With the ongoing rise of input costs, many manufacturing businesses are being left little choice but to put through price increases on their brands.
In this article, we discuss the importance of implementing a price increase the right way for your business and brands to avoid costly mistakes. We also discuss two very different strategies to approaching a potential price increase.
The potential pitfalls of price increases
Commercial managers can find price increases daunting due to the variety of pressures applied on them by customers, competitors, and consumers. Not to mention the time required to analyse, build, implement and track and measure any such increase.
In our experience, there are several common factors that can lead to a poorly implemented price increase that hurts your brand. These include:
- Being reactive rather than proactive
- A failure to align internally including misalignment of agreed deliverables & KPI’s.
- A lack of external engagement
- Price variations post price increase
- Price architecture becomes a secondary thought
- Supporting information and documentation is a last-minute input
- Lack of understanding around Cost of Goods (COGs) and other costs (E.g. overhead allocations)
Failure to address these factors properly can quickly lead to a protracted process. This may result in a ‘trade off’ scenario where you are bargaining with your customers over the price increase you need to take, or worse still, your demand generation team (I.e., your sales team) is distracted from their primary role. Either way you risk:
- Loss of momentum for several weeks or months
- The need to manage risks and fallout associated with poorly managed increases
- Price gaps in the market if not implemented properly
- Failure to recognise other potential related problems in the future
How did our industry end up here?
Fifteen years ago it was almost ‘too easy’ for suppliers to put price increases through. It was reasonably common for suppliers to take price increases to boost or improve a brand’s financial result often at the detriment of shoppers and consumers.
During this era our industry experienced an immediate change in tack by including:
- Immediate pressure on supplier pricing (think Down Down & Rollback)
- A change in price increase processes and timelines (from 4 to 13 weeks)
- Demand for full visibility of supplier costs down to the ingredient and cost composition
- Buyers were removed from the price increase process to enable a “good cop, bad cop” strategy to unfold in each negotiation
In the last 15 years, several major retailers have taught their suppliers to believe that price increases are something that should be avoided at all costs and are damaging to business. Price increases and their process, as suppliers had previously known it, had effectively changed for the foreseeable future! Price increases were effectively changed from a simple submission to a drawn-out process that was often an adversarial negotiation including threats of delisting products, penalties and “dealing back” the full value of the increase taken.
This has resulted in many commercial managers either delaying pricing discussions to the detriment of their businesses or being forced into a position where they have had to release vast quantities of confidential information about their business operations which may or may not be held in confidence.
From a commercial team capability perspective, this has led to an entire generation of account managers and in some instances sales directors who have either (a) never taken a price increase, or (b) are frightened or intimidated to enter a price increase discussion for fear of repercussions by the major customers. It is evident that change is necessary for businesses to be able to confidently and competently implement what is rightfully their commercial decision to make.
The clock is ticking for your brand
The perfect storm has been brewing over the last 18 months made up of sudden, but foreseen, higher product input costs and inflation. As a result, commercial managers who are not confident in makingpricing decisions and customer management teams who have only had limited pricing negotiations in their careers are now paying a heavy price.
Reviewing and setting pricing is the fundamental right and responsibility of a brand owner. It is a core commercial decision that businesses must get right to balance volume throughput and profitability. As such It needs to be treated with great importance and so careful consideration must be given to It. It then needs to be reviewed and adjusted when appropriate for a business.
Before rushing into a price increase decision, it is prudent for your business to conduct a thorough review of its operations to ensure no ‘fat’ has crept in. All departments need to be challenged with the following four questions:
- Are we investing our funds as effectively and efficiently as we can?
- Are we achieving an acceptable return on expenditure?
- Can we restructure internally to create efficiencies (e Do we still require a large office post COVID?)
- What other ‘low-hanging fruit’ exist in the business that we are not utilising to create efficiencies?
Two approaches to managing a price increase
Once a business has established that price pressures have become problematic and change needs to occur in order to maintain an acceptable level of profitability, a business must evaluate whether a price increase is the correct way to go.
Do you save on cost by pulling back investment or increase prices to allow you to continue to invest? Both strategies have their merit but pre-planning the right approach for your brand is critical.
Hold price but stop investing
To stop investing, stop all marketing and withdraw trade spend investment means becoming a ‘dark brand’. Becoming a ‘dark brand’ means you must consider both the pros and cons of such a strategy:
- It can be implemented quickly
- Reduces other costs to offset price pressures internally
- May work in the short term if your brand already has momentum and the rest of the category also has momentum
- Low risk in the short term but could be delaying the inevitable
- Potentially detrimental to long term brand health.Your brand may lose relevancy with shoppers and customers
- Negative retailer response through loss of trade spend investment (fixed & variable)
- Could drive unwanted volume if your brand becomes the cheapest in the category
- Opens the door for competitors to fill the investment void you have created
Increase price and invest further
Implement a price increase and invest further is another strategy to consider and potentially the less risky option for your brand in the long-term. But, just like the strategy to become a ‘dark brand’ it has both pros and cons:
- Long term focus on the health of your brand through continued investment
- Can strengthen trade relationships if managed correctly
- Allows for a reset of base & promotional pricing strategies if planned out correctly
- It facilitates a reset of your pricing and promotional investment to leverage optimal price elasticities to satisfy your shoppers and consumers
- Accurately reflects the ‘real cost’ impacts your business has experienced during this high inflationary period to avoid a “margin grab”
- Takes time to implement
- If not implemented correctly it could damage your portfolio pricing architecture
- Requires sharing (potentially confidential) operational data with retailers
- It’s been commonly reported that retailers take additional margin. If so, how much? And does this reset your margin targets with your customers?
- Requires a great deal of planning to formulate a clear and considered approach to implement your price increase in order to offset the anticipated customer push back
We have discussed the importance of implementing a price increase and presented two alternative strategies to overcome the need for a price increase.
Detailed analysis and planning of any price increase is required before deciding on what is the best approach for your business. There is no one-size-fits-all approach.
You must consider factors such as price analysis, shopper and consumer behaviours, communications, demand, timelines, post implementation measurement and evaluation. This ensures you take a 360-degree approach to your price increase.
For more information and help with Implementing a price Increase for your brand Hexis Quadrant can work with your commercial team to develop, implement, and measure the right approach for your business.
(Click here to contact us for more information around how to implement your price increase effectively)