Podcast Ep 148 | We need to increase pricing but the sales team is resisting. What should I do?

Price increas­es are a bit of a dirty word in busi­ness — and they have become a crit­i­cal suc­cess fac­tor for com­pa­nies in 2023 with incred­i­bly high price infla­tion affect­ing input costs;

• Endur­ing com­pa­nies that have been around for many decades have mas­tered this dis­ci­pline, where­as new­er com­pa­nies have not nec­es­sar­i­ly had to learn this les­son yet, and it hurts.
• Big, expe­ri­enced com­pa­nies were mak­ing price increas­es fast and ear­ly — and prof­it­ing from it;
• Small­er, nicer com­pa­nies wait­ed, thought about it, and many paid a seri­ous price with their mar­gins shirk­ing and tier bot­tom line fad­ing too.

Prac­ti­cal­ly many busi­ness­es must increase pric­ing at some point, and peo­ple don’t nec­es­sar­i­ly like to do it — espe­cial­ly the sales team who deal with cus­tomers all the time.

In this episode, we talk about the method of price increas­es, why it mat­ters and some of the best ways to do it in your business.

EPISODE TRAN­SCRIPT

Please note that this episode was tran­scribed using an AI appli­ca­tion and may not be 100% gram­mat­i­cal­ly cor­rect – but it will still allow you to scan the episode for key content.

Brad Giles 00:13

Hi, wel­come to the growth whis­pers where every­thing we talk about is build­ing endur­ing great com­pa­nies. My name is Brad Giles. And as always, I’m joined today by my co host, Kevin Lawrence. Good day, Kevin, you’re look­ing good. I hope that you’re doing good.

Kevin Lawrence 00:27

I am doing good. Life is good life is life is grand.

Brad Giles 00:30

Excel­lent, excel­lent. We like to start things off always with a word or phrase of the day, what might be your word or phrase of the day.

Kevin Lawrence 00:39

Mine is con­nect­ed adven­tures. And it’s one of my mantras in my life is there’s noth­ing like adven­tures with peo­ple you love to be con­nect­ed with. And with that con­nec­tion, you do you go have great expe­ri­ences. And you know, the high­lights of my life are just great expe­ri­ences with peo­ple I care about so con­nect­ed adven­tures, and I think life is this great big grand adven­ture. And there’s the con­nec­tion you have with the peo­ple at work, the con­nec­tion you have with friends con­nec­tion with your part­ner con­nec­tion with your fam­i­ly, just con­nect­ed when he had to make those con­nec­tions, and then have adven­tures togeth­er. I don’t know. I don’t think it gets bet­ter than that.

Brad Giles 01:20

Well, mine is not what you think it’s going to be. It’s a phrase I’ve used a few times before. And I was remind­ed of only recent­ly by some­one I know, replace busy with stu­pid. So yes, I’m run­ning very, I’m very busy at the moment could become I’m very stu­pid at the moment. And that leads to Stephen Cov­ey’s quad­rant to some­thing that we recent­ly did an episode about.

Kevin Lawrence 01:46

But what if you’re real­ly busy with a lot of awe­some high impact things?

Brad Giles 01:52

Let’s not let’s not com­pli­cate things, like

Kevin Lawrence 01:55

just look­ing sor­ry. I’ll just stay stu­pid. I’ll just stay stu­pid and not quite.

Brad Giles 02:01

Not well. No, just because there’s I know inter­est­ing way to be orga­nized. For sure.

Kevin Lawrence 02:07

And I would just say that I am hyper orga­nized, and very busy. But my life is full of rich­ness at work, and full of rich­ness in my life. I don’t think it could be any bet­ter. But I know what you’re say­ing. You’re say­ing some­thing dif­fer­ent than that. Yeah. It’s being busy with triv­ial things and you know, not things when you’re going moment to moment. Lov­ing what you’re doing.

Brad Giles 02:33

Yep, yeah. Okay, so I’m not even going to give you the chance to try stitch those two togeth­er. But what I am going to say is talk­ing about an inter­est­ing sub­ject today. Yes, when we were throw­ing ideas around, I just threw my head back and laughed when you said this one, right. We need to increase pric­ing. But the sales team is resist­ing. What should I do?

Kevin Lawrence 02:57

Yeah, that nev­er hap­pens. That nev­er hap­pens. Espe­cial­ly when there’s mas­sive infla­tion was it well there still is infla­tion Yes.

