In many organisations, leaders assume a price rise is straightforward. Costs increase, so they expect prices to follow. Yet most companies discover that implementing a price rise is far more complex than expected. In this episode, Joanna Wells explains why companies often fail to achieve the margin improvements they expect from price rises. She also explores how unclear ownership, sales resistance, data limitations, and system constraints can quickly derail even well-planned pricing decisions.
TIME-STAMPED NOTES:
[00:00] Introduction
[01:12] The Challenge of Rising Costs
[02:39] The Problem of Ownership
[03:53] Case Study: Finance and Product Portfolios
[05:47] Case Study: Sales and Customer Relationships
[09:03] Case Study: Pricing Teams and Internal Views of Value
[11:59] Operational Systems and Data Challenges
[14:05] Conclusion: Improving Pricing Capability
[00:00] Most executives I speak to think that taking a price rise should be fairly straightforward. Costs go up, prices go up, simple, right?. But inside most organisations, things don’t work as smoothly when it comes to price rises.
So, here’s a simple question: When your organisation takes a price rise, who actually manages it, and what’s the process?. Is it Finance, Sales, Marketing, or does it depend on a particular person or a certain situation?. In many organisations, that question really doesn’t have a clear answer.
Hello, I’m Joanna Wells, I’m the founder of Taylor Wells Advisory, and we focus specifically on improving margins through pricing strategy. In this podcast, I’d like to share some of my experiences of working with companies on pricing strategy. What tends to work with a price rise, and what often makes them far more difficult than they need to be.
The Challenge of Rising Costs and Price Rises
[01:12] Now, over the past few years, we’ve all seen a lot of cost pressure and disruption. There’ve been supply chain issues, commodity price increases, fluctuations, lots and lots of inflation, global instability, wars, and political tensions, you name it. For many companies, that’s meant you’ve got to move quickly with costs to cover your margin.
And that’s usually when organisations realise how difficult pricing actually can be. From the outside looking in, pricing looks simple. I’ve actually had someone say to me, “How difficult can it be? You just add, you know, 5 to 10% on costs”. Right, give that a go!.
But inside the organisation, when you’re actually doing it, and you want to do it well, you realise calculating prices, planning a price rise, changing prices in a system, it really does affect almost everything in an organisation and almost every team, from Finance, Sales, Marketing, Operations, and IT. And if these teams aren’t aligned, things really start to become complicated.
The Problem of Ownership
[02:39] And often, from my experience, the problem really starts with something quite simple, really basic, and it’s about ownership. Inside most companies, no one really owns pricing. Yes, people might put their hand up and say, “I’ll do a bit of pricing, I’ll help you out, I’ll change those prices in the system,” but no one really is accountable for pricing. I’ve even seen pricing teams that say, “I’m not accountable for pricing”.
So, if you’ve got that dynamic happening and you’ve got a lot of opinions around pricing, that’s for sure, but no one will actually go, “Yeah, hand up, I did that. This is my decision, I own that decision”. So, when a price rise is necessary, when it’s needed, when you’ve got your executives that said, “We really need to take a price rise, we need to cover our costs.” People have to come together and coordinate and start making decisions quickly. And that requires ownership and accountability, and her, that’s where the weakness in the process, even if there is a process, starts to show.
Case Study on Price Rises: Finance and Product Portfolios
[03:53] Let me think of an example for you here. In Finance, the Finance manager might calculate the cost increase at price rise time. But allocating those costs and increases across a large portfolio, I’m thinking here of a large, complex B2B business from manufacturing and distribution right through to the end consumer and retail, often means dealing with a very large product portfolio. So, allocating those cost increases really isn’t easy.
I’ve worked with many of these types of businesses. I’m thinking of one in particular, a B2B complex manufacturing business where the Finance manager had to apply cost increases across a huge range, it was about 350,000 SKUs. But when we reviewed and looked at the data and the COGS (Cost of Goods Sold) movements, we saw that some products had increases three to four times the underlying COGS movement, while others had barely changed at all.
Now, no one in particular, he wasn’t wrong, he didn’t do anything wrong when he did that. It was simply a very, very difficult task to allocate costs, even if you don’t have that many SKUs. But if you could just imagine, correctly and accurately allocating costs across thousands, hundreds of thousands of products. It’s almost impossible. And this is what we see time and time again. A lot of Finance people are wasting a lot of time trying to do that. It’s a great effort, but it’s not getting the outcome that many businesses need when they’re taking a price rise.
Case Study on Price Rises: Sales and Customer Relationships
[05:47] Okay, so if it’s not Finance, then who should it be?. Well, often when there are some issues in the price rise process, and people are not sure who does what and who’s accountable, what we tend to see is Sales, the National Sales Manager or the Sales Director, bravely steps in.
Of course, it makes complete sense in some ways because Sales are close to the customer, they know the market very well, they understand the relationships, and they often have a close relationship with key accounts. And someone needs to start having those difficult pricing discussions, so in one way, that profile looks good.
The Salesperson should step in and do it.
I actually remember one company I worked for, a B2B engineering parts business. They were taking a price rise, and leadership had approved the price percentage. Everything was going well, Finance had calculated the prices, Marketing had prepared some beautiful letters, and everything looked really good; everyone was like, “Yeah, we’re ready to go”.
