Raising prices to the customer. When is the best time to negotiate a price increase?
Depending on the business cycle in the economy, and on the micro scale of our relationship with the customer, getting an increase accepted by the customer can be difficult or easy to achieve. In this article, I will zoom in on five situations where getting a price increase may be easier and may not damage the long-term business relationship. When considering a price change to a higher price, use the following situations:
- Actual quantities are much lower than previously contracted
- There are external factors beyond the control of the business partner
- The old merchant has left and a new one has taken his place
- Our company has not won any new business from a client in the last 12 months
- Raw material and energy prices are rising
1. actual quantities are much lower than contracted quantities
Depending on the industry in which we operate, volume forecasts are subject to more or less error. When working with a client on a long-term basis, we will periodically receive new requests for proposals. If we have projects in our portfolio with a client that are already very old or at a much lower volume level than initially estimated, it is worth considering linking the latest RFQ, which is attractive from our point of view, to a price increase on old projects. This is known as the Russian front technique: „On the two old projects, volumes are 30% lower than expected. If we get this new project, we will raise your prices by 2% on the old projects, otherwise we will have to raise prices by 12%”. Let's remember that purchases are most often accounted for by annual cycle savings for a given portfolio. This may sound brutal, but it works especially where the client is aware that switching suppliers on old projects will be very expensive or there are not many options for a new project (primarily technical industries).
2. there are external factors beyond the control of the business (e.g. Tax New Deal in Poland)
Tax and legal changes are an excellent time to sort out our cost structure and margin levels on individual customers. Usually such changes affect everyone and no one questions them. It is important not to sleep through this moment and jump on the increase train. A customer organisation massively bombarded with increases will be more likely to accept ours as well, without going into too much detail. Raising prices at the right time will also leave less of a crack on the relationship in the long term. If we start talking too late, when the customer has already caught his or her breath, we run the risk of our company resisting much more and being remembered badly, which of course has an impact on the long-term relationship with the customer.
3. the old merchant has left and a new one has taken his place
In 9 out of 10 cases, the quality of data management and documentation of bid and negotiation history are much better in sales organisations than in purchasing organisations. Many purchasing organisations operate with spreadsheets, email programmes and pdf files. Often when an old buyer leaves, they take all the knowledge with them and the new buyer is left with a „clean slate”, which often puts them in a difficult position. If the client has an ERP system, it simplistically contains the prices, it lacks the history of how the tender process was conducted, it lacks the history of events that took place during the collaboration. Even if a client has a purchasing platform, this does not immediately indicate that it actually manages the tendering processes and relationship history well. Often buyers rotate every 2-3 years, and people in sales have been looking after a particular client for much longer. If the terms of the relationship with a particular client do not meet your boundary requirements, then a change of buyer is a good time to ask for a raise. The new buyer will get to know his suppliers. If you get a lot of his time at the beginning of the acquaintance, the story of the raise can turn into a success story of new projects!
4. our company has not won any new business from a client in the last 12 months
This point is linked to the first point. When advising purchasing, we tell them about two indicators that operate in sales. The first is the „hit rate”, where suppliers compare customers against each other, looking at how often out of 10 bids made to different customers they win a new project and of what value. The second is the ratio of current revenue and fixed costs per customer. Both of these metrics define which client to dedicate time and resources to, as such an investment will have the highest ROI. Purchasing cannot benchmark suppliers with impunity. We as vendors, having already owned the business with the customer, should signal that since we are not winning anything new, we are forced to raise the price to the customer. Sometimes it is worth disciplining the customer. Either he will leave on his own or we will find a new way together.
5. commodity and energy prices are rising
The purchasing function often gets official letters/e-mails signed by a very high-ranking „VIP” person in the supplier organisation with information of the type:
„In order to protect our customers from inflationary pressures we are systematically optimising our manufacturing processes however ... due to the increase in electricity prices we are forced to increase the prices of our products by 20 %....Yours sincerely
A very important director”
This is a popular form of mass communication of increases. 50% customers will respond with nothing and we will simply change the prices to the higher prices in our system and start invoicing according to the new price list. The rest of the customers will attempt negotiations, and few will take the time to do so. Most will be those where we have a significant share in their cost structure. If an item is a significant part of our cost structure and its price changes frequently in the market, it is worthwhile on occasion trying to force the client to move to a pricing formula based on an independent index. In this way, we transfer part of the risk of doing our business to the client by adopting a neutral position. As standard, when we prepare to discuss increases, we only do so from our perspective. We look at what proportion of the cost is electricity, fuel or steel, for example. Look at which groups are important to the customer, where he or she has a lot of exposure, and argue with these things too, „the shirt closer to the body”. The customer's imagination will start to work more strongly and it will be easier for us.
Raising prices to the customer. Where to look for support?
Eveneum supports companies in negotiating increases with their customers. We work with Polish companies exporting to Western Europe and with multinationals communicating raises to clients in Poland. If you are struggling to negotiate a satisfactory pay rise, we can help you by:
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