Brad Giles 03:08

Oh, yeah. Like infla­tion wage pres­sures prob­lems all over right. We you know, sup­ply chain issues. You know, in Aus­tralia, we’ve got a we’ve got a short­age of French fries. You can actu­al­ly order french fries as a main for June you get Span­ish fries. Night. We don’t know what they are. But you can order you can order them on the side. Right. What is this? Like? You get a steak with chips. Yeah, fries? Yeah. So sup­ply chain issues any­way, like, a lit­tle hole there. Yeah. But it can be a bit of a dirty word. Kin­da. It’s hard.

Kevin Lawrence 03:42

And the truth is, yeah, price increas­es is a dirty word for a lot of peo­ple yet, in 2022, it was a crit­i­cal suc­cess fac­tor. And even I mean, it always is, but it was ampli­fied in 2022. And the amount of dif­fer­ent com­pa­nies that we heard say­ing, Yeah, I know, we got to increase prices. You know, I’m not sure what the cus­tomers are blah, blah, blah. But the sales team, the inter­nal push­back was often the biggest obsta­cle a lot of peo­ple had, except for com­pa­nies that have been around 3040 50 years and were endur­ing, you know, the real pro endur­ing com­pa­nies. They mas­tered this decades ago. It’s just kind of like brush­ing their teeth. Of course, you do a price increase annu­al­ly, or even quar­ter­ly it’s a nor­mal dis­ci­pline. Yeah, for most busi­ness­es, but for a lot of com­pa­nies in the small to mid mar­ket. They don’t have that dis­ci­pline yet. They haven’t had to. And of course, if you don’t have the dis­ci­pline, and you don’t have the reps doing it and the expe­ri­ence doing it, and did­n’t do it ear­ly, it costs you dear­ly. It’s an hour. It is ama­teur hour and the nice guys and a nice com­pa­nies and the thought­ful com­pa­nies, they basi­cal­ly gave up their mar­gins and a chunk of their bot­tom line, because they’re play­ing with the big boys and big girls. And, and, and, you know, their input costs were going up, you know, if you’re buy­ing sup­plies from, you know, the big com­pa­nies like Bay­er and Mon­san­to and, and all the big they’re, they’re increas­ing it. So it’s so basi­cal­ly it’s a real hard­core dis­ci­pline in busi­ness but only busi­ness­es have been around a while have been good at this. And in those places that don’t have the dis­ci­pline, the sales team resist like crazy because they’re not trained and used to it and we’ll get into that more. But you know, I want to share an exam­ple to start with, and this to maybe to kind of kick it off. But this is, you know, I worked about a decade ago with a com­pa­ny in the plas­tics busi­ness, the inter­est­ing when I was a kid, one of my high school jobs or post high school was work­ing in a plas­tics fac­to­ry, which I learned a lot about what I did­n’t want to do. But I learned some inter­est­ing things there. But basi­cal­ly, plas­tic prices are fair­ly direct­ly con­nect­ed to the price of oil, right? Because plas­tic comes from oil. And I worked at the plas­tics com­pa­ny. And we were more of a nice guy com­pa­ny. But we bought from the big, big, big con­glom­er­ates who sup­plied plas­tic around the world. And our prices have our input cost of plas­tic, which was a huge por­tion of the cost would vary a lit­tle bit, but we went through a time when oil spiked. And so our input cost almost dou­bled. But because of the way our con­tracts were done, and the sales­peo­ple in the rela­tion­ships they had, we did­n’t push it through quick­ly. And it real­ly destroyed the mar­gins and the prof­itabil­i­ty of the com­pa­ny. But the thing is, the sup­pli­ers weren’t tak­ing any hits, they were push­ing that cost to us, we had price increas­es like month­ly at that point from them, and they had a sys­tem and we went back and read the fine print in the con­tract. And it made it very clear that based on changes in oil prices, which led to the com­mod­i­ty price change, they could make price increas­es on a month­ly basis. And we could take them or walk away and try and find some raw mate­r­i­al some­where else. We had no choice. They were very smart. It was prob­a­bly writ­ten into the con­tracts 50 years ago. So they had it and you know, we had to get real­ly, real­ly good. And with that com­pa­ny, we had to retrain the sales­peo­ple, we had to add, cen­tral­ize the pric­ing deci­sion under the CFO, who in that case, we met his respon­si­bil­i­ty. And there became a pric­ing com­mit­tee that looked at this stuff every sin­gle month. And we will look at the future prices of the com­mod­i­ty we had a whole sys­tem that we had to build because we nev­er had to deal with that before.

Brad Giles 08:02

Ama­teur hour.

Kevin Lawrence 08:03

Yeah, we went from ama­teur hour to semi pro Yeah, in a six month peri­od, after it almost cost us the business.

