Remember the “good old days” when price changes were an annual event that your customers simply expected?
Nowadays, price increases are almost as rare as the proverbial hen’s tooth. Contrary to decades past, this is a time of low inflation – and even deflation – in many industries. In fact, there have been fewer price increases in the 1990’s than in every decade since the ’30s. As a result, customers have become resistant to price changes and sales forces have grown rusty in the art of implementing them. The consequences can be costly, as many companies have learned. But customers can be convinced and sales forces can be convincing.
The key to tackling these challenges lie in three basic principles:
- Base your increase on solid facts
- Manage the communication process and the message
- Train your sales force to communicate the price increase with confidence and handle objections
Find the Facts
Before you implement a price increase – or even decide what price you will charge – you need to conduct strong pricing research to build your case. For example, Pricing Solution tracked the pricing history of two clients in separate industries and compared it with the Consumer Price Index. In both cases, the clients’ prices hadn’t kept up with the CPI even with a scheduled eight-per-cent increase. With this information, the sales teams at both firms perceived that their price increases were fair, and that their customers would agree. To bolster their case, they were given sales materials that highlighted additional value-added services that had been implemented since the last price increase.
Another effective form of research is to conduct interviews with clients and their customers to gather information on the pricing perceptions in the industry. In an interview with a major customer of a client, it was revealed that they were expecting price increases over the next six months, but not higher than five per cent. “That was important intelligence”, says Paul Hunt, president of Pricing Solutions, “because our client got an idea of the tolerance level for price changes. We then informed the salespeople that their customers were expecting a price increase.”
Manage the Message
To successfully implement a price increase with your customers, you should prepare them well in advance. Salespeople need to spread the word, among customers, that a price increase is coming and explain that as a valued customer you want to advise them ahead of time. Furthermore, the sales forces should be available to assist customers and answer questions through the transition period. Companies should also consider delaying changes (“grandfathering”) for some or all of their clients, to give them additional time to prepare for the increase.
It is also important that price increases are communicated internally. Your head office should have a co-coordinated strategy to tackle problems that could arise. In one instance a buyer told the key account manager that he would not accept a price increase, and then proceeded to call the account manager’s boss. Caught off guard, the boss agreed to meet with the buyer and discuss the increase.
“This changed the dynamic of the relationship they key account manager had with the customer”, says Hunt. “You have to make sure head office is prepared to respond and that executives have co-coordinated plans, with the sales force, that does not undermine the salespeople’s authority.” The sales force should maintain some accountability for the price increase rather than simply blaming it on head office. Hunt adds, “ Sales people should not be given authority to waive price increases; that responsibility should rest with head office.”
Companies must prepare for competitors to also react to your price increase. Simulate how competitors might respond and plan accordingly. Consider the financial implications of your competitors following or not following your pricing lead. You may also want to test the waters before plunging straight into a price change. For example, when the president of Hertz wanted to launch a price increase, he announced it to the trade press a month in advance. When his competitors didn’t follow suit, he postponed the increase. After floating the idea a couple more times, competitors followed Hertz, and the increase went through.
Empower the Sales Force
As front line employees, the sales force needs to buy-in to the price increase to ensure that business continues as smoothly as possible. Not only must salespeople believe that the new prices are fair and justified; they also need to be trained to communicate that message with confidence and handle any objections adeptly. Training can be done through simulated interviews of meetings with low-, medium-, and high-resistance customers. This allows the sales force to experience the kinds of objections that might arrive with the price increase and how to deal with them. They will get the chance to role-play and receive tactile feedback on their efforts. “Getting the sales force together as a group and getting them to buy-in can really improve the success rate,” says Hunt.
Continue to Follow Up
Once a price increase has gone through, the follow-up work begins. Success hinges on how well you follow-up with existing and potential customers on your new prices. In addition, pay attention how your customers are reacting to the most recent price change. This doesn’t need to be taboo, in the case of one major beverage company we asked consumers about the price change indirectly and tried to get a sense of how they perceived the value and price of the product. Surprisingly, many customers didn’t even know how much they had paid, which bodes well for future increase and healthier profits.