But once the increase went to market, what we found, actually, is that Sales teams had started adjusting the price increase from the original plan. And they’d done it customer by customer, and sometimes at the line-item SKU by SKU level. Some increases were reduced, some were delayed, and some conversations were completely avoided. Some Sales teams just dread having to discuss price with customers, especially an increase, oh no!
So, what we found, it wasn’t that they were trying to resist.
They were actually very compliant with the strategy, and they knew that it needed to happen. We needed to take a price rise, but they were simply, almost trying to protect themselves in some way and protect the relationship. It’s so difficult, I realise, to keep those relationships and make new business. Business growth is incredibly difficult, and then you’ve got to have that difficult conversation with a customer saying, “We’re going to increase your prices”.
They sort of think, “Oh, I hope that’s not going to jeopardise the relationship, please no, what are you going to say?” In this particular instance, within a few months, the increase that was discussed around the board table, with executives and senior managers, looked extremely different in the market than it did in the plan. And really, at the end of the day, it did not achieve the margin outcomes that the board and the executive team were expecting, and there was a lot of disappointment. And more than just disappointment, there was severe financial pressure on the business.
Case Study on Price Rises: Pricing Teams and Internal Views of Value
[09:03] I’ve also seen pricing teams make personal adjustments or judgments on price increases. When the executives said, “This is what we’d like the price increase to be,” I’ve seen the pricing team go in and question that and say, “We’ll start, we agree on this portion of the portfolio, but not this portion,” and they start spreading those adjustments across the portfolio based on what they believe the product should be positioned at.
I’m thinking of a B2B industrial business pricing team that I’ve worked with. They would say stuff like, “We think these products are premium, we think these products are highly competitive and should have a very large discount, we believe these are entry but not new, but entry in between evolved, so we’re going to put this percentage on it”. And it got quite complex.
It was a criterion, for sure, it’s better than nothing, but the increases would be redistributed across the range based on their internal view. And they’d all agree as a team that they were correct, and on paper, it really did make a lot of sense. But those decisions that were being made were not validated by the market response, the elasticities that we were getting.
It was validated by their own internal views and emotions about value.
And it actually, there was a big conflict, really, between the view of the pricing team and of the executive team, who did believe that the increases they wanted to occur in the market were being questioned. And look, there’s nothing wrong with challenging opinions on value. It’s actually a very healthy way to be, but it should always be backed with evidence.
And in this case, in this instance, we saw that the viewpoints of the pricing team were not reflected in the market. Customers did see value in a different way. And sometimes, these two views are quite different. I highly recommend that you get that cross-reference of different data sources just to cross-check your viewpoints. There are processes, customer value discovery processes, research that you can do just to cross-check your data, your opinions, your internal belief systems, because that’s the best way to get the outcome that you need. Sometimes it’s good to be challenged.
Operational Systems and Data Challenges Regarding Price Rises
[11:59] There’s also more of an operational systems data side to increasing prices that I think we should consider as well. Updating price lists across systems within an ERP can be incredibly difficult. Often, when I’m looking at systems as part of the diagnostic, I can look at an ERP and think, “Good lord, all of these fields are taken,” and often they’re taken and used in completely the wrong way, not used in the way that the software vendors of that particular system would be happy with. It’s often a land grab to take fields and use them across different teams.
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There are often master data issues.
And in terms of pricing, there can be many different price lists in that ERP, some sitting dormant, often hundreds. I’ve seen hundreds if not thousands, of legacy custom-built price lists for specific deals as well as your more traditional list prices that are used across different markets, and just being left, not maintained.
So you can imagine, you’ve got all of that happening in the background. And then, you’ve got to prepare Sales teams on communicating and aligning that communication with the actual data communication, the actual price list, and making sure the data and the messaging are aligned and matching.
If you say you’re going to do a 4% price increase and then your system churns out something like an 8% increase or doesn’t churn out anything. Then you’re going to have a very difficult conversation. I suppose this is exactly why Sales teams get nervous at price rises. They’re just thinking, “Gosh, I hope everything has gone okay in the back end as well”.
So, things, you say systems, you go, “Well, everything’s embedded in the system, it should just run, it’s automated,” but it’s often not that straightforward at all.
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Conclusion: Improving Pricing Capability and Decisions on Price Rises
[14:05] So, the real issue when I think about all of these examples and what I’m trying to say, it really isn’t the price rise itself. The real issue here comes down to pricing capability. Simple things, like:
- Do you have the data?
- Do you have the process?
- If I asked you what the process is, could you explain it to me? Could you write it out simply?
- Is it a good process?
- Who runs it?
- Do you have a team that you can trust to set and manage prices?
- And the ownership needed to manage pricing decisions properly across the organisation?
So, here’s a question to consider: If your company needed to take a price rise tomorrow, would you be confident that the team and your systems would be able to implement it well?. Because in many companies, that’s where the real challenge begins.
Thank you very much for listening. I’m Joanna Wells, I’m the founder of Taylor Wells Advisory, and we focus specifically on improving margins through pricing strategy. I look forward to seeing you in the next episode. Goodbye.
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