At some point, every company faces the question of when and how to increase price. For many companies, its an annual exercise. For others, price increases occur many times throughout the year. There are phantom price increases (think of that ½ gallon of orange juice that is now only 59 ounces, but costs the same), hidden price increases (the introduction of airline fees), ‘friendly’ price increases (dear Valued Customer… we must increase prices due to cost increases), and many more. However, most companies fail to ever realize the full monetary value of the price increase. Why?
(For purposes of this article, the focus of this article is on B2B rather than business to consumer B2C pricing.)
Most B2B companies price to buyers in two simple ways: transactional and contractual. Transactional Customers tend to buy at list prices or negotiated ‘spot buy’ prices which typically do not require a formal price agreement. Contractual Customers are a bit different in that there is a one or two-party agreement which defines a negotiated price for an established period of time with specific terms and conditions. Simple and well-known concepts if you are involved in sales, pricing, or contracting, but the devil is always in the detail.
Unless companies use a sophisticated price increase process (I worked at one company which had a dedicated team who spent the entire year working on the annual list price process), chances are the true impact of the price increase is never calculated or measured. Even worse, companies decide to increase prices based on what the rest of the market is doing or in hopes of hitting revenue targets. Admirable goals and great sound-bites for Wall Street, but this is the untold truth of price increases. Transactional Customers typically bear the burden of all price increases, and the resulting revenue/profit is usually well below expectations.
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