it’s about protecting your market power.
But why do businesses need to raise prices in the first place? We’ll start with inflation – the broad and rapid increase in prices, coupled with the declining purchasing power of money.
While inflation typically occurs gradually, in recent years it’s seen a rapid surge. This is being felt by everyone, whether it’s at the grocery store or at the gas pump. For manufacturers, this means increased costs for vital raw materials, essential components, and everyday operating expenses.
On top of inflation, manufacturers also have to contend with global supply chain disruptions. Shortages of key components, like semiconductors, wild fluctuations in the prices of raw materials like copper, zinc, and iron, and the increased costs of shipping these items from point A to point B, all lead to production delays and increased costs – costs manufacturers must either absorb, or find a way to overcome.
And if that wasn’t enough pressure, competitive markets and a high demand for skilled workers have brought up labor costs. Whether its engineers, or production line operators, attracting the best talent requires competitive wages and benefits packages. Even the cost of energy has increased, meaning it costs more to literally keep the lights on in your facilities.
When all of these factors come together at the same time, it creates a volatile environment for manufacturers, making it difficult for them to turn a profit.
Times like these have made justifying a price increase less about increasing profit, and more about maintaining high product quality and ensuring the long term viability of your business.
Developing a Price Increase Strategy
Setting a price increase is about more than just pulling a number out of thin air. You must be able to give valid reasons for a price increase to your customers. And that involves doing a bit of homework.
Before you pick up the phone or set a meeting with your customers, you must first develop your price increase strategy. The best pricing strategies take three factors into account:
- Understanding Your Production Costs
- Analyzing Competitor Pricing and Market Research
- Leveraging Different Pricing Strategies
Lets break down each of these three steps to help you develop your price increase strategy:
1. Understanding Your Production Costs
What areas are hitting you the hardest? Whether it is the cost of raw materials, shipping expenses, or labor, starting with a cost-based analysis will help you understand your production costs in detail. Establish profit margin goals with clear targets, backed by analysis of good data. This is also a great time to review your own value proposition – what is it that makes working with you beneficial that your competitors lack? Reinforcing this is critical to justifying your price increase and ensuring that your new prices reflect the value you bring.
2. Analyzing Competitor Pricing and Market Research
It’s not enough to know how you arrive at your own costs. Performing a competitive analysis on your competitors will also help you understand their own pricing, if they have recently increased prices, and their overall positioning. We also recommend conducting market research to help you better understand the current market, and align your pricing with customer’s perceived value, price sensitivity and needs.
3. Leveraging Different Pricing Strategies
After the first two steps, you should have a ballpark idea of how much your price increase will be. But focusing on the exact amount is only part of the problem.
You’ll also need to determine how to implement the price increase. Leveraging different pricing strategies is essential for explaining price increases to customers.
Some common pricing models that can be used in combination for your approach include:
- Cost-based Analysis: A detailed accounting of your cost.
- Competitor Price Analysis: Understanding the market landscape
- Value-based Pricing: Focusing on perceived value, not just cost
- Customer Segmentation: Tailoring pricing to specific customer groups
- Attribute-based Pricing: Charging based on key features most valued by customers
- Pricing Tiers: Often volume-based, allowing for different price points
- Dynamic Pricing: Utilizing technology to adjust prices based on demand fluctuations
- Early Adopter Innovation-driven Pricing: Charging more for new or exclusive innovations
- Bundle Pricing: Offering related products or services together
- Penetration Pricing: “Get in the door price”, useful for market entry, but be cautious – it’s easy to give a lower price, but much harder to take it away later
You can use any of these strategies in tandem, but it’s also important to be mindful of the timing for your price increase.
Aligning a price increase with an upcoming contract renewal, the start of a fiscal quarter, or even phased in over several months can be an effective method of how to explain price increase to customers. Be prepared to adjust pricing based on changing market conditions and customer feedback, and leverage data analysis for further insights. Remember that innovation drives better company outcomes.
It doesn’t have to be earth-shattering – even revising design, updating features or offering additional colors or a color change can deliver better company margins and drive better conversations with customers.
Align Your Internal Team
Lastly, after developing your price increase strategy, it is vital that your entire organization is aligned regarding price increase justification. Financial literacy at all levels of management is essential. Everyone from management, to your sales team, and on down to customer service must understand where the price increase is coming from, and why a price increase is justified.
This includes developing a deep understanding of your P&L and Balance Sheet internally, as well as creating internal documents and FAQs with consistent messaging to make it easy for anyone to confidently explain the price increase to customers. Prepare personalized communications for your highest value and longest tenured clients.
How to Explain Price Increases to Customers
Now that you’ve done your own internal analysis and created a price increase strategy, your organization can begin explaining the price increase to customers. This is where your preparation pays off, as your approach to how you inform your customers will make a huge difference.
Below you’ll find our best tips on how to tell customers about a price increase:
Give Advance Notice
No one likes a nasty surprise, and if you approach a valued client with a price increase and expect it to take effect immediately, it can feel like an unfair demand. Your best bet is to give them ample notice to prepare for a price increase, particularly when the increase is larger. Giving your client weeks, if not months, to prepare for the increase shows you respect your relationship with them, and allows them time to prepare on their end.
