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The anatomy of an annual price increase

And it’s that time of the year – we are going to perform an increase to our selling prices. But practically, what are the steps you need to implement a price increase effectively?

Why do we do that?

In a previous blog post, I explained why we do price increases. Click here to read more about it.

How much?

This question has two facades:

  1. What’s the financial price realization target in absolute terms (like we like to achieve 700K USD price realization versus the previous year)? This target is usually imposed by corporate following the early financial planning round. In this example, if your business unit has an annual revenue of 70M USD, this translates into 1% overall price increase.
  2. Blanket or targeted?
    • Blanket price increase means that all products/regions/customers receive the same percentage of an increase (i.e., 1% increase on all prices). Practically, this is the easiest price increase you can apply.
    • Targeted price increase means that certain products / regions / customers receive higher or lower increase. For example, products with lower sales (end-of-life) might receive higher increase, or regions with higher competition might receive lower increases. This is a complicated price increase.

Given the operational complexity of targeted price increase, you should only choose this method if you think there are pricing imbalances in your current price lists, and you can reap the benefits of correcting those through targeted price increases. Like certain regions/products that could accept 2-3 times more price increase than others, without losing any sales in volume.

Calculating new price lists

Imagine you’re the pricing manager of an organization, and your CFO tells you that we will increase the prices by 1%. What do you do? There’s no button on the ERP systems to just increase the prices and push it to the customers.

The first step is to identify the current pricing structures on ERP systems (I wrote a blog post about this subject here). There might be price lists like:

  • Master price lists, where theoretical prices of products/services are kept (like reference prices).
  • Customer price lists – Certain customers have a price for each product available to them. This tables might be related to the master price lists with a formula (customer price calculation functions), or it might be totally independent (based on negotiation).
  • Region price lists – either individually created by regions or calculated as a function of the master price lists.
  • Discount structures – a table that help calculate net selling prices per region / customer based on a master or regional price list.
  • Project price agreements / lists – prices agreed with a customer for a specific project.

All these above items can be found as tables in databases, or worse as excel sheets in SharePoint folders.

What you will need to do is to apply the right increase to the right products at the right table. Sounds easy, right? Well, not quite. If you have 2000 active products and 2000 active customers (which is not unusual for an EMEA-wide industrial company), you end-up with 4-million prices in your system. Every time you touch these prices, you mess them up a little bit. Over time, you end-up with such price lists that no one can explain you why they are the way they are.

So, this is a quite heavy technical work to be performed. You need to be an expert on the ERP system you are operating and most probably very good at Excel. Don’t forget to validate a sample of your price lists with the sales team before communicating them.

Communicating the price increase

In my experience, most of the times I saw this happening: An email from the customer care supervisor to all customers, stating that the prices are updated, and their new price list can be found attached. This usually creates frustration at the customer side, because this approach has no emphaty.

Nowadays, I see more empathetic emails sent by higher management to customers, explaining the reasons behind the increase, and a follow-up email by the customer care with the new price list. That is better.

But the best would be;

  • to create an individualized email, explaining the reasons why the increase is necessary,
  • picking the top 10 SKUs customer bought last year, showing the price increase on these SKUs
  • this email to be sent by the account manager

In this last method, the customer would understand the impact of this increase without digging into large excel files and can simply reply to this email if they have any questions.

Follow-up

You might think that it is over. It is not. Now you have to measure/monitor whether the price increase is really happening or not.

  • Certain regions might delay communication; thus, customers place orders at old prices
  • You might have missed something in the very complex ERP configuration
  • Certain customers might dispute the increase.

So how do you monitor?

  1. Transactional monitoring: You simply download daily sales information, and see which transactions occur at updated prices, and which occur at old prices. The first days you might see a lot of transactions at old prices (simply clearing the backlog), but as days pass by, you should see only new prices. Then, for each old price you catch, you should investigate – a call to the customer care person who took the order to understand how this order was recorded at an outdated price could be a good beginning.
  2. Financial monitoring: Monthly, download the sales data and compile a price realization report (click on this link to read the blog post where I explain how to do that). Is the price realization aligned with the target? If not, why doesn’t the increase stick? Which regions / customers/ products are below target? Then call regions to understand why this is happening.

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