During the annual price planning processes, companies put their best team members on assessing past strategies. They analyze how well each price performed and plan prices for the upcoming year. Everyone’s eagerly anticipating a significant impact on the bottom line.
Unfortunately, the efforts of these power teams are futile if the business can’t make those price increases stick. The simple truth is that many of these increases will get whittled down to nothing. The various negotiations and discounts given to customers when trying to close a deal get in the way.
Developing sticky prices is challenging. However, businesses that succeed in making increases stick can grow enterprise value year over year. After all, a 1% increase in price can result in an 11% increase in profit.
Give your company a better shot at success. Follow this five-step guide strategy development to drive sticky price increases.
5 Steps to Executing Sticky Price Increases
1. Tie Price Increases to Value Creation
Every price increase should be linked directly to a product or service value. If you plan to ask your customers to pay 3% more for a product line next year, you must create and communicate 3% more value for affected customers. Begin working on increasing value in ways you can substantiate months before a price increase goes into effect, not at the same time. After all, you want to explain how you’re already providing more value as proof, not simply promise to do so going forward.
Document and communicate how your company creates value for affected customers. Track improvements in on-time delivery, handling special customer requests, and other ways you provide additional high-quality service across the year. By arming yourself with this proven value over many months, your company gives your increases a much more solid foundation. Then you can expect to make price increases stick as a result.
2. Build Realistic Price Increase Goals
Companies often set price increase goals based on the belief they should expect a 4% price increase (or another magic number) every year. Unfortunately, this number is grounded in nothing more than the fact they have always had an arbitrary price increase target of 4%. This is far from uncommon. We have seen companies build this expected increase into their budget every year when they’ve never achieved a price change of that magnitude before.
Setting unrealistic expectations creates an environment in which price increases are expected to fail. Of course, if your team believes price increases are going to fail, they will. Then you’ll find it impossible to hold your team accountable for executing increases going forward. Setting reasonable expectations — and then expecting your team to meet them — breeds confidence and a culture of pricing improvements. This will ultimately make even higher goals possible down the road.
Furthermore, if your product doesn’t account for a large share of your customers’ spending, a realistic price increase may fly under the radar of purchasing.
On the other hand, attempting an aggressive price increase that draws a heightened level of scrutiny may cause more pricing headaches than expected.
Consider the State of Your Accounts
Don’t forget to take the state of your costs into account when planning your company’s price increases. Holding prices flat when costs decline by 5% is a better outcome than raising prices 4% when costs go up by 5%. If your raw material costs are falling sufficiently, holding the line on pricing may be the most profitable strategy you can attempt.
If you choose not to initiate a discussion about prices with your customers, however, be sure to put just as much effort into preparing to defend keeping prices flat as you would if you asked for an increase. Don’t put yourself at a disadvantage if your customers initiate the discussion.
3. Strategically Segment Customers and Product Lines
A “peanut butter” strategy approach applies the same price increase to all customers or all products. It’s easy and simple, but it rarely works. Companies end up leaving money on the table with some customers that might have accepted a larger increase. Then they don’t get the price increase through with others.
Some businesses go one step beyond this by applying a “chunky peanut butter” approach. They vary price increases by customers but not by products, or they vary increases by products but not by customers. While better than the plain peanut butter approach, this strategy will also underperform. This is because every customer values every product uniquely.
Careful price increase planning, customer-by-customer and product-by-product, takes significant effort. It does, however, pay large dividends in the long run.
4. Measure and Analyze Strategies Regularly and Often
Many companies implement price increases and then try to connect the dots when things don’t go well, often months later. Don’t make this mistake. Stay on top of the performance of price increases. This allows you to understand the intricate details of pricing challenges, successes, failures, and opportunities. Then you can take corrective action early if your price increases don’t stick.
Unfortunately, many businesses get hung up on this step. Measuring price increases is hard. It requires looking at actual price achieved, customer-by-customer and product-by-product. Eliminating the effects of elements such as discounts, rebates, and customer mix requires significant effort, time, and powerful tools. But this is a step your company can’t afford to skip. You can’t develop a culture of successful price increases without constant evaluation and optimization.
5. Provide Incentives to Motivate Your Sales Team
This is a must. The success of price increases comes down to how well your sales team pushes them through. They have to convince customers to pay more for your products. This effort takes dedication and commitment from your sales team. There’s no better way to motivate them than through strategic incentives.
Note: If you only incentivize sales reps on volume, revenue, or even margin, they will focus only on these objectives. In other words, they’ll view price increases as an impediment to achieving their sales goals. However, if your company includes this updated pricing strategy as part of their incentives, they’ll eventually share your determination and commitment to sticky prices.
Start Planning Your Sticky Price Increases Today
Need a better way to plan your annual price increases and regularly analyze their success? Powerful business analytics software like KiniMetrix helps companies:
- Identify the target customers for price changes
- Measure price performance
- Create successful incentive programs
Learn more about building a pricing strategy focused on delivering fast and researched profits using your existing sales transaction data. Watch a quick video demo to see how KiniMetrix works today.