Leverage Your Price Increase Strategy
If you’ve put the proper time into developing your price increase strategy, you should be able to confidently explain your price increase to customers. This is where you can focus on the value that you bring to your clients: consistent quality, reliable delivery, exceptional customer service. You can justify your price increase without excessive detail or blaming external factors. Try to keep a positive spin on it.
Here’s an example of how to tell customers about a price increase:
Rather than saying “The cost of raw materials have skyrocketed, and we must raise our prices,” try framing it like this:
“To continue delivering the exceptional quality and reliability that you expect, and to ensure that we can invest in innovations that benefit your business, a modest price adjustment is necessary”.
Emphasize that the adjustment allows them to continue to have a strong, reliable partnership with you that benefits their business and customers as well.
Addressing Concerns and How to Negotiate Price with Customer
Even when you present a strong reason for a price increase to your customers, they may still push back. They may threaten to find another provider or not to renew their contracts. While it is understandable that they may see the increase as a negative, we don’t recommend that you negotiate directly on the core price increase with the customer.
Pricing mistakes often occur when companies feel they have little perceived leverage, leading to discounting or other practices that cause more harm than good.
Instead, acknowledge their objections, and fall back on your value proposition and price increase justification that you’ve worked on. The negotiation skills of your sales team are crucial here.
Consider leveraging a trading strategy that negotiates with the customer on something other than price. For example, some tradeoffs could include:
- Increased volume discounts or large order commitments
- Higher specifications or enhanced features
- Amended contract terms for longer periods
- Faster delivery times for specific orders
These trades can tie back into your value proposition, and can ultimately strengthen your relationship with the customer.
Try to Understand the Customer’s Position
Explaining a price increase to your customers becomes easier when you can understand their position, and tie the value you bring back to it.
Listen actively to their concerns, acknowledge their feelings, and find ways to work with them beyond simply nixing the price adjustment. Consider offering tiered options or volume based discounts, or incrementing the price increase over several months.
You should never apologize for the price increase, but rather frame it as a necessary business adjustment that allows you to continue providing a high level of service and quality that they rely on and are accustomed to.
Reinforce your value proposition, and paint the picture for them that continuing your working relationship is in their best interest.
For the client, seeking out a new manufacturer, making a deal, and onboarding them can ultimately end up costing them more in delays and lost time than your price increase would.
Common Price Increase Strategy Mistakes to Avoid
Lastly, even with a well throughout price increase strategy, there are some common pitfalls to avoid that could otherwise jeopordize your efforts and negatively impact customer relationships.
Some of the most commonly made mistakes include:
- Under/Overpricing: Finding the ideal price point is difficult. Underpricing devalues your product, and overpricing can drive away customers. Rely on your data, competitor and market analysis to help you hone in on the right price increase.
- Relying Solely on Cost-Based Pricing: It’s important to understand your costs in finite detail, but it can’t be the only aspect of your price increase strategy. Consider what the market is willing to pay, what your competitors are charging, and your product’s perceived value. These all must play a role in your pricing strategy.
- Ignoring Customer Value and Market Research: Market research is necessary to understand your customer’s needs and pain points, and how they perceive the value of your product. Ignoring this important aspect is detrimental to your ability to raise prices.
- One-Size-Fits-All Pricing: Different customer segments have different needs, purchasing volumes and price sensitivities. Failing to segment your market means you could be overcharging some customers, and undercharing others, ultimately leaving money on the table. At the same time, you don’t want to overcomplicate pricing structures. Avoid too many tiers and convoluted pricing sheets, but allow room for flexibility.
- Not Testing and Adjusting Prices: The market is dynamic, with economic conditions, customer preferences and competitor actions constantly changing the game. Successful companies continue to monitor their pricing performance, test new price points and continually make adjustments based on data and market feedback.
Being conscious of these pitfalls will help you implement a sound price increase strategy, and effectively explain price increases to customers. Following this advice will ensure that your pricing decisions are sound, strategic and sustainable in support of your long-term business goals.
Manex: California’s Premier Manufacturing Consultants
Explaining price increases to customers is one of the most challenging conversations a manufacturer faces. Approaching the discussion with a well researched and prepared price increased strategy, transparent communication, and steady focus on the quality and value you provide, can not only justify the price adjustments, but strengthen customer loyalty as well.
Explaining a price increase to your customers requires a careful and nuanced approach. Remember to keep the discussion positive, and frame it as essential for maintaining the same level of quality and service they have come to expect. Consider offering tradeoffs, beyond simply reducing your price or avoiding the price adjustment altogether.
Are you a manufacturing company looking for help explaining a price increase to your customers, or simply looking to streamline your operations and reduce costs?
Manex has been providing expert consulting to manufacturers in California since 1995. We have the skills and deep industry knowledge to help your organization streamline its operations, provide enhanced services to your clients, and approach delicate negotiations from a position of strength.
Contact Manex today for a free initial consultation and let us help your organization achieve its goals and build more resilient partnerships.
