Implementing a Price Increase the Right Way for Your Brand

Implementing a price increase for your brand is a crucial component of doing business and a core skill of every commercial manager.  

To avoid costly mistakes, a price increase must follow sound principles to be initiated the right way.

Overview of pricing strategies and pricing INCREASES

Implementing price increases can be daunting for brand owners due to the variety of pressures applied on them by customers, competitors, and consumers combined with the time required to analyse, build, implement, and track/measure any such increase.  

In this article, we will discuss the importance of implementing a price increase the right way for your business, brand, and consumers. We will also present two price increase strategies.

In our experience, we have identified several common factors that can lead to a poorly implemented price increase that hurts your brand. These include: 

  1. Being reactive rather than proactive
  2. A failure to align internally, including the misalignment of agreed deliverables and KPI’s
  3. A lack of external engagement 
  4. Price variations post price increase 
  5. Price architecture becomes a secondary thought 
  6. Supporting information and documentation is a last-minute input 
  7. Lack of understanding around Cost of Goods (COGs) 
  8. Lack of understanding surrounding other costs (I.e., overhead allocations).

Failure to address these factors properly can quickly lead to a protracted process. This may result in a ‘trade off’ scenario where you are bargaining with your customers over the price increase you need to make, or worse still, your demand generation team (I.e., your sales team) is distracted from their primary role. Either way you risk: 

  • Loss of momentum for several weeks or months 
  • The need to manage risks and fallout associated with poorly managed increases 
  • In market price gaps if not implemented properly 
  • Failure to recognise other potential related problems in the future 

How did our industry end up here? 

Fifteen plus years ago, it was almost “too easy” for suppliers to push price increases through.   

It was reasonably common for suppliers to implement price increases to boost or improve a brand's financial result often at the detriment of shoppers and consumers. 

In recent times our major retailers, have taught their suppliers to believe that price increases are something that should be avoided at all costs and are damaging to business.  Price increases and the process as suppliers had previously known it had effectively changed for the foreseeable future! 

During this era our industry experienced an immediate change in tack by including: 

  • Immediate pressure on supplier pricing (think ‘everyday low prices’ and ‘price freezes’)
  • A change in price increase processes and timelines (I.e., 6-8 week notification periods, fixed prices for 12 months or Net-Net pricing)
  • Demand for full visibility of supplier costs down to the ingredient and cost composition (risking insight into supplier ingredients or IP)
  • Buyers were removed from the price increase process to enable a “good cop, bad cop” strategy to unfold in each negotiation. 

Price increases were effectively changed from a simple submission to a drawn-out process that was often an adversarial negotiation including threats of delisting products, penalties and “dealing back” the full value of the increase taken. In some instances, the retailers have even taken additional margin themselves after reducing a supplier’s price increase through negotiations.

A NZFGC member survey conducted in 2021 revealed some of the concerns surrounding price increases and the difficulties suppliers faced when attempting to make them. 

“Price increases to date have been very infrequent and we have absorbed a lot of the additional cost of goods from our suppliers.”(1)

This has resulted in many brand owners either delaying pricing discussions to the detriment of their businesses or being forced into a position where they have had to release vast quantities of confidential information about their business operations which may or may not be held in confidence. 

“Infrequently. Very difficult to get price increases accepted without threatened deletion.”(2)

From a commercial team’s capability perspective, this has led to an entire generation of account managers, and in some instances sales directors, who have either (a) never taken a price increase, or (b) are frightened or intimidated to enter a price increase discussion for fear of repercussions by the major customers. 

“Haven't had one since being with the company for three years.”(3)

There clearly needs to be a change where this no longer occurs, and businesses can confidently and competently implement what is rightfully their commercial decision to make. 

The clock is ticking for your brand 

The perfect storm has been brewing over the last 12-18 months. While sudden, higher product input costs and inflation were foreseen. This cost is becoming even more significant as retailers now publicly state they are ‘working with suppliers’ to manage the level of increases being received in this high inflation environment, which could be seen as preconditioning by your customers warning you to not take price increases despite your own business challenges.

As a result, brand owners who are not confident in making pricing decisions and customer management teams who have only had limited pricing negotiations in their careers, are now paying a heavy price. 

Reviewing and setting pricing is the fundamental right and responsibility of a brand owner. It is a core commercial decision that brand owners must get right to balance volume throughput and profitability. As such, it needs to be treated with great importance; thus, careful consideration must be given to It. It then needs to be reviewed and adjusted when appropriate for a business.

Before rushing into a price increase decision, it is prudent for your business to conduct a thorough review of its operations to ensure no "fat" has crept in. All departments need to be challenged with the following five questions: 

1. Are we investing our funds as effectively and efficiently as we can?  

2. Are we achieving an acceptable return on expenditure?  

3. Can we restructure internally to create efficiencies (I.e., Do we need a big office post-Covid-19?) 

4. What other ‘low-hanging fruit’ exists in the business that we are not utilising to create efficiencies? 

Price Increase Strategies 

Once you, as the brand owner, have established that a price increase is the correct way to go, what are the next steps?   

The true challenge for any brand is how to grow and prosper in this volatile environment. Do you stop investing or increase prices to allow you to continue to invest? 

Both strategies have their merit but pre-planning the right approach for your brand is critical. 

To stop investing, stop all marketing and withdraw trade spend investment means becoming a “dark brand”. Becoming a “dark brand” means you must consider both the pros and cons of such a strategy.  

Pros: 

  • May work in the short term if your brand already has momentum and the rest of the category is going up around you 
  • Low risk in the short term but could be delaying the inevitable 
  • It can be implemented quickly 
  • Reduces other costs to offset price pressures internally. 

Cons:  

  • Long term brand health: your brand may lose relevance with shoppers and customers 
  • Retailer response through loss of trade spend investment (fixed and variable) 
  • Could drive unwanted volume if your brand becomes the cheapest in the category 
  • Opens the door for competitors to fill the investment void you have created. 
  • Price increase and further investment is another strategy to consider and potentially less risky for your brand as it is more long-term focussed. But akin to being a dark brand, it has both pros and cons. 

Pros: 

  • Long-term focus on the health of your brand through continued investment 
  • Allows for a reset of base and promotional pricing strategies if planned out correctly 
  • Can strengthen trade relationships if managed correctly 
  • Understanding and reflecting the ‘real cost’ impact your business has experienced during this high inflationary period to avoid a “margin grab” 
  • Reset your pricing and promotional investment to leverage optimal price elasticities, which serves to satisfy your shoppers and consumers. 

Cons:  

  • Takes time to implement 
  • It’s been commonly reported that retailers take additional margin. If so, how much and does this reset your margin targets with your customers? 
  • How much operational data should you share? 
  • You need to formulate a clear and considered plan and approach to implement your price increase to offset the anticipated customer push back 
  • If not implemented correctly this could damage your pricing ecosystem. 

Summary 

We have discussed the importance of implementing a price increase for your brand and presented two strategies in which to go about it. They both come with pros and cons and so must be carefully considered before applying.  

Regardless of what pricing increase strategy is right for you, a detailed approach to the analysis and planning of any price increase is required before deciding on what is the best approach for your business. There is no one-size-fits-all approach given how businesses, even in the same industry as ours, differ substantially. 

You must consider factors such as price analysis, shopper and consumer behaviours, communications, demand, timelines, post-implementation measurement and evaluation.  This ensures you have taken a 360-degree approach to your price increase. 

For more information and help with implementing a price increase for your brand, Hexis Quadrant can work with your commercial team to develop, implement, and measure the right approach for your business, as we've done for so many of our clients. 

By Hexis Quadrant