Formalize Your Price Increases NOW!

November 17, 2021 Charlene Norman rel="nofollow"Leave a comment

Some of us can remember the recession of the 1980s: high inflation, decimated industries, double-digit interest rates. I was a young buck — beginning my career. Most of my early memories have long evaporated — except one.

The VP of Sales was storming around the office for a week, moaning about the large customer accounts our company was losing. He was shell-shocked and kept repeating, “We were too late. We were too late.” One day, I asked him what he meant.” We put through our price increases too late. AFTER everyone else. We thought we were being decent with our accounts. What we did was surprise and annoy them. They left for our competition. It will be at least a year before we have a chance to get them back. If the President had listened to me and the CFO, we would not be in this mess.”

The two big lessons I took away and have held tight ever since are always take advantage of every opportunity for a price increase and never be the last to do it. I used those two lessons frequently throughout my career and have been counselling my clients these last few months.

Never put off price increases and never be the last to do so.

Right NOW, is the best time to put through your necessary price increases. Why? The short answer is because your customers are expecting it. So, don’t let them down. The long answer is well, longish and in three parts.

The long answer

At this stage, many businesses have made it through the pandemic, bruised but still standing. However, the government help for most industries outside hospitality and travel has ended. This means there is a two-prong ongoing challenge for all of us. Carry on AND brace for the headwinds still to come.

Thanks to the media, society is primed and gearing up to withstand the inflationary pressures expected over the coming months. Therefore, it makes a great deal of sense that all price increases by all companies be announced sooner rather than later. Because as we all know, it is much easier to deal with an avalanche than a constant dribble of ‘death by a thousand knife cuts.’

Raising prices is always tricky. I have yet to meet anyone in business who relishes the exercise. However, we have the best window to ask for everything we want, demonstrate our moral courage, and show we have our customers’ backs. Right now.

Let’s begin

There are two or three areas we will all do differently this year. First, the scenarios driving the price increase. (Enlist your CFO. She/he will prove invaluable.) Second, the explanations about the price increase. And finally, indicating how we plan to do business differently in this new year.

Calculate the Scenarios

What is your baseline?

If you are like many, the last time you raised your prices was BEFORE the pandemic started. In other words, your last price increase was at least three (or more) years ago. The first thing you want to do then is to calculate a baseline. This is the price increase you would have put in had you been just another “capitalistic sod.” In other words, how much would your prices be this past year if you had not been such a nice person and COVID had not occurred?

What is your moral compass?

There are at least three factors that drive your wages and benefits. Inflation and merit are the usual ones. You already know how to calculate any annual increase and the attendant benefit costs. Do that.

The third factor is new. Do you pay based on the living wage scale? I have never met a businessperson, NOT in moral agreement with paying living wages. The objections are always on the side of the negative impact to profit.

If your current pay structure rests on the minimum wage scale, this is the optimum time to put in living wages. Not only has society been primed these past few years about living wages, but it is also accepting of the attendant higher costs.

Lean on your CFO and review your people costs. What is the extra cost you need to pick up as you move your entire workforce to a living wage? What are the ramifications on the rest of your talent pool? And what is the resultant price increase?

What about the rest of the costs?

Recalculate all-non people costs line by line (for the entire year) and adjust for all the increases you know and anticipate. Calculating this piece has not changed from previous years. What is the total price increase for all that?

You now have three different scenarios impacting your price increase for this year. Add the impact of each and arrive at one calculation. It should be sizeable. Don’t panic. We both know that nobody will accept a massive price hike without an explanation.

The three-part explanation

Your explanation will be much more extensive this time around and rest on at least three different stories or reasons. It goes without saying the numbers I use here are for context only and bear no resemblance to your operations.

The first piece

Write about the many years you have not put through any price increase. And that while you were thinking about it for early 2020, the pandemic caused you to change your mind. So, you left 1.5% on the table for the last number of years. Now that the government incentives have dried up, you must reckon with the impact of that initial decision as we all struggle to find the new normal.

The second piece

Write about how your business depends on your committed employee base. Everyone is aware of the enormous labour uncertainty that exists, and you want to keep your exceptional employees for as long as you can. One of the best ways to keep employees long-term is to pay them living wages, so they don’t worry about feeding and sheltering their families. Plus, you know in your heart, it is the right and just thing for every business to do now. So, you are relieved that the extra 5% you have committed to paying will ensure you can continue to deliver your usual high-quality standards uninterrupted.

The third piece

This is where you write how all the suppliers who impact your operations have served what amounts to a 6% increase. At this stage, emerging bruised from the pandemic, you have no extra cash to weather all those additional expenditures. And you know everyone in the industry is struggling with these wild increases.

Something to consider

The total price increase is shy of 13%. And no doubt you are extremely uncomfortable with passing all that along.

Consider challenging every employee to find 5% savings across the board in every area except employment costs. In addition, consider challenging your salespeople to increase their efforts by 5%. Between the two challenges, you can probably find 3% permanent savings this year.

Pass those permanent savings on to your customers in the form of a reduction to the total price increase. Articulate how you have challenged your employees to deliver an extra 5% this year, how you have complete faith in them and have proactively shaved 3% off the total price increase to a more manageable 9.8%.

Enlist your CFO to keep a scorecard of how the entire company is doing with these metrics, and don’t forget to share them publicly with your employees over the next year.

Putting it all together

You have all the pieces you need to layout your price increase communique. Here is the order.

Start by expressing how this note is not something you want to issue, that you are grateful to have a long relationship with your customer base and right now, you must come clean. Acknowledge the last two years have been difficult for everyone, and unfortunately for you, operating so close to the line is not an option.
Highlight the overall price increase upfront and say you want to share how you produced all this.
Underscore the first, second and third pieces and their respective increases.
Highlight what the three total together.
Underscore your discomfort over the size and share details about your 3% program. Finish with how this brings down the outrageous amount to something more manageable and shows how you are holding your team accountable to alleviating some of the pain.
Bring out something new and positive for the coming year. Perhaps you have a new and improved feature or program or offering or increased level of customer experience, a quarterly industry event to which you will invite all your customers, a planned private event for your best customers. Whatever it is, be sure it is a natural part of your business, raises your performance stakes in some way and appears to be valuable and tangible to your customers. The whole point of this paragraph is to stress how you are constantly thinking and acting with your customer’s best interests at heart.
Emphasize you understand this is not an easy time and have set a date two months hence for the increases to go into effect. Naturally, if anyone wants to prepay in full for a product or service before that date, you will happily oblige.
End with your profound hope for their understanding and your willingness to discuss their particulars privately at their discretion.

When to announce

One of the best ways to announce a price increase is to take a cue from the public companies. They constantly issue the bad news late Friday afternoon, after the markets close.

Send your price increase notifications out late Friday afternoon. You give yourself two days to unwind, reduce your emotional level a few notches, and fashion some ‘standard’ talking points. The fallout will start on Monday. Be surprised at the minor pushback you receive.

In summary

Raising prices always causes trepidation. And yes, there is the real chance that some customers will abandon your business in favour of lower quality, lower-cost alternatives. That will happen to everyone. And there are ways to offset those account losses.

Regular operating conditions will be crazy for at least the next year or so for all businesses. So, you want to get those price increases laid down soonest to begin 2022 with a fresh slate of estimated revenues and expenses. The best way to blunt the impact of the amounts in question is to be genuine in your communications about the specific whys behind them and articulate at least one new action you propose to take for your customer base in the new year.