Seven Keys to Successfully Increasing Prices in 2021
Prices are going up across many industries in 2021. In consumer markets, Proctor & Gamble, General Mills, Campbells Soup, Hormel Foods, J.M. Smucker, Kimberly-Clark, and many other companies have recently announced price increases. In business markets, from chemical firms like Sonoco to Beckers Group, U.S. Silica, and Pinnacle Resources, to many others across multiple industrial sectors are announcing or driving price increases.
Historical experience would indicate that most of these price increases will not be realized. Fortunately, we don’t live in the past. We live in the now. Today, inflation across multiple sectors looks real.
While Costco is sticking to its strategy of offering rotisserie chicken at $4.99 despite the dramatic increase of chicken prices, and Dollar Tree is still selling items largely for $1, most companies realize a need for a price change.
So, if you are considering a price increase today, which you likely are, here are the seven key factors for enabling a price increase to succeed.
1. Specify the key success factor for your business.
The centerpiece of most company’s valuation and business strategy is a focus on market share, revenue, or profits. For price optimization, one can have one or the other as the target, but no two will lead to the same set of decisions.
The aggression and thoroughness at which your company will pursue a price increase is contingent on understanding the orientation of your company. Make sure you specify, in words, which factor is the dominant goal for your company.
Of course, executives often want all three, but one will dominate their strategy and actions.
2. Quantify the portion of business you expect to keep after a price increase.
Acknowledge that not all customers will accept a price increase. Quantify how much business you can lose and still come out ahead with the price increase. Then, estimate the business that is really at risk.
In a few but very large business sectors, companies can use measures of elasticity to estimate the impact of a price change. In many other sectors, elasticity metrics are questionable at best. In these sectors, estimate which customers will accept a price increase and which will move to a competitor or leave the market.
Of course, no customer wants to see higher prices, and all are likely to resist at some level. But protestations from customers are different from brand-betrayal actions. Despite loud cries of protest against price increases, customers often accept them in the end.
The point of these inquiries is to clarify the expectations and your company’s ability to weather any customer loss. This will build resolve around the price increase and generate quantitative early success criteria for your actions.
3. Drive price increases at the offering level.
While recent reports indicate an average price increase of 5% is forecasted for 2021, the variation between sectors is huge. Prices in some sectors have risen by more than 50% in the first half of 2021 alone. Meanwhile, other sectors are experiencing little to no price increases.
For example, Proctor & Gamble planned price increases of 7% in Beauty, 7% in Fabric & Home, 4% in Grooming, 3% in Healthcare, and -1% in Baby, Feminine, & Family care to yield an overall average price increase of 4%.
And it isn’t just the sector level which should be considered, but rather the individual product. Differentiated products may be able to absorb a price increase more easily than undifferentiated offerings.
Define the price increase goals not at the broad level, but at the individual offering level. Here, you are more likely to be able to identify an overall more successful strategy even though not all offerings will have the same price increase.
4. Announce your price increase early and often.
Customers, shareholders, and yes, even competitors need to know of your price increase. Use the opportunity when speaking to media, making press releases, sending customer emails, or even when appearing at industry conferences that prices are increasing in response to the changing cost and market requirements.
This does three things. One, it informs shareholder expectations regarding performance guidance and strategy, all of which materially impact stock prices. Two, it informs customer expectations regarding their costs going forward. And three, it signals to competitors the opportunity to follow with their own price increases.
5. Look for followers.
If your company is looking to increase prices in response to input cost increases, it is highly likely your competitors are as well. Watch them and listen closely. Are they raising prices too?
The success of your price increase is contingent on both your customer relationships and the actions of competitors. When prices are increasing across the industry, the likelihood of successfully increasing prices without losing market share and revenue is much higher.
If competitors are not raising prices, you may need retrench and then announce the price increase again while outlining the need to maintain a healthy industry. Price increases do not always succeed on the first attempt. Be prepared to try again in testing the market for a sustainable path.
6. Launch a flanker offering.
Not all customers can absorb a price increase. Some may be forced to exit the market or search for a lower cost alternative. (Remember the Costco rotisserie chicken and Dollar Tree examples.)
If possible, launch a lower-price and lower-cost-to-produce offering to enable customers to downgrade. This will enable a price increase on your mid-to-premium offerings while stemming potential customer relationship losses with a more affordable but still profitable offering.
This is where reduced package size offering, fewer options, or other strategies to build a Good-Better-Best-Super Best versioning strategy will really pay off.
7. Measure and reinforce.
Once the price increase has been announced and put into the market, measure outcomes and reinforce the decisions.
If you have completed step 2, quantifying the portion of business you expect to keep after a price increase, then you are in a position of measuring outcomes to know if you are succeeding or failing.
Anecdotal evidence is very likely to be about customer complaints regarding pricing. Quantitative measurements reveal whether the cries of a few customers represent the trend of the customer base.
If you succeeded, look for opportunities to take a second price increase. If you are not performing as expected, detect the root challenge and course correct quickly.
The opportunity to increase prices will not last long and the competitive landscape will continue to evolve. Taking reasoned action today will increase the likelihood that your company will remain competitive tomorrow.