The Federal Open Market Committee released their most recent inflation forecast for 2017 and beyond. And while inflation remains historically low, it’s also on the rise, with 1.9% projected in 2017 and 2% for 2018. We have already seen raw material inflation edging up the costs of metal, rubber and other industrial commodities. To quote a recent Bloomberg article, these prices have been “on a tear” since the second half of 2016.
When you run a business, talk of inflation typically translates into fear and angst. Here’s how we suggest you prepare for what’s coming…
1. Act Timely
Most companies experience a lag between when their material costs increase and when they pass those increases onto their customers. Purchasing sees the inflation first, yet months can go by before the systems, knowledge and tools are in place to increase your prices. Costing methodology, accounting systems, and poor communication all can mask cost increases. The result? When you realize it’s time to adjust prices, you’re already operating at a deficit; you’ve spend months paying more for materials and absorbing those costs.
Successful companies have no lag (and push back on suppliers). You want to assess now how you will make price changes happen:
- Be proactive and transparent at the executive level.
- Have regular communications between operations, marketing/commercial and even IT teams.
- Gauge where you stand — both from an operations standpoint and emotional one. Are your systems ready? Is your team mentally prepared to communicate price changes? How much practice do they need to have pricing conversations? What fears do you need to overcome?
2. Engage Internally
Being transparent means being upfront about raw material cost increases, especially with your sales team. No one likes change, so lay the groundwork for what’s coming. When was the last time you increased your prices? Even if your company has historically raised prices annually, you may need to deviate and raise gradually at more frequent intervals.
- Educate your sales team on the how and why behind a price change before it happens (and once again when it does). Give them knowledge and insight, so they become proficient and confident when communicating these changes to your customers.
- Having these conversations is a skill that needs practice. Conduct real-word training — even using your procurement team to play the customer — complete with sales scripts and role playing exercises that take your team through customer objections. A practiced, informed, and confident sales team is a successful one.
3. Communicate Externally
Part of preparing your sales team includes crafting the messages they’ll convey to your customers. Create a toolkit of customer-specific communications to help lay the groundwork for the call. When we do this for our clients, it typically includes:
- An initial customer letter and follow up communications (emails, letters, etc.)
- Talking points
- Frequently asked questions
- Sales scripts
- Customer-product specific reports showing the effect of pricing actions
The last of these tools is one of the most important, yet it is also often overlooked. You need to drill down with each customer, assessing variables like contracts and negotiated deals. The more targeted and specific you are, the better results you’ll realize.
4. Incentivize Your Team
Your sales team is in the business of getting business and nurturing relationships, and having to communicate a price change can cause concerns. Your sales folks are likely wondering: how will this impact my volume (and my commission)? When you reward your team for overcoming these fears, everyone benefits. Your team will retain their customer base and your customers will value your candor.
Consider implementing incentives that recognize a sales person’s skill at having these difficult conversations and negotiating through them. For example, an incentive on volume alone could be counterproductive. Align incentives with a successful implementation of a price increase, such as a percentage target reached, special bonus, or other positive metric. Ask yourself: what should we implement to encourage our team to do the right thing?
5. Have a Plan and Measure Against It
When we work with a client on a pricing strategy, we start with a very detailed and focused project plan. We map out all of the above variables and drill down to the customer-product level from modeling a differentiated price increase to customer-product increase realization plan.
Being this specific can feel daunting, but it’s critical to maximize what you get out of your price increase — and to overcome the raw material increases you’ll likely encounter. When you force yourself to plan at the customer-product level, you have a clear understanding of what you need to do, when you need to do it, and a way to measure your success.
The Bottom Line