We’re being squeezed right now ! How should we handle the price increase of our raw materials?
Denys, for the last few months, we’ve had many, if not all of our suppliers come at us with price increases. We are an organic/natural paint manufacturer, selling mainly in B2B and we’re positioned mid to upper market. Thanks to our position, we’ve been enjoying a correct margin, and we thought we could simply slightly reduce our margin. But we can’t absorb these costs increases anymore, and we need to increase our retail prices, too. How should we do it? We used to set our prices at a premium compared to conventional paint because of the additional customer benefits (better indoor air quality and less harmful chemicals for the environment).
Your pricing approach seems to be pretty much value-based. Although I find value-based pricing generally superior, especially for products with good differentiation, I think you should always check competitors’ prices, do your cost-plus pricing, and integrate these into your pricing.
Here is my 7-steps guide to make sure you cover all important elements
STEP 1 Now is a good moment to talk to your customers and recheck the benefits you deliver vs the costs you incur. Maybe some of your paint’s components could be changed for a (near) similar customer benefit but at a lower cost. Still, think broader than just product. You also provide advice, different ordering possibilities, payment terms and delivery options, … All of these should add value for your customers. If not, drop them.
STEP 2 Can you combine the price increase with some new customer benefits? This helps make the transition smoother. Bring a small change to your offering which brings additional value at a small additional cost.
STEP 3 Customers have a certain willingness to pay. It is based on the benefits they perceive, how much they value these, their available budget, etc… But willingness to pay do not exist in a vacuum as customers compare your offer vs other solutions. So check competitors’ price evolution as well.
STEP 4 If you decide to implement a price increase, announce it early on so your loyal and B2B customers are not taken by surprise. For loyal customers, maybe give them a “protection period” during which they won’t be charged the higher price. Explain why you need to raise your price.
STEP 5 Did you keep prices stable for a period of time? Remind them of this, too.
STEP 6 By announcing it publicly, chances are high that your competitors will hear about it, too. They are most probably suffering from the same conditions on the supply-side. Knowing that you will increase your prices will give them more room to respond, and one of their responses might also be a price increase.
STEP 7 Finally, everybody now is talking about price increases. A day doesn’t go by where you don’t read about the increase in raw material prices and inflation. In this context, setting higher prices will face less resistance since the general expectation is that prices will increase.
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