Avoid the Margin Squeeze…Think Proactively About Raising Prices!

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Raw material and commodity prices are increasing for manufacturers!  At least, that is one of the key findings in the September 2009 Manufacturing ISM Report On Business.  It raises an important question about what manufacturers should be doing on the demand side in setting prices for their products to avoid the margin squeeze resulting from higher input prices.

Let me begin by summarizing some of the key findings in the ISM report as they relate to pricing:

• A variety of commodities are up in price including aluminum, copper, copper based products, diesel fuel, plastic products, polypropylene, PVC, stainless steel, and steel among others.
• 36 percent of ISM survey respondents reported paying higher prices while 9 percent reported paying lower prices. 55 percent of supply executives reported paying the same prices as in August.
• The 12 industries reporting paying increased prices during the month of September include: Textile Mills; Fabricated Metal Products; Paper Products; Plastics & Rubber Products; Machinery; Nonmetallic Mineral Products; Transportation Equipment; Computer & Electronic Products; Printing & Related Support Activities; Miscellaneous Manufacturing; Primary Metals; and Chemical Products. The only industry that reported paying lower prices during September was Food, Beverage & Tobacco Products.

As B2B companies face increasing raw material prices, it is critical for them to be extremely proactive in developing and executing a plan to raise their product prices and more importantly, realized prices.  Realized price is the net price (e.g. after discounts, adjustments, rebates, surcharges, etc.) that a company actually receives as a result of negotiation with the customer.

A sluggish response to increasing raw material prices will rapidly lead to lower margins and profits.  It is no mystery that most companies have had to lower prices, often dramatically, to effectively combat the recession.  With low prices, companies are already operating at very low margins and any further reduction in those margins can lead to dire consequences.

So, what should a manufacturer do?  Here are some tips:

1. Ensure that you have a clear understanding of the increase in raw material prices for each of the products in your portfolio
2. Assess the extent to which you want to increase prices for those products taking into account factors such as your margin goals, competitive environment, and customer demand
3. For a more refined approach, you should consider doing a fine grained segmentation based on attributes such as region, industry vertical, channel, etc and develop a plan to increase prices based on each segment's profile
4. Set updated price and establish guidance to ensure appropriate price realization.  As many B2B prices are the result of negotiation, the importance of providing updated guidance to the sales team cannot be underestimated. Otherwise, the sales team will negotiate away any price increase in the form of additional discounts, leaving your realized price to be no different than before
5. Arm your sales team with the right information to communicate the rationale for price increases to customers
6. Closely monitor incoming deals to ensure that they are in compliance with the updated guidelines

Proactive price planning and response is the key to your company staying ahead of any price increases and protecting your margins.  Considering what one of the survey respondents in ISM Survey said "Purchasing remains a challenge as suppliers now seem to be trying to raise pricing at any sign of life in the economy.", you should be prepared to raise price for your products as well.

To learn more about what your company can do to increase profits as the economy recovers, you can listen to the Vendavo OnDemand webinar on the topic.