Management practices must coincide with the times. In an era of static or eroding prices, waiting to buy at the last minute makes a lot of sense. If you make or sell something, numerous benefits are achieved. Inventory turns increase. Carrying costs decrease. Replacement costs decline. Profits improve. It all makes perfect sense, and its the optimal way to play the game. However, what happens when inflation begins to take hold. Is this a game changer?
From my perspective, inflation at the very least gets your attention, and in many instances, it changes the way you play the game.
Let’s face it, over the past year or so, basic commodities from corn and wheat, to copper, silver and oil are all in an inflationary mode. Up to this point, manufacturers have been willing to absorb modest price increases in their raw material costs, thereby sacrificing margin. However, this is beginning to change - and this could be a game changer. The reason its a game changer is simple - it totally changes the psychological nature of the marketplace. And psychology impacts everything from pricing strategies, to buying decisions. Wait and see suddenly becomes Just Do It! Because it will likely be higher tomorrow.
Granted, not everyone is being proactive in implementing the price increase agenda. In fact, I suspect your salespeople are protecters of “the status-quo.” After all, they have been accustomed to pitching management why they needed to drop prices over the past decade, not increase them. In fact today many sales people literally don’t know how to execute a price increase strategy. If this is the case, here are a few strategies to nudge them in the right direction.
- Educate Your Salesforce: You may need to open your books so they understand the pricing pressures you’re exposed to - everything from commodity prices (copper, steel, wheat, oil …), to individual parts you must purchase. If they understand the dynamics of the marketplace, they’re better able to sell it.
- Change The Compensation Package: If you bonus your salepeople on sales dollars - change it. Sales people are not known to protect margin, at least until it impacts them directly. Bonuses must be based on margins!
- Announce It: Price increases should never be a last-second surprise. Your customers are hoping you don’t raise prices, yet are fully expecting you’ll need to raise prices. Give them a heads up so they can change their prices proactively.
- Be Proactive: Price increases in the 3-5% range are generally better received than increases of 8-10%. Small, yet significant price increases will be less likely to encourage competitive shopping. However if you’re already behind the 8 Ball, an 8-10% price increase might be necessary.
- Watch Your Accounts Receivables: Price increases can be a huge strain on your cash flow as raw material costs increase. However equally important is your accounts receivables, especially if customers attempt to stretch out their payment schedules.
Let’s be honest, this will be the first major exposure to significant inflation for many of your employees. Oh they saw $4.00 gasoline a couple years ago, however during this period, many companies held their prices due to competitive pricing pressures in the marketplace. Today, things will likely be different. All indications suggest a sustained inflationary period in front of us. And when it comes to inflation, being proactive is bliss, being reactive is a killer.
What are you doing to stay one step ahead of the inflation game?
I thought this sign was unique and I sent a copy to Dan Pink, which is posted under the title 