How to increase prices. 3 tips.
First, let’s learn about the financial impact of how we time a price increase.
This is the fourth and last article on the topic of Inflation and Pricing. The content is part of the graduate class I teach at NYU (New York University), the How to Make Money, and the Global, Profitable & Ethical series.
Timing of a price increase
Let’s look now into the timing of a price increase. There is a bit of math involved here but I want to show you why this is so important, and this will help you when you make the price increase to others or when others increase prices to you.
Imagine that you say, “Okay, fine, I rather increase prices by 4% than to fire ½ of the team” See the previous article for the case. As we did before, imagine your sales are 100 million. You implement the price increase on skincare, one of the products that you sell, and you get four million for the full year. But we’re in February and you say “it will take me a while, I need to make the presentations, how to explain it, so the price will effectively increase, July 1st. What will happen then is that you won’t get the benefit for the full year, you will only get it for half a year, because your price increase is effective only for half a year, so you’re not getting 4 million this year, you’re only getting 2 million. But your cost didn’t increase in July, it increased January 1st, so you have all that cost increase that you have not yet compensated for, you got a problem.
For the next line you say, “okay, fine, I’ll rush it through. I’ll do everything tonight, and I’ll go ahead now. Still, you know, you must communicate it to customers, so the best you can do is April 1st. Now that’s better, but it’s not 12 months, now it’s nine months of a year, April through December, so you won’t really get four million, you will get three million.
You say, “okay, fine, how much do I have to increase prices so that I can recover what I haven’t recovered yet, and get fully covered to get this four million for each one of my businesses? And you do the math and say okay, Makeup I will increase it by 14% on July 1st, so I will really be getting 7 million. With this, I will compensate for the other two.
And now you are getting better at it. You see how the math works, and you say “I will also decrease prices of sun, but I’ll do it in October, and the reason why is that the negative impact, the price reduction, will be only for three months, October, November, and December. So I’m not really reducing prices by 4 million, the impact will only be 1 million.
How to increase prices
We learned that Pricing has a tremendous impact. The problem is that if we increase prices too much, we may lose our customers. Salespeople are terrified of that. I’ve traveled to 193 countries, mostly to go and see customers and to explain to them why we are increasing prices.
This is what I’ve learned:
1. Explain price increases well. Your client will understand when there is inflation or an increase in material costs or other cost drivers. Go prepared to know how to respond when challenged.
2. Mention price decreases first. List price increases from lowest to highest. Many people only read the first line.
3. If you are getting a price increase, try to push back. Otherwise, you will have to pass it on to others; ask for a salary increase at work or increase prices to your clients.
Practice Case
Your company asked executives like yourself to comment on whether to increase, decrease, or make no changes to pricing. Please share your thoughts on our blog here on what to do about pricing.
Background
Cost: a reduction in production capacity and foreign exchange has resulted in an overall cost increase of 30%.
Government regulations: a regulatory change has reduced how many consumers can buy the product at any given time by 50%.
Consumer demand: sales dropped last year. They have recovered some.
Profitability: the profitability of products varies from -20% (some products are sold at a loss) to +80%.
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