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You need to convince your customer to accept a price increase, but you may have to do this in a variety of ways instead of asking for something without giving something at the same time. Instead of the standard approach, try these approaches.
Offer alternatives to get to where you want to go. When it’s time to raise prices, give your customer alternatives. He gets to participate and does not feel totally trapped and angry. He knows you must raise prices at some point so if you have thought out options for him, he is more likely to take the news more reasonably. Instead of excluding him, include him in the decision that will increase your sales revenue regardless of the selection.
Take the opportunity to offer your buyer alternatives to this price increase that may be acceptable to both parties. Here are some alternative options to consider offering to your customer.
Price increase alternatives to consider:
- Volume Increases/ Process Reviews/ Redesign Options: Tell him to order two or three times the volume and you may be able to give him a volume discount given that setup costs are the same regardless of the volume run. Are there parts or services you provide to him that can be made cheaper if he orders in a different manner or different time (i.e. Middle of the month versus month end, order services all together with lower overall costs incurred). Look at all of the tasks your firm does to complete a product, offer a service and think about stripping it down to bare bones to cut out costs. What processes can be eliminated that do not really affect the viability of the product? What can be changed in the manufacturing process that speeds up production, cuts labor costs, reduces scrap, eliminates finishing, painting, rubbing, edging, trimming, outside services, inspection time or any other task that if reduced in time or labor hours involved will cut your cost IF accepted by the customer?
- Packaging: Suggest different, cheaper, packaging ideas, lower cost shipping methods or no packaging or freight at all (i.e. Let the customer come pick up the parts, strap the parts or products to a returnable pallet, package in a reusable wrapper, box, etc.). Can the packaging provided to the customer be cheapened? (i.e. Lower cost materials, no printing, wrapper comes on a roll).
- Freight: Tell the customer you will drop the price if he picks up the product, saving on your freight costs with your driver or an outside carrier. Instead overnight delivery, allow a four or five-day shipping window (lessening the freight bill). If delivery date does not matter, go rail versus truck for long hauls. Give the customer a better rate if you are simply restocking a warehouse and have extra time versus fulfilling their current orders.
- Order Size/ Combination: Ask him to order other products and increase the order size and you might be able to provide some discounts. Ask the customer to increase the order size so this reduces the setup time required for any order (fixed cost spread over a larger denominator of products produced). Ask your engineers, for a particular customer, what would be the most cost efficient order combination that could be obtained to drive down manufacturing costs; and then take this model to offer a reduced price for these combinations of order mix of products.
- Stock inventory/Guarantee buybacks: Ask your customer to allow you to make stock to be put on your shelves and held, but he must pay carrying costs while you are holding it for him (after an established period of time), and guarantee to buy it all in the event he leaves for another vendor.
- Early payment discounts for AR and AP: Offer an early payment discount to your customer (i.e. Pays in 10 days versus 60) and at the same time, take advantage of early payment discounts worked out with your own vendors associated with this account.
- Buy from your customers: Your customer might sell something you can use, and if cajoled, may be willing to sell it to you at cost in exchange for a price freeze on your product purchases for an equal amount of time. See if you can reach an agreement with him to get a deal you both like and instead of gaining more, you enjoy a healthy cost reduction on the purchasing side of the income statement. More money is more money, right?
Work with the customer and tell him you want a resolution to the proposed price increase that he can accept but no matter what, be clear; your firm cannot absorb all price increases forever.
