Price increases should be planned and implemented strategically

Although our clients at Deloitte operate in so many different industries, here are four of the most common pitfalls we see when implementing price increases:

• Using cost inflation as THE benchmark: Some companies use their largest raw material cost to determine the size of any price increase without considering whether this input will govern long-term profitability. 
  
• Passing broad-brush price increases: In some cases, we see price increases being made in a broad-brush manner, i.e. same/similar across all products and customers; the reality is that in most cases some products are more able to sustain higher prices than others. 
  
• Failing to communicate appropriately: The mere idea of price increase often creates nervousness and push-back from sales departments; yet when positioned properly, customers often accept (and even expect!) price increases. 
  
• And finally, losing momentum over time: Limited effort on tracking and measurement often leads to leakage through discounts and promotions over time – something we see over and over again.
  

Navigating the challenges with pricing actions 
Although the circumstances are difficult, the current economic climate also presents opportunities for companies to capitalise on the new dynamics present in the marketplace. But it takes time and preparation to effectively implement a price increase. 

So, what separates success from failure? Here are four lessons from companies that have successfully raised prices on the back of these turbulent market conditions:

1. Correct the less-than-optimal commercial decisions made in the past: In a buyers’ market, many companies have historically traded profitability to meet sales goals. The current situation calls for taking a step back and re-evaluating this trade-off, including taking a detailed look at low profitability transactions, volume discounts, frequent small orders, unproductive rebates, free packaging and free shipping.
2. Be structured and targeted in your price increases: Passing on broad-brush price increases to protect margins is the norm in many companies. However, in many cases these increases get diluted over time through discounting and promotional activities. Instead, an effective strategy leverages the differences in products, channels and customers to drive targeted price increases. To do this, you have to clearly understand your product’s value proposition compared to competitors’, as well as price sensitivity. Price increase strategies that are built on a granular and well segmented understanding of product and customer typically result in higher actual price realization and customer retention, sometimes even supporting a targeted volume growth. 
   
3. Communicate effectively, both internally and externally: Given the range of potential market reactions, it’s no wonder that sales teams tend to treat price increases with care. By nature, humans tend to feel more strongly about losses than they do about gains, and businesses worry that by raising prices they will lose customers. And there are many examples of price increases gone wrong. Customers may not want to receive price increases, but in the current environment, they expect to receive them. And price increases are only effective when executed by a sales team that understands, accepts the reason, internalizes the change, and is equipped with the right information. 
   
4. Re-think your commercial positioning: Both the pandemic and now the war in Ukraine have created deep and far-reaching impact on what customers value and how they live their lives. Now is the time to understand how customer needs have shifted and use all of the tactics that you have in your commercial strategy to re-think your brand, positioning, and packaging strategy and tactics in the market. Also, consider whether cost increases can be passed through using non-price mechanisms, for example offering lower-cost options to price-sensitive customers, incentivizing low-cost behaviours (such as online ordering) or piloting innovative pricing and contracting models that align your pricing structure with customers’ value drivers.
   

The time to plan for price increases is now 
Few people expected the war in Ukraine, which means that the extremely high levels of inflation has caught many companies off-guard. However, with some forethought and care, price increases can be managed effectively, strategically and profitably. Yes, it takes courage to raise prices, especially when markets are unstable, and the economy is still in recovery mode. However, many companies haver managed to do exactly that, and with positive results.