As prices of raw materials increase, an increase in prices is inevitable. For B2B companies, renegotiating prices without damaging relationships can be tricky. Sales personnel dealing with this issue believe that the key is putting the customer first and keeping in mind the value that the firm brings to the customer. Through a customer-centric approach and including relevant clauses in contracts, B2B companies can lessen the pain and fallout of these difficult conversations.
Recently, a concerned executive in a session asked me, “How do we increase prices to customers we have strong relationships with?” B2B firms often face inflation, which cuts into
profits. And price increases are the only solution. A few strategies to handle price increases, which are mentioned in a recent article, are: 1) treat customers differently- not all customers provide you the same value 2) Add a few features to soften the blow, 3) if contracts have price increase clauses, enforce them and prepare to have difficult conversations, 4) start charging for additional services like shipping. However, the ground realities are best known by salespeople interacting with customers. Several of them shared their thoughts and experiences on the subject with me.
Most of them agree that cost-justified price rise is an unavoidable issue, especially when inflation is high. One executive says, “A very practical situation many B2B marketers and
sales personnel are confronted with, especially since prices of raw materials (e.g., steel) are fluctuating.” However, they also agree that it doesn’t have to be a roadblock or deal-breaker in the relationship between vendor and customer. They believe that honest communication with customers about costs and including relevant clauses in contracts can go a long way towards keeping the relationship intact while allowing firms to raise prices.
As one executive puts it, “In the B2B IT space that I closely work in, we usually see price
increase clauses included in contracts mainly to account for any cost-of-living adjustment (COLA) and forex-related changes. In the current environment, as salaries and costs increase, many providers/sellers choose to exercise this right. There are further nuances to how much price rise is acceptable and what macroeconomic cost index it is linked to. But in my honest opinion. being transparent about it to customers and having an honest conversation usually works well for most providers/sellers regarding price increases.”
Interestingly, none of the executives who responded to the article’s contents mentioned
charging for additional services as a means of price adjustment. And while many of them talk about the importance of value, they do not suggest treating customers differently based on how much value they bring. The overall impression, in fact, is one of putting customers and value at the forefront of any decision-making regarding price increases.
Some respondents mention sector or industry-specific practices and challenges. One
executive says, “As a B2B salesperson in the capital goods industry, I believe it is important to understand the pricing levers of our customers as well while we approach for price rise. If my customer can pass on the price rise in the market, then having those difficult conversations becomes easier. The more info/data points we have around the end price, the smoother it becomes to navigate the price rise.”
An executive working in the public sector has a significant input. He discusses how the two factors that underline price renegotiation—1) centralisation of decision making and 2) relationship and customer stickiness—affect price increase negotiations in the public sector.
Organisations with centralised decision-making (private organisations) have a better chance of renegotiating prices than those with distributed decision-making (public sector organisations and RFP scenarios). Further, public sector organisations are bound by various guidelines like CVC, audits, etc., which prevents them from using the strategies mentioned in the article. Hence the best way out for public sector firms is to cross-subsidise in other projects based on relationships, to pre-empt and bundle high-margin products to ensure ease of contract execution for the entire term, and to hedge in advance for the period of price validity.
An executive in manufacturing talks about open book pricing as a means of price negotiations in his industry: “A popular trend in manufacturing is open book pricing. Link the final product price to certain key raw material prices.”
Despite the differing ideas and practices mentioned by the respondents, the discussion often revolved around two key concepts: the value the B2B firm brings to the customer and the importance of a solid relationship with the customer.
According to one executive, an inside-out (only addressing the internal company perspective) pricing strategy is not smart. He emphasises the importance of looking at the
big picture and says companies can be short-sighted when raising prices. The value that a firm brings to the value chain is not tangible or immediately visible; therefore, management goes for what brings value to them in the short term. They forget that the customer has the option of moving to a competitor if the terms become unfavourable. Instead, he suggests, companies should evaluate the value chain, analyse how it affects their positioning in the value chain, and approach pricing based on that value. He concludes, “My aim as a salesperson would be to keep the value to the customer as the most important metric in any price increase to the customer.”
Where customer relationship is concerned, the executives are practically unanimous in supporting the importance of a strong foundation. They recommend that transparency and
honesty about the situation always work with long-term customers. The relationship, in their opinion, is one where the customer sees the vendor as a partner and as one who always has the best interests of the partners in their mind. More than one executive emphasises the importance of being prepared with objective information for price negotiations. One of them points out, that the customer might already have the relevant information from other sources, so preparation and transparency are keys to a successful renegotiation. As an executive succinctly says, “In the end, a happy customer is the best customer to have.”