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by Nick Hood - Wednesday, 29th August 2007

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The company was run by an enthusiastic but inexperienced owner-manager who sent an e-mail to its largest client out of the blue, saying that it was raising its quarterly retainer fee by 20 per cent. The client, who was going through a tough time, was put out to say the least.

The client, not unnaturally, refused to allow the fee increase and instead began looking for a replacement. He found two alternative suppliers offering similar services, but ten per cent cheaper than the existing provider.

Tales like this make a price hike all the more agonising to contemplate. The owner manager must weigh up whether it would drive away customers or tarnish previously good relationships. Internally, raising prices is usually also an issue, especially with sales teams who are sensitive to losing market share to the competition and with it their commission.

Yet as business rescue experts, my firm meets thousands of companies in trouble every year, often because they have shied away from the challenge of making sure prices stay ahead of costs, and therefore produce profits.

If your business can’t increase volumes to compensate for deteriorating margins, the only answer is to swallow hard and think about how you’re going to implement a price rise. And as with all difficult news, the key is how you deliver it.

A first step is to find out how your prices compare to your competitors. You may have room for manoeuvre, but if not, give serious thought to how you can soften the blow – maybe some re-structuring of discount levels or a relatively inexpensive improvement to service.

The next move is to identify your key customers and talk to them first. This is not just customers who give you the biggest turnover, you should also include those “rising stars” who may be your future winners, as well as those who spend less but give you above-average margins.

When you speak to them, be constructive by looking at the impact of the proposed increase from their point of view – ask yourselves how will it affect them? Are they having a bad time and could this be the last straw for their business? You don’t want to force them out of business and be faced with a bad debt if they go under.

Be flexible with your important customers. Think about introducing the price increase in stages to allow them time to adjust. Recognising and communicating the fact that you see this as a shared problem is vital to maintain good customer relationships.
Wherever possible, have these conversations face-to-face, rather than by telephone, e-mail, or worst of all, by a standard letter.

Recently, a very large media database company sent an impersonal letter, addressed ‘Dear Customer’ to our accounts department. It was unsigned and I took umbrage at the suggested 11 per cent price increase. Negotiations are continuing, but so far the proposed increase is down to only 2.5 per cent.

Making a personal effort speaks volumes about how you value their business. Explain why you are raising prices; tell them about your increasing costs or falling profitability. There may be other suppliers they can turn to, but there’s a reason why they’re buying from you in the first place and this is rarely just because you’re the cheapest in the market. No sensible buyer really wants the hassle of changing suppliers.

Most of all, take a pragmatic view of the problem. You may lose customers, but it’s quite possible that the net result will still be a gain on the bottom line. It may also be an opportunity to shake out marginal turnover.

Most of the companies we deal with survive their crises and emerge stronger. Many of those who don’t make it have been too cautious over price rises and paid the ultimate penalty. Your customers will understand commercial reality, provided you’re honest with them. They may not like paying more, but on the whole they will live with it. Be brave and see what you can do.

First published in May 2004.

Tags: price increase, sales, price hike, price rise, turnover,