Catch the Rising Cost

One of the most complex business challenges for leaders is increasing costs. It can be labor rates, raw materials, health or business insurance, transportation (fuel, vehicle, & freight), and many other categories. When inflation is out of control, and some costs rise at over 100%, it can feel impossible to catch up. Business leaders hope that prices will stabilize and return to past levels. Unfortunately, it can be too late by the time they realize these costs will only continue to increase. Gross margins and profits are declining, and a business can quickly lose money. Some companies can close or never fully recover.

Many companies I've worked in have a surcharge built into their contracts or a simple price escalation based upon fluctuating costs. I've used six or twelve-month rolling averages of inflation rates, diesel fuel, or other raw materials indices. These contract terms also allowed companies to increase annual prices.

When a business realizes costs have significantly increased, it’s time to implement price increases. Business owners and sales teams are concerned that customers will cancel and go to another vendor. This is always a risk, but your customers are often affected by these market increases and may have already passed these increases on to their customers. 

These times are not for the weak of heart. Business owners need to act quickly and honestly communicate the challenges they're facing to their company.

Here are some basic steps to consider:

Step 1: Financial Analysis: Quickly analyze what components of your cost are rising. Be specific and utilize actual costs and outside metrics to confirm that these increases are prevalent in the market. Calculate the total gain required to maintain target profit margins and assume that all customers will not accept the increase. We realized 85-90% of the targeted price increase in past businesses. Build this slippage into your overall increase. Identify the total increase weighted percent required to maintain companies' margin targets.

Step 2: Billing Plan: Build a plan with the billing group to implement a pricing surcharge increase. It is often not an easy project, with complex pricing, contract terms, and cumbersome billing systems. Businesses are not staffed to increase every customer pricing record and may require additional staffing to complete this initiative. It is important to check local and state regulations to ensure your price increase complies.

Step 3: Internal Communication Plan: The message communicated from your team to customers must be clear, concise, and consistent. All company employees need to understand the business challenges and impact. Speaking to your entire team together reduces mixed messages. Employees should walk away with a hard copy document explaining the rationale and justification for the increase. Additionally, how to handle customers who are not happy. All employees should understand why prices are increasing, when, and their role in supporting the increase.

Employees, especially sales reps, will be concerned that customers will cancel. Remind your employee's the value of your service and products to customers. Communicate that everyone in your market is getting hit with similar increases. Identify who will receive and can handle customer complaints, the escalation process, and who has the authority to wave this increase.

Often sales reps' compensation plans are based on total revenue or gross margin dollars. Many businesses create a surcharge (environmental surcharge) to cover these rising costs, which are excluded from the sales commission.

Communicate to your team that will personally be involved with every customer who wants to cancel.  Be willing to compromise with customers, meeting them halfway or rolling back increase if business continues to be profitable.

Step 4: Customer Communication Plan: Write a letter and email that explains the elements affecting your costs. Be specific about what prices have risen. It might be wise if you don’t share the percentages by the component but the overall increase. During turbulent times other cost elements can increase, and you do not want to return to your customers every time these changes. Your team should have the specific details to handle customer calls. Some customers or customer contracts will require these details and should be provided. If you have not been aggressive with past price increases, put that in your customer letter.

Top Customers: These can be the top ten or twenty customers who deserve your attention. The price increase message needs to be delivered in person and written by the sales rep plus a senior company leader.

Summary

These are some basic steps to address rapidly changing business costs. The most critical part of this equation is your communication process with employees and customers. If the delivery of this message is honest, straightforward, direct, yet firm, you will be surprised by customers' acceptance. Some customers tell me they were surprised it took us so long to reach out regarding our pricing. Your customers want your business to be healthy so you can continue delivering excellent service. Be thoughtful, quick, and deliberate. 

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