Brad Giles 08:10

And then you know what prob­a­bly the prof­itabil­i­ty became more consistent.

Kevin Lawrence 08:16

Of course it did, because we built mech­a­nism, we rewrote our con­tracts with the cus­tomers now it took a while so that we could pass on those price increas­es. And we learned a few things from the big com­pa­nies we bought from is we would increase the price quick when prices went up. But we would decrease it slow when the prices fell again. Yeah, but that takes years to rewrite all the con­tracts and rene­go­ti­ate those terms. Like, you know, it’s almost like a full upgrade of your ERP. It’s a full upgrad­ing of your pric­ing sys­tem, because it weaves through­out the entire busi­ness. So the point of it is, look, we’re not judg­ing peo­ple who real­ly got ham­mered because they could­n’t increase their prices appro­pri­ate­ly. And we know peo­ple did, and that’s unfor­tu­nate. But there’s some things to learn from this. And one, it’s a hard core dis­ci­pline pric­ing. To some­one needs to own it. And it’s not sales. Sales job is to build rela­tion­ships and exe­cute the strat­e­gy in the mar­ket. Pric­ing is part of strat­e­gy and result.

Brad Giles 09:26

And sor­ry, Kev. The cus­tomers will always com­plain about price

Kevin Lawrence 09:31

that they’re sup­posed to. That’s their job.

Brad Giles 09:37

don’t be sur­prised when you own a tiger and a baits like Yes, don’t be sur­prised when cus­tomers com­plain about price increas­es, but it needs to be a func­tion with­in the organization.

Kevin Lawrence 09:53

It is and of course the cus­tomer is going to resist and of course like I don’t blame, say at num­ber 23 I Of course, sales teams resist, I don’t blame them, I would if I was a sales­per­son, because it cre­ates fric­tion, it’s hard on the rela­tion­ships and makes it hard­er for them to achieve their goals. Most of the times cus­tomers go with it most. It just cre­ates nego­ti­a­tion and work­ing and mas­sag­ing to make it hap­pen. And the final thing I want peo­ple to get, you got to make it an annu­al event. Like it needs to be a recur­ring cycle in your busi­ness. And if you’re a win­ery, it’s no dif­fer­ent when the when you pick the grapes, and then you bot­tle the grapes, right? It’s a rhythm, it’s a six a cycle, and it needs to be built in like the best com­pa­nies in the world do inter­est­ing. And this is a side note. A com­pa­ny that I that I know, an exec­u­tive with, and I’ll give too much details. But dur­ing the mas­sive infla­tion of 2022, they went to their cus­tomers and said, Hey, to a retail­er, you know, we’re gonna give you a 4% price increase, you know, and the retail­ers like, that’s not enough. The retail­er was expe­ri­enced been around decades and says it needs to be at least 10. It’s not that the retail­er want­ed to pay more, the retail­er knew that they were just going to pass it along any­ways. And they knew the real costs, and they knew the game that if they did­n’t get these price increas­es now and when they could, it would be hard­er to do. Yeah, lat­er. And so, you know, there’s so many exam­ples of, of get­ting this right and get­ting this wrong. But the main thing is, is break­ing down and hav­ing a sys­tem where there’s account­abil­i­ty out­side of the peo­ple who have to do the work.

Brad Giles 11:50

One of the ways things, yeah, you’re right, Kim, one of the worst things that you can do is let price increas­es be led by an absence of prof­itabil­i­ty. Okay, so we begin by say­ing, oh, last quar­ter, or the quar­ter before or last year, we did­n’t make the prof­it that we want­ed. What can we do about oh, we need to increase our prices. Okay. So there’s a team that I work with. And I remem­ber dis­tinct­ly that was the case and, and we got to a point where they were like, this was through the pan­dem­ic. And all of the price increas­es that occurred through there. And I was like, we’ve got to increase prices, we’ve got to increase prices, we got to be on top of this stuff. And I kept going on and on. So even­tu­al­ly, they were like, Alright, I think we could go for like a 6%. And we went into this, this rau­cous quar­ter­ly plan­ning ses­sion talk­ing about pric­ing, where we were say­ing, Look, six, and then we kind of went and I ate. And we final­ly we did like a bot­tom up analy­sis of the p&l where it was going, what are the major impacts and changes from pric­ing that we think are going to occur in the next year. So we land­ed on 10%. Okay, we’ve got dis­agree and com­mit around 10%. This is where we’re going, this is what we’re doing. Fast for­ward, a quar­ter lat­er, the sales team went out and pre­sent­ed it to the cus­tomers. And there’s a major multi­na­tion­al that this team com­petes with all the time. And they put their prices up 15 16%. And though, and so the cus­tomer was like, awe­some. We thought you were going to be going like 16, maybe even 20. Exact­ly. And they were just, they were just flab­ber­gast­ed. And I’m like, Look, you got­ta get more dis­ci­plined around this stuff. This is not some­thing that should be led by emo­tion. It should be led by Yes, when you will process.

