Inflation causes a business’ costs to surge and it also depreciates an economy’s currency..
Companies had to grow by the same rate to maintain their position in real terms. In periods of relatively stable prices, it was possible to compensate for cost increases with productivity gains. But that will be impossible in the future.
Inflation now reappears when economies are fighting against sluggish demand. The recent crisis has caused consumers to be more price-sensitive than ever.
Managers most urgently need to solve this complex situation quickly and make their firms inflation-safe. If a business doesn’t want to take a serious blow to its profits, then it will have to raise prices.
Five steps to secure margins
Increasing prices is not a one-time measure. It has to be done again and again. A process is needed that involves all relevant functions from marketing and pricing to sales, controlling and top management. A five step agenda helps managers to plan and implement price increases.
1. Target: Which prices should you strive for
This area has a cost component (how much to increase) as well as a market component (how much can be achieved). Individualization by segments, products, and customers is much more successful than one fixed across-the-board price increase.
Check details and the duration of existing contracts. Modern contracts don’t include price information. At the most, the pricing part is an addendum that allows for changing prices without having to change the basic contract.
2. Instrument: Which price instruments can best implement the planned price increase
Aside from list price increases there are many more options available. In B2C industries, package sizes can be reduced to avoid jumping over important pricing thresholds.
Other instruments include introducing surcharges, working on payment terms, or reducing discounts. Analyze every segment and decide from your company’s perspective on the best way in which to implement the planned price moves.
3. Preparation: How can you prepare the price increase in the best possible way
Communication about price increases is important and necessary, and top management plays an important role in this phase. It also includes training and incentives.
Is the sales force capable of pushing through higher prices? What about incentives for the sales force?
4.Steps: Which steps should you apply when you ultimately raise prices
Decide on the order: All customers at the same time? Or first the easy ones and then the “tough negotiators” later? Will you do it in person or by e-mail? What are fallback options if the implementation is tough or impossible? Are there less expensive alternatives? What are your walk-away prices?
5. How much did you really achieve in total
On average, most companies only realize 53% of the originally planned price increase. Customers often receive “goodies” to at least partially compensate for higher prices: longer payment terms or additional discounts.