Price increases are a fairly controllable tactic for Finance teams looking to improve profitability. Ultimately, price increase strategy can come in several forms (e.g., adjusting rebates or cost to serve) and may only apply to select customers.
After collaborating with leadership, sales, and marketing teams to select the specific product/solution(s) for which to raise pricing, several factors should first be considered before planning to implement.
Initial Considerations for Price Increases
At the onset of exploring price increases, a Finance team should consider:
The macroeconomic and competitive landscape should be stable if a price increase is being proposed. If macroeconomic conditions are challenging or competitors are noticeably cutting pricing on competitive solutions or products, the timing may not be best for a price increase unless the solution or product in question is deemed to be insulated by its premium or unique positioning.
If possible, market research should be engaged early on to ascertain what the elasticity implications are from proposed price increases against both static and dynamic competitive scenarios. A beneficial result (i.e., expected higher revenues and profit) across most potential outcomes can help build internal support/buy-in for the price increase strategy.
Special Channel/Customer Considerations
Unless the business in question is direct-to-consumer, certain channels and customers may have leverage to push back on proposed (end-user) price increases. While all channels will likely be wary of potentially lower sell-through from price increases, some may be successful or justified in stressing their strategic position (i.e., % of sell-through, exclusivity, etc.).
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Price Increase Strategy Implementation Recommendations
Once the above considerations are addressed, the following steps are recommended for implementation of price increases:
Collect and break down available net pricing data to see what controllable sales and marketing tools by specific customer can be affecting net pricing by unit that flows through to revenue such as:
- Customer/Channel Mix – proportion of transactions by customer and channel type
- Geographic Location – proportion of transactions for specific geographies or delivery routes
- Product Mix/Assortment – Mix of product portfolio offered by a specific customer
- Channel Margins – markup to end-user price that is offered
- Rebate Levels – reduction to end-user prices
- Co-op Marketing – spend to advertise product/solution within a specific customer
- Bonus Product/Samples – value of free or trial products
- Marketing Collateral – Branded materials provided to customer to promote awareness
- Shipping/Handling or Freight Fees – Expenses related to delivering product
Address Low-Hanging Fruit
After reviewing the data and grouping net pricing by dimensions such as customer, channel type, and geography, easier opportunities to adjust sales and marketing tools should present themselves, such as:
- Small or non-strategic customers receiving unjustified levels of channel margin, rebates, co-op marketing, or marketing collateral
- Geographic price discrepancies which can be leveled if not justified by known market realities
- Customers/channels that receive higher levels of support from these sales tools should be justified by factors such as profitability or market share
Those situations not meeting justifiable criteria should have their support levels adjusted (i.e., lower rebates). After addressing these more straightforward issues, efforts should continue in areas that require more coordinated tasks.
Optimize Product Mix (If Multiple Products/Solutions)
If analyzed properly, the transaction data can illustrate what the optimal product mix by customer type or geography can be. It should be understood that all customers won’t purchase the most profitable product/solution mix. With that said, working with your sales team, opportunities should exist to improve the profitability of the product mix which works with market realities. Pushback from both the sales team and customer is possible, as resistance to change is common, but a collaborative approach should yield incremental profitability.
Optimize Customer/Channel Mix Based on Cost-to-Serve
While putting a product or solution on all physical or virtual shelves seems like the best way to capture all potential sales opportunities, analysis of transaction data can shed some additional light. Some customers and channels can have high costs-to-serve that ultimately make them less profitable. Factors such as high expedited shipping instances, return volumes, co-op marketing needs, or specialized packaging are examples of cost-to-serve components that may not be justifiable for all customers. The sales team should be informed of what appropriate levels of costs-to-serve are based on data insights.
Optimize Sales & Marketing Tools Utilized With Customers/Channels
While sales teams have all the aforementioned tools available to offer customers to drive sales, not all tools have to be made available to all customers. Analyzing the data properly should allow Finance, Sales, and Marketing teams to see, for example, that a certain channel type like e-commerce is more profitable with higher levels of rebates, but not co-op marketing. Not all situations can be changed but some changes should provide incremental profitability.
Adjusting Sales Team Incentives
The sales team is a key stakeholder in price increase implementation. In order for them to be motivated to implement these changes with customers and channels, their incentives, such as commissions and compensation, should be adjusted to related to the product and channel mix changes. If approved by leadership, consultation with Human Resources to effect this change correctly is needed.
Bringing in Pricing Experts
If you’re looking for help with pricing optimization, or if you’re thinking about bringing in financial consultants, then contact us at 8020 Consulting! We offer outside expertise with industry best practices and would be happy to help you define your needs and offer advice on next steps.
For more insight into this financial planning & analysis discipline, you can download our related infographic. It offers a clean and printable format that makes it a handy resource as you explore and implement price changes:
About the Author
Marco has more than 17 years of Finance and Consulting experience. His work spans various industries including technology, entertainment, telecommunications, consumer products, financial services, and healthcare. Marco has expertise in Financial Planning & Analysis (budgeting, forecasting, and reporting), Strategic Planning, project management, financial modeling, merger integration and valuation. Prior to joining 8020 Consulting, Marco held Finance and Strategy positions at Epson America and also worked for various firms including Deloitte Consulting, Paramount Pictures, Grupo Modelo, Cricket Communications, UBS, and Goldman Sachs. Marco holds a B.A. in Economics from Brandeis University, and an MBA from the UCLA Anderson School of Management.
Categorized in: Financial Planning & Analysis