Responding to “Form Letter” Price Increases
HCS Consulting March 2005 Newsletter
During a recent meeting with a client, we were discussing how to respond to “Dear customer” letters that announce across - the - board price increases. We all know that inflation has returned in many commodities. “Form letter” price increase announcements have as well. This newsletter includes some tactics that you can try to reduce or eliminate the impact of an announced price increase.
- With your important suppliers, make it clear that form letters addressed to “Dear valued customer” or “Dear customer” are not an acceptable notification of the supplier’s desire for a price increase (there may be a need, but they need to demonstrate it). If your business is important, a direct contact should be expected.
- You should always reply to these announcements when the supplier is of significance to your business. Your purchasing people, or whoever has responsibility for the supplier, should call their regular contact, express concern about this type of notification, and state that you need to have some discussion before any price change can be made. If your people get resistance, and they will, have them refer the person to you or another designated management person. If the announced increase is effective within 30 days, ask for an immediate extension until you have an opportunity to review and discuss the request.
- Prior to the meeting (preferred) or phone discussion (less effective), do some homework. The reason for the increase will be stated in the letter as “volatile raw material market,” “increases in our transportation or fuel costs,” “oil prices,” etc. There is nothing that you purchase where a 10% cost increase to your supplier should equate to a 10% price increase to you. If you can estimate the percentage impact on your supplier’s cost structure of the announced factor, you will be in a better position to negotiate. If you do not have an estimate, ask the supplier to explain the method they used to decide how much of an increase to request, and how it applies to the items that you purchase from them. Even if you finally accept a price increase, you have learned some valuable information that will help you defend against the next one.
- Do not grant an increase without getting some consideration in return. Here are some things that you can ask for during your negotiation.
Your supplier may be willing to do something to avoid having a completely unhappy customer.
- Cash discounts
- Delay of the effective date
- Shorter lead times
- Increased capacity
- Return of some obsolete material for credit
- If you have to accept an increase, try to delay it for as long as possible. Can you purchase some additional material at the old price? Can you delay the effective date until next month, next quarter, until you set new standards, etc?
- If you anticipate that prices are going to continue to escalate, ask the supplier to guarantee to hold the new price for a quarter, 6 months, a year or whatever you can get.
- If the letter contains a statement that “we will continue to look for cost savings” ask that your supplier identify some opportunities where you can work together. If there is no statement regarding the pursuit of cost savings, that is another point to bring up during your discussion. Taking real cost out of the system will benefit everyone.
- Finally, make it clear that you expect the supplier to promptly pass through price reductions when the raw material or cost factor changes for the better. I’ll bet that you will never receive a form letter announcing a decrease in price. You have to set the expectation and follow up periodically.
Here’s the rest of the story about my client. The company that sent them the letter that triggered our discussion is their current supplier. We had just done some competitive quotations with other qualified suppliers and discovered that the incumbent’s prices were 25% high. What does that say about the claim that “it is necessary to raise prices.” Now is not a time to take price increases lightly. If you try all of the suggestions that I’ve included and your supplier sticks with their announced increase, you may have to accept it. But you always have the option of doing a market test and considering other sources. Even in a period of tight supply, your future business may be an important opportunity for another supplier.
For those of you who deal with the customer side of your business, here is a suggestion. Before sending this type of letter to your customers, consider the points mentioned above. They may help you be better prepared for feedback from your customers and, if you can address the concerns upfront, you may find it a much easier process.
Thank you for reading this newsletter. If you know of someone in your company or in another company that would find it of interest, please forward it to them. If you do not want to receive future newsletters, you may reply and indicate that.
©2005 HCS Consulting - All rights reserved.