Kevin Lawrence 13:39

And that’s why some­body needs to own it. Yeah. And nor­mal­ly the peo­ple that own this are peo­ple who are ana­lysts and peo­ple who have, who can do strate­gies, and some­times do sen­si­tiv­i­ty analy­sis and things of, well, what hap­pens if 10% of our cus­tomers leave? Well, if we if we raise our prices, 6%, and nobody leaves, but we raise at 12%, and 10% of our cus­tomers leave. In some mod­els, that can mean you make more prof­it. Yeah, like hav­ing cus­tomers leave can be good for your prof­itabil­i­ty. And obvi­ous­ly, it’s their strate­gies that’s not across the board. It’s nego­ti­at­ed. If it’s an aver­age of a 7% increase, some peo­ple should be get­ting a 22% increase. And maybe some peo­ple only need to get a four. But this is where the sci­ence of it and then analy­sis to know how to do it well, with the intent of doing the right things for your key cus­tomers. And then we had one com­pa­ny, we did a 50% price increase on a whole batch of our cus­tomers, because they were unprof­itable high main­te­nance pain in the butt. Now, at 50%. High­er it was worth it. But that is not a deci­sion that a sales­per­son could make that that inquiry required. an incred­i­ble amount of analy­sis to make it hap­pen. So one of our one of our clients,

Brad Giles 15:07

sor­ry, go, how many cus­tomers? Did they lose increas­ing by? 50%?

Kevin Lawrence 15:12

Not as near as many as they thought. I don’t remem­ber the exact num­ber. Yeah. But, you know, a nor­mal brain would think they would lose most. Those peo­ple did­n’t have an alter­na­tive. Yeah, because we were sell­ing it tru­ly below the real cost of build­ing it. No one else was dumb enough to to sell it that that cheap. Yeah. So do I think we did­n’t lose as much as we should have? I don’t remem­ber the exact but it was­n’t was­n’t as much as you would have. Nev­er is no, because also price isn’t always the most impor­tant thing. Now, pric­ing is impor­tant. And you’re deal­ing with big­ger com­pa­nies and things that can be so inter­est­ing. And one of the things that we did so, you know, gen­er­al­ly sales­peo­ple should not be mak­ing this deci­sion. It should be made by a cen­tral com­mit­tee. And, you know, it helps when sales­peo­ple are incen­tivized or paid based on gross mar­gin, but even then, they’re often still going to take a sale, rather than risk of not get­ting a sale at a high­er margin.

Brad Giles 16:08

Because sales­peo­ple who are com­pen­sat­ed with rev­enue only, like the sales bud­get only if that’s how they get a com­mis­sion. They’re, they’re incen­tivized against the busi­ness’s prof­itabil­i­ty correct.

