bp default image

How to Raise Your Prices

"Regardless of whether you believe we have officially managed our way through the recession or not, one thing is clear: It’s more expensive to do business now than it was a couple years ago."

During the course of the past few years, most of us have had to deal with the struggle of increasing costs to our business all while we fight our way out of the past recession. Regardless of whether you believe we have officially managed our way through the recession or not, one thing is clear: It’s more expensive to do business now than it was a couple years ago.

But despite the hikes we’ve experienced in the cost of doing business, few of us have felt all that comfortable going to our customers with price increases. As a result, we’ve seen our profit margins continue to decrease.

It’s unrealistic to expect that we can sustain this downward profit trend for much longer. It’s time to reverse the wheel, and get our profits trending back in the right direction – by managing to increase our prices, while continuing to maintain customer satisfaction.

On the rise
Whether our company’s profits were up or down, our cost of doing business seemed to maintain a steady pace during the recession. Interestingly, nearly all of our suppliers held the line on prices during even the worst part of the recent recession. Like us, they were fighting to stay in business and couldn’t afford the risk of losing customers to price increases. In the past year, however, virtually every one of our suppliers has raised prices at least once; some have done so two or three times. So our shop’s material costs clearly have increased, and I suspect that you have found yourself in the same position.

Likewise, labor costs in our industry also have increased substantially. Good employees are now much more willing to move around to look for better paying jobs. And in spite of national unemployment numbers still being relatively high, the fact is that securing a solid employee for your business will now cost you more money. While it was easy to justify salary and wage freezes in 2008, 2009, and even into 2010, by now most businesses in our industry have given raises to their employees. Many have even given multiple raises to their valued employees as a reward for sticking with them through the tough times (and to help retain those employees).

All of these cost increases beg the question: Why are we willing to increase our costs of doing business but reluctant to raise prices for our own customers?

I believe that during the recession a lot of us experienced a shift in our relationship with our key customers. Suddenly, customers were much more concerned about pricing than ever before. Many, in an attempt to lower their own costs of doing business, were required to obtain multiple bids on their projects. And even though our customers might not admit it, quality and service took a back seat to the need to get pricing as low as possible for their own survival. Jobs you would have never lost to an inferior competitor sometimes slipped away from you solely based on lower prices.

Now’s the time
As a result of all these factors, now might be a great time to have a discussion with your key customers about pricing.

A successful strategy for this particular conversation should include a couple of important aspects. First, be sure that you’re providing significant value to your customers before you approach them about pricing increases. If your relationship with your customers is based heavily on price and you’re only viewed by your customers as the supplier with the lowest prices, then you will probably have a significant challenge in raising your prices.

The ability to sit down and discuss pricing increases correlates directly with your company’s capacity to provide “value-added services” to your customers. It doesn’t really matter if your initial relationship with a customer began based on pricing. If you have since managed to establish the kind of relationship in which your customers rely upon you as a key partner in managing their business, then a conversation about price increases will always have a greater chance at success.

Secondly, be very open and honest with customers when explaining the increased costs that your business is experiencing. Walk them through some of the details of your material increases, particularly identifying materials that are used in producing their products. Discuss labor increases that you have absorbed into your business, explaining that you have great people to help service their account and you simply can’t afford to lose them. Remind them: Quality people cost money. Most of your clients will be able to identify with these types of cost increases since they have been experiencing the same struggles in their own businesses.

Lastly, as you have these discussions with your customers, it’s important to focus on establishing a customer-vendor relationship that will serve both parties for the long term. Make sure they know that the pricing conversation is not about the next job coming into the shop. This is about you and your customer doing business together for several years to come, and in order to do that, both companies need to ensure that the relationship is mutually profitable.

To this point, you might choose to discuss agreeing that the proposed price increase be good for the next year or two – or whatever length of time works for both parties. We try not to guarantee a price lock unless with absolutely have to because material and labor costs are difficult to project for an extended period of time. If a price lock is used, it should be promised for the shortest period of time as possible.

Also, discuss making the price adjustments effective a few months down the road, when it’s easier for your customer to absorb the increase due to budgets, or other factors. Working with them through the price-increase process will help your customer understand that you’re interested in a long-term relationship, not just a quick profit.

Let’s be clear here: Raising prices with your customers is a big deal. In no way is the process of a price increase quick, easy, or straightforward. Proposing an increase to a customer is something that should be thought out thoroughly. In fact, in some cases it just might not be a good idea.

But your company, like the rest of our industry, has certainly experienced some fairly significant increases in the cost of doing business. Simply absorbing those costs for the long term is not an option. I can assure you that your costs are not coming back down any time soon – or ever. So you must begin looking at scenarios where you can pass some of those costs along to your customers. If this process is properly executed, you can continue to enjoy a successful relationship with them and earn better profits along the way.

Marty McGhie is VP finance/operations of Ferrari Color, a digital-imaging center with Salt Lake City, San Francisco, and Sacramento locations. The company offers high-quality large- and grand-format photo, inkjet, fabric, and UV printing. marty@ferraricolor.com

View more from this Big Picture issue