Contributors:
Travis Sheldon | Senior Manager, Strategic Growth & Innovation
Pricing increase is the most direct path to immediate growth. It adds new revenue, raises profitability, and typically, requires no major investment. Executives love it and always have it high up on their agenda during regular team meetings. If this is the case, then why is it still so difficult for many organizations to raise prices in today’s inflationary environment?
The Problem
What does it take to make the right pricing decisions? Following the status quo is safe. Even the boldest executives are fearful of customer defection due to pricing increases. That is why so many companies shy away from raising prices even when they are not monetizing the full value they generate for their customers.
T&Co by Cherry Bekaert has observed that most companies miss out on 10%of gross margin across the pricing value chain. Our Strategic Growth and Innovation team recently worked with a leading component supplier for medical device companies that sought growth through pricing in an industry where 5% year-to-year discounts are the norm.
Four Elements of a Successful Price Change
Pricing changes require four critical elements:
1) Determine logically defendable market pricing
We helped our client transition from cost-based pricing to switching cost-based pricing. To do this, we determined the point at which it made no financial sense for their customers to switch suppliers. Even for an offering with limited market differentiation, companies often forget that there is a switching cost to changing suppliers. Despite our client’s challenges in producing meaningful product advantage vis-à-vis its top competitors, the engineering integration, and the trust that it has with customers do create value. Therefore, despite a lack of unique product offerings, we helped our client develop defendable pricing based on its level of entrenchment with key customers.
2) Demystify customer defection
We built sensitivity models for our client to assess the likelihood of customer defection. Our analysis revealed that customers due for the largest price increases (those who were most likely to defect) were also the least profitable. In the worst-case scenario model, even though revenue declined, gross margin impact was net positive, and the fear of customer defection became less acute for an organization that is focused on gross profit growth.
3) Talk to customers anonymously before taking pricing action
A survey of over 30 procurement individuals who deal with the client and its competitors revealed that they were unlikely to seriously consider another supplier if price increases were no more than 5 to10%, as it simply was not worth the hassle due to switching costs.
4) Refine negotiation and value capture tactics
We built a price negotiation calendar in tune with our customers’ fiscal year-end, preempting budget cycles and removing “wrong time” from the list of customer excuses for not accepting higher prices. We also prepared for negotiations with a repository of pre-populated materials and data to justify increases.
Over the course of our year-long engagement, our client drove over 5% in pricing increases that fell directly into profits. Further, our client established a new set of pricing capabilities and processes that can continuously improve its strategies.
Ultimately, instituting price increases does not have to be a leap of faith. You can de-risk the possibility of customer defection, minimize the downside impact, and generate immediate profit increases through a structured, evidence-backed approach.
Guiding You Forward
Our T&Co by Cherry Bekaert Strategic Growth & Innovation consulting team is comprised of strategists and consultants that help organizations see market trends before the competition to anticipate the needs of customers and take advantage of new untapped growth opportunities. If your business needs assistance with price increases, contact our Strategic Growth & Innovation team.
