Here’s what to consider and how to respond when customers challenge price
By Marcia Gauger, for SBT
Question: We supply a major component to OEMs, and I am faced with the challenge of asking my customers for a price increase. I am dreading this because my customers not only have indicated that they will not accept any price increases from suppliers, they also want us to cut our costs and pass the savings on to them. We have cut as much as we can, and rising business costs, such as benefits and insurance, are forcing us to take action. Any ideas for softening the blow?
Answer: Whenever customers ask suppliers to maintain or decrease costs, don’t assume that they are solely concerned with the price per item or cost of the product or service that you provide.
Instead, they are looking at bottom-line profit increases for themselves.
If you understand that, you’ll be able to increase prices and still keep the customer happy.
Usually that is accomplished by looking for new and better ways of accomplishing the same or better goal through better technology, more accurate JIT delivery systems or other innovative strategies.
Be careful not to justify the price increase in terms of why you have to have it. It’s a "what’s in it for me?" world.
For instance, if you justify a price increase by stating that your benefits have increased and you need to pass those on, your buyer will most likely react negatively. Instead, look for creative ways to make your customer win, like demonstrating added production through changes in design or implementation.
You can eliminate much of the negatives associated with price increases by planning ahead and communicating with your customers. Here are some guidelines for seeking price adjustments:
1. Know your customers – How have they purchased in the past? Use that knowledge to prepare your price strategy.
If it’s a new customer that you don’t have history with, try to find historical data through another party. Set your limits. If the buyer expects you to go beyond your limits, walk away. Look for more profitable business.
2. Focus on the buyer with the greatest win – Buyers, in the purest sense of the word, have one job. That is to get the lowest possible price for their respective companies.
Find the buyer who has the most to gain or lose from using your product. For instance, a product manager may be a good choice if he or she has had success with your component.
If the buyer is suggesting a change in suppliers, demonstrate that such a change would cost the company more in terms of re-engineering or tooling.
3. Look for ways to cut costs for the customer without adding costs or diminishing profits for your company – For instance, recommend an amended delivery schedule, or modify options to accommodate the pricing demands. Offer pricing options to put the customer in control. Limit the options to three, as not to confuse the customer.
4. Consider alternatives – What "value added" might you provide to justify a price increase to your customer? Consider services that represent little real cost for you, but are seen as a value for your customer to offset the price increase.
For instance, you may agree to training the customer’s staff or helping with pull-through sales if the client commits to a contract increase for a year.
5. Quantify the results – Show the customer that by using your product or service it will reduce costs, avoid costs or allow the client company to realize more profit.
Don’t just tell your client this. Work out a formula to calculate the savings. Break the price into smaller pricing options where appropriate.
For instance, if you are selling a piece of equipment that is $50,000, perhaps you could break the price into delivery, installation, building a prototype, machining, etc. Let the customer pick and choose what’s most important, and price accordingly.
6. Plan your future proposals carefully – Always consider what might change in terms of your costs and timing. Base current proposals on current capabilities and costs. Detail all the elements by using price sheets.
For example, "We will provide XXXX, for $YYYY, assuming XX worker availability and labor rates of $ZZ per hour."
Then, when changes do occur, you have established a basis for adjusting your price. Always reconsider costs when asked to do repeat work. Many suppliers reduce profits or even take a loss by offering to do the same work at the same price as before, without considering what changes may have occurred that necessitate a price adjustment.
7. Avoid nibbles! – Often, customers make "minor" amendments or adjustments to a work agreement while work is in process.
Such changes can add time and/or other hidden costs to your project, which may reduce your profits. Always document those requests and, when appropriate, remember to adjust your pricing accordingly.
Another way that customers "nibble" is to take payment terms and credits that are unearned. Utilize payment terms as a negotiation tool when establishing new agreements.
8. Protect your value – Never cut your price without making it conditional, or making the customer give something in return.
If you do, it will diminish the value for the customer. Whenever you discuss an investment with a customer, make sure you think about what you will concede and what you will ask the customer to concede, if necessary. You need to think creatively. If the customer doesn’t like your price, can you repackage your proposal to include smaller quantities or a different means of delivering your product or service?
Marcia Gauger is the president of Impact Sales, a performance improvement and training company with offices in Wisconsin, Florida and Arkansas. You can contact her at 262-642-9610 or marciag@makinganimpact.com. Her column appears in every other issue of SBT.
