Price Increases & Cost Reductions
SALES & MARKETING
A recipe for Channel Conflict – or Harmony? BY MIKE MARKS, INDIAN RIVER CONSULTING GROUP
A Mike Marks is co-founder and managing partner of Indian River Consulting Group, a consulting firm to distributors and manufacturers. He specializes in helping distributors and manufacturers accurately diagnose problems and identify risk-bound alternatives. Contact him at mmarks@ircg.com or visit ircg.com.
s we face ongoing shocks to the economy, everybody in the value chain will face the same challenges: Some price increases won’t stick, some cost reductions won’t be enough, and businesses that are undercapitalized will continue to fail. Many will negotiate extended terms before they file. And as customers try to navigate their own challenges, many will change distributors and even brands. Those companies that make it through this pandemic will have earned or changed their reputation, for better or worse, based on their actions. Price increases and cost reductions were one of the earliest and most persistent actions taken in the channel. Those firms driven by strategy rather than short-term earnings considered the long run when making price and cost decisions.
PRICE INCREASES
Whether they like them or not, distributors and customers recognize the need for price increases when their upstream partner needs them for survival. With channel harmony in mind, here’s how a supplier acting strategically implements price increases: • A good price increase announcement is genuine and presents a truthful case. • It isn’t done too early as a “just-in-case my profit is affected,” because, if you do that, you are telling channel partners that, “It is all about me and you guys figure it out on your own.”
• No one knows if extra costs due to productivity declines during social distancing will be here long term, so smart distributors and manufacturers will acknowledge the uncertainty and the goal of rescinding related price increases when possible, similar to the fuel delivery surcharges in the ‘70s. • Alternatives are provided that could get rid of the need for an increase. For example, put boundaries on minimum order size, order frequency, direct digital links or other factors that reduce the need for the increase. • An advance notice period must allow for delivery shipments that are backordered.
COST REDUCTIONS
A distributor has three options when faced with a price increase from a manufacturer: Pass it along, absorb it by cutting costs, or absorb it and dilute profit. It is harder for distributors to pass on price increases than it is to do a cost reduction. In a distributor’s business model, a high percentage of their cost structure is variable. A manufacturer has few variable costs, and, because so much is fixed, they will find it relatively easier to do a price increase. A distributor that is stressed will first go to their strategic suppliers and ask for some support. They will simultaneously try to develop a plan to set some customer price increases. Most will want to wait until they believe that the increase will stick – along with their key customers. If they can’t wiggle out, then a cost reduction is next. Winter 2022 • 101
