Price increases are necessary in business

August 23, 2012

By Bob Johnson, NAID CEO

I often hear from NAID members that increasing prices is “impossible.” However, price increases are not only possible, they are a necessary part of operating any business. That being said, when I bring up the necessity of monitoring and adjusting service charges to members they either say “yeah right, get real,” or turn pale.

These reactions are understandable. Most customers know there are many other service providers to meet their needs. They also know (or strongly suspect) many of those competitors would meet their existing price, if not lower it. Given these circumstances, a price increase might result in a lost customer. In tough times, this fear is magnified because customers are more likely to be sensitive to any increase.

While I agree this is a possibility, many NAID members overlook factors that can help them raise prices effectively or make marginal accounts more profitable.

  1. You do not have to raise prices indiscriminately, on all accounts, across the board. In fact, price increases are more effective if they are applied to accounts on a case-by-case basis following a systematic review of the profitability. Price increases should be ongoing. If the proposed adjustment sends the account shopping, it is much easier to deal with a few vulnerable accounts than a mass exodus. Plus, anything done indiscriminately sends a negative message to the customer. If done correctly and carefully, this fine tuning can actually strengthen that relationship.
  2. Increasing the profitability of an account can sometimes be achieved by adjusting the service scenario or route. Another benefit of reviewing account profitability annually is that the process can uncover changes in route density or service requirements that evolved over time. Throughout the months and years, accounts add, subtract, or move containers, which can affect not only the profitability of the account but the route as well. These changes can only be understood fully by evaluating the profitability of your accounts on a routine basis.
  3. Price increases should be factored into equipment acquisitions and upgrades. There are two ways price increases factor into the issue of equipment acquisitions. First, new more efficient equipment maybe the best strategy for increasing profitability. For instance, using a low production mobile truck can price you out of the market. On the other hand, if your company uses state-of-the-art equipment already, then adding capacity without analyzing the profitability of each account doesn’t make much sense either. There is no need to add equipment to serve unprofitable business. It is better to run the profitability analysis, make adjustments and then add capacity. In the unfortunate and unlikely event that a significant number of accounts leave, you may not need the additional capacity. I know that sounds horrible but that means the only reason the additional capacity was needed was to serve the customers that were already sucking profits.

Also, think about what the fear of talking about price says about your customer relations program. If metered and deliberate price adjustments are just too scary, chances are there is an even bigger problem with customer relations, which I will discuss in next Tuesday’s NAIDnotes.