How to Raise Your Manufacturing Company’s Prices Without Undermining Your Market Position
By J Schneider, VP, Strategy
If your manufacturing company is like most, you probably don’t relish the idea of raising your prices. After all, you operate in a cutthroat market. Your prices are finely tuned to stay competitive. And your end market may not be willing to pay more for your products at a time when cheap imports are gaining traction.
Yet you know you can’t let your prices stagnate forever. Your own cost of doing business is going up — while your margins get even thinner. Too many companies employ manufacturing pricing models from a point of fear. They’re so worried they’ll price themselves out of the market that they ultimately eat the cost in an effort to avoid rocking the boat. It’s a strategy that might work in the short term. But in the long term? Not so much.
So, how can you raise your prices without disrupting your position in the market? Use these tips to approach price hikes with strategic intelligence.
A Guide to Successfully Raising Your Products’ Prices
It’s critical that you navigate the inevitable price increases without damaging your business. Here’s how.
Focus on Your Market Price, Not the Manufacturer’s List Price
Most manufacturers price their products using a “cost-plus” model, in which they target a particular margin over and above manufacturing costs. This “cost-plus” calculation plays a big role in determining a product’s MSRP. But it’s important to keep in mind that a manufacturer’s suggested retail price is just that — a suggestion. And the MSRP is almost always higher than what the product will ultimately sell for.
When it comes to raising your prices, MSRP is the wrong place to start. The only number that really matters in this context is what your customers are actually willing to pay for your product. Your true market price, which reflects what your customers are actually paying for. This number offers a glimpse into what customers might be willing to pay.
Talk to Your Core Customer Base
At root, manufacturing companies are scared to raise prices because they simply don’t know how their customers will react. This reflects a fundamental lack of communication with and understanding of customers — and it’s a big problem.
If you don’t know what value your product brings to your end customer, then your pricing will always be a shot in the dark. In order to successfully navigate price increases, you must first establish regular contact with your end market.
Be direct and ask your customers to tell you what they value about your product or solution. What do they like about your product? What need does it fill? And how does it help them get their own job done? What additional features or services would they want you to provide along with your product?
Whenever possible, attach a price increase to new or added value. If not, you’re more likely to leave a bad taste in your customers’ mouths.
Drive Value to Your End Users
Customer perception of your pricing is critical. If they perceive a mismatch between your product’s value and its cost, that spells trouble. The good news? The more value you offer your end-users, the more freedom you will have to raise prices and capture the revenue, margin, and market share you’re after.
As a company, commit to drive value to your end-users — and ensure that your internal teams are aligned on this goal. That may mean adding new features, services, or enhancements to your existing products. Or it may simply mean talking with your customers to understand what they already value about your products and emphasizing those perceived benefits in your marketing.
Do Your Research to Build a Smart Strategy
Most companies have no idea what will happen if they raise their prices even a modest 1-2%. When that’s true, fear of the unknown often ends up driving the discussion. And that means prices are sure to remain untouched. Don’t let that happen to you. Instead, start by doing your research.
Do you know how many price increases your competitors have had over the last two years? What is your product’s true market price in your region? If you don’t know the answers to these questions, it’s time to do some digging.
Conduct a market study on pricing by comparing all of your major competitors by top-selling SKUs. Then, map out your primary and secondary competitors and see how you rank against them. Are your prices lower than your primary competitors but higher than your secondary competitors? If so, you may be in a prime position to raise prices. If your prices are already higher than the competition and your customers’ struggle with your value, then a price increase may not go over so well. And if your prices are lower than everyone else in your category and you still aren’t able to gain traction in the market, your problem goes beyond pricing.
Keep in mind that you don’t have to raise the price of every product at the same time. A phased approach may be a good option to test the waters and give your company the confidence to continue.
Review and Adjust Your Prices Regularly
To get the best results, plan to review and adjust your prices on a regular cadence. If you resist raising your prices until your back is against the wall, then you may end up hiking them too high all at once. Your new price may actually be right — it’s just your approach was wrong. If only you’d warmed your customers up with more incremental adjustments over time, you’d have had better results.
Create a core team to review your market pricing on a quarterly basis. The same core team should also be responsible for any SPRs (Special Price Reductions) which are requested and approved or denied. Set yearly objectives as a company for each segment of your business. Depending on where you fit within the market, you’ll want to adjust your strategy so your customers can understand your value.
Don’t Wait for Your Competitors to Make the First Move
Manufacturers that are afraid of raising their prices often decide to wait and let their competitors make the first move. They think, “I don’t want to be the first one to move on price. I’ll wait for my competitor to raise their price, then make my adjustments.” If this describes you, you might as well accept that you aren’t the market leader. This approach entrenches your firm as a follower and makes it all the more difficult for you to raise your prices moving forward.
It’s not about being the first to raise your prices simply for the sake of getting there first. It’s about striving to determine the best course of action for your firm irrespective of how your competitors are pricing their products. With a few exceptions (such as when the price of raw materials is the sole reason for a price increase), your firm should focus on setting the standard rather than following others. The main reason is this: you’ll never really know why your competitor has raised their own prices. Basing your increase on this unknown variable is a poor strategy from the start.
Consider Your Customers’ Customers
Finally, keep in mind that your price increase will have downstream impacts. If you produce a part that is used in assembling another product, then a price hike on your part may put the squeeze on your customers (and, by extension, their customers). When planning a price adjustment, make sure to find a way to do it so that you minimize the downstream impact. For example, avoid raising your prices right before your customers’ busy season. You must know your end-users’ business model and cycles in order to chart the right course of action.
Just the thought of raising your manufacturing company’s prices may make you want to break out in hives. But with a firm understanding of your product’s true market price, value to customers, and market position, you can adjust your prices in a way that underscores rather than diminishes the value of your brand.