Management - Raise Prices and Keep Clients
How To Take A Tactful Approach
The best time to increase prices, really, is any time you need to. There's no perfect time. "Raise prices when it is warranted and justifiable," says Scott Gingold, principal of Greater Business Solutions. "In other words, it's when the distributor legitimately needs to raise prices due to increased fixed costs, such as electric, health insurance or rent. In turn, the distributor needs to carefully and thoroughly explain this to customers."
Here's a guide to raising prices without giving up the clients that you've worked so hard to get.
Sort Through Your Customer List
When it's time to increase prices, Mike Emoff, CEO of Shumsky (asi/326300), says distributors must carefully comb through their current accounts and decide who may be receptive to a hike and who might not be. "Do they have a lot of potential for growth? Am I their secondary or primary vendor? Am I their only vendor? All of these are factors I use that I recommend to all of us to determine which ones I want to take a risk on," he says.
Emoff thinks this is also an opportunity for distributors to dump some of their most difficult customers who use up too much of their time and hurt their bottom line. "Everyone's got them, and I think now is a good time to raise prices on that customer, because one of two things is going to happen: They're going to pay you more, or they're going to go away," he says. "Give them the option of staying with you at a higher price, or self-select out. Either one benefits you."
With your remaining clients, Emoff recommends going through them one by one to determine which are most likely to remain loyal even after a price increase. "You can sort by the easiest – the relationship's strong, they like you, it's not going to rock the boat – and then you can look at the other ones that are higher-risk," he says.
Detail Your Explanation
Once you add up the increased costs to your company – including utilities, insurance, taxes and anything else that comes into play – Gingold suggests putting together a one-page explanatory document. Prepare to share it with each customer that will be affected to help them understand that the increases are not arbitrary.
"I wouldn't bring my accounting books in, but I would create a simple, one-page spreadsheet," Gingold says. "Don't leave it with them, because you don't want it ending up in the hands of your competitors. You could even laminate it so it's clear you're not giving it to them. But at least you're showing them what the increases are."
Be Direct & Honest
They aren't conversations that business owners look forward to, but if possible, Gingold strongly recommends conducting in-person meetings with clients to explain why their rates are going up.
"The verbiage is really pretty simple," according to Gingold. "Say, ‘The last thing I want to do is sit here today and talk about a price increase. Frankly, I'd rather talk about growth, I'd rather talk about new opportunities, and I'd rather talk about how we can work together more closely. However, due to forces out of my control, I'm forced to sit here today and tell you what I'm up against, and how we can find solutions together.' "
Gingold suggests talking about any financial sacrifices that you've had to make in order to build a rapport with the client. "Every business owner is making sacrifices, meaning they're not drawing the same pay they once were or they're not taking a vacation," he says. "They're reinvesting in their business. Or, maybe they need to buy new equipment for the business."
But if you discuss business upgrades, make sure they're pertinent to the client's situation. "The customer doesn't want to hear, ‘I just bought myself a $900 chair,' " Gingold says. "They want to know you bought a new piece of equipment that will manufacture things better for them."
Let Customers be Solution Providers
One of the best ways to keep your customers happy – and get some free advice while you're at it – is to ask for their financial expertise. "Longtime customers should be part of the solution," Gingold says. "In other words, when explaining the need for an increase, also seek counsel and suggestions on how to seek alternatives to defray costs such as different insurance suppliers, telephone services and IT providers."
Gingold thinks this can be a pretty simple conversation. "Let's say I've been a distributor for two years, and I'm dealing with Joe, who's been in business for two or three generations," he says. "It's not a bad thing to go to Joe and say, ‘Listen, I have to talk to you about a rate increase. I'm facing these increases with my electric, with my insurance and with my building. You've been in business an awfully long time. Do you have any secrets or wisdom I can use?' Now, you've gained the guy's sympathy and told him that you respect and appreciate his wisdom, and you've legitimately sought out free advice. So, it becomes more of a partnership or a team."
Think Margin Over Price
For those customers who you believe may bolt if you even hint at a price hike, Emoff says there's still a way to increase your margins with them. For one, you can begin offering products that aren't found anywhere else.
"I've done this before: If I'm looking at my margins and realizing that a particular client is a little bit lower than other clients, and I need to get my margin up because the costs are too high to operate my business, I will develop custom products that they can't price out in the open market," Emoff says. "You can start shifting clients from stock products to custom products, and then you can't be priced out."
Another avenue, according to Emoff, is to upsell a complementary product at a higher margin. "Say they're buying a hat at a lower margin. Say, ‘Thank you for the order of hats. I'd like to also sell you these scarves,' and upsell them at a higher margin," Emoff says. "Whatever it may be, the add-on product can oftentimes be at a much higher margin than the product that they think is a core item."
You can also add value through enhanced packaging for low-margin, high-commodity items, like coffee mugs. "The mug is 99 cents, and the margin on that is low because you've got to go low to remain competitive," Emoff says. "You can put it in a really cool box, and the margin of the box could be 50%. Because it's creative, it's going to add some value, I believe, to the client."
Finally, Emoff notes that many companies are beginning to charge for services that used to be included in the overall price of an order. "If you have a receiving process in which you deliver by hand, you can charge a surcharge per job for that," he says. "Many organizations do that, and that's another way you can get higher margins without getting into the pricing game on a per-product basis."