Passing on costs

Here’s when and how you can adjust prices for your work
By Marcia Gauger, for SBT
Question: I am finding travel more difficult these days. Fewer airline connections have meant that I have a lot more time invested in traveling for the same amount of billable work. Do you think it is right to pass that added expense on to my customer?
Answer: Tighter travel requirements have changed business conditions for many. However, remember that your customers are in the same boat. I’m a firm believer that once you set a price for a particular assignment, sale or project, you should stick to it. That doesn’t mean that you shouldn’t adjust prices for future work, however.
Before you make any price adjustments, consider ways that you could capitalize on the added time and make it valuable for your customer as well. For example, on a recent training assignment, our facilitators were forced to spend a “dead day” on the road because of the way the training was scheduled. The client agreed to reimburse our people for development work and for grading assignments during that time, which helped them and us.
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. Justify your request – Make sure you let the customer know why you are making the adjustment and what that means to the customer’s firm. When increases occur that are beyond your control, negotiate a new agreement with your customer. Keep in mind that most customers want you to be successful. If you present legitimate reasoning, your customer is more likely to agree to a price adjustment than if you simply send a bill for more than the original agreement.
2. 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 on your equipment if the client commits to a contract increase for a year.
3. 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.
4. Set your pricing policies in advance – When you present a proposal to a new client, state that the pricing is for a particular timeframe or specific project and that it will be reviewed in a given timeframe.
5. 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.
6. Communicate to avoid misunderstandings – Price disputes after the fact are almost always the result of misunderstandings. A good way to avoid misunderstandings is to carefully detail your quotation, and review it carefully with your customer before work begins. If there are variables that you can’t detail initially in a quotation, always provide an approximate range – i.e. “Air travel to be billed as actual – for recent similar projects, air travel expense has varied from $500 to $1000 per trip.” Set customer expectations early – that way you avoid the need for unpleasant price increase announcements.
7. 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.
8. Plan for give and take – 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.
November 9, 2001 Small Business Times, Milwaukee