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.

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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 evolutionpartners.com.au We also have a weekly newsletter as well at Lawrenceandco.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.