Kevin Lawrence 16:20

And I was even talk­ing about ones that are incen­tivized, again, with gross mar­gin ones that are paid based on gross mar­gin, even there, some­times they’re still just want to take the deal, even though they might not make as much it. That’s why we need lead­er­ship. But one of my clients came up with the Green Deal cal­cu­la­tor. Because a lot of sales­peo­ple might not under­stand the pric­ing method, it can be very com­pli­cat­ed. So they took they found a very sim­ple cal­cu­la­tor with like an input for num­bers. And it would spit out when the deal was green, yel­low, or red, beau­ti­ful. If the if the deal was green, go ahead. That’s good, healthy, prof­itable pric­ing. If it was yel­low, they need­ed to mas­sage it more with­out talk­ing to any­one and, and if the green deals instant­ly approved, but yel­low and red deals, they had to talk to their man­ag­er and work on it and find a way. The main thing is, is they made it eas­i­er for peo­ple for sales­peo­ple to man­age pric­ing with­out get­ting into the real, deep, deep chal­lenges of it. But on the dark side, I want to share a sto­ry that you know, one of the com­pa­nies that I know of you it took him nine months to fig­ure out their price increas­es, and they kept talk­ing about it, which hap­pened to a lot of peo­ple in COVID. And the prob­lem is by the time they final­ly got around to it, the com­mod­i­ty that they were most con­nect­ed to it already start­ed to decline in price. So when real­ly they should have tak­en a 9% price increase to the mar­ket. And that would have been accu­rate and right. And because if com­mod­i­ty is accept­ed, thank you very much. But because by the time they went, it was already declin­ing, the win­dow was clos­ing and it made it so much hard­er. And it cost them on their mar­gins. We saw char­ter mar­gins, it was it was bru­tal. So the key thing here is a cou­ple of key points. Of course sales team will resist because you’re mak­ing our heart drop hard­er, and they’re sup­posed to con­nect us with the cus­tomer. But this is a strate­gic deci­sion not tac­ti­cal, it’s okay to frus­trate some of your non tac­ti­cal or non key cus­tomers, and even for the key ones to nego­ti­ate things and make it work. So first of all, they should­n’t be account­able for this gen­er­al­ly. But they should be con­sult­ed and involved. But their job is to exe­cute the strat­e­gy deci­sion. And ide­al­ly, it’s help­ful when they’re paid on gross mar­gin because they’d ben­e­fit from it. And espe­cial­ly if they’re if they’re not paid well on low mar­gin deals, con­tracts have to be allow­ing for this, you have to have con­tracts that allow flex­i­bil­i­ty, and antic­i­pate annu­al reviews. The oth­er piece is a strate­gic view of pric­ing, the pric­ing com­mit­tee, the pric­ing own­er with finan­cial mod­els and analy­sis to guide us. And you know, final­ly signed off by an exec­u­tive team often under the finance func­tion or a sep­a­rate func­tion. And then know­ing that that own­er­ship and where it sits, so it’s not debat­ed. And then final­ly some tools. There’s some won­der­ful tools out there I’m prais­ing this oh great books on pric­ing, and stud­ies around pric­ing. But even you know, there’s tools that can show you what a 1% price increase can do. Or one per­cent­age of gross mar­gin. It’s, it’s mag­i­cal, the impact that 1% can make and hav­ing tools to pro­vide sim­ple vis­i­bil­i­ty so peo­ple can under­stand it and make because peo­ple want to make good choic­es. It’s mak­ing it easy for So to sum­ma­rize, Brad, how would you say so? My sales team is resist­ing a price increase. What do I do? What is the answer? Put the price

Brad Giles 19:53

Just put the price up mate. Explain to the sales team that every year we are imple­ment­ing a sys­tem every year, every quar­ter, we will have a per­son or team who is not from the sales team, inter­nal or exter­nal to ana­lyze our pric­ing. And to to increase that. And this will become an ongo­ing sys­tem. Yes, this is poten­tial­ly one of the biggest impacts to your con­sis­tent prof­it that you can make.

Kevin Lawrence 20:29

Cor­rect. And in a sim­ple exam­ple, in our, you know, bou­tique firm with over a dozen of us, every Jan­u­ary, we do price increas­es, it’s writ­ten into our con­tracts, that after 18 months of work­ing with us, the price will increase con­sis­tent with infla­tion between two and 5% annu­al­ly. And it’s every year, it’s expect­ed. And every year we do it out. Some­times we make excep­tions, there could be a rea­son to make an excep­tion. But the thing is, it’s built into our upfront agree­ment for it to be expect­ed, because that’s nor­mal. Infla­tion is just a basic price increase. You’re not actu­al­ly increas­ing your prof­it. You’re sus­tain­ing it. And that’s why it’s so damn critical.

Brad Giles 21:13

Very good. Very good.

Kevin Lawrence 21:15

Awe­some. Well, hey, thanks for lis­ten­ing. This has been the growth whis­pers and today we’re talk­ing about mak­ing sure you con­tin­ue to grow your prof­its as you grow. I’m Kevin Lawrence in Van­cou­ver, Cana­da. This is Brad Giles and Perth, Aus­tralia. Just sub­scribe you know, you can go and sub­scribe to wher­ev­er you get your pod­casts or on YouTube, YouTube to search the growth whis­pers on YouTube and you’ll find us if you want to watch us on video. Brad’s got an awe­some week­ly newslet­ter he puts a lot of thought and resource into you can get that at evo​lu​tion​part​ners​.com​.au We also have a week­ly newslet­ter as well at Lawrence​and​co​.com. But we have an awe­some week and hop­ing that you respect your­self and the val­ue you cre­ate for your cus­tomers by con­tin­u­al­ly increas­ing your prices appro­pri­ate­ly, respect­ful­ly, con­sis­tent­ly. Have an awe­some week.