When facing unprecedented material cost inflation, how can you make price increases stick without losing sales?
Like many manufacturers, swings in raw material costs had put this industrial paint manufacturer on a roller coaster when it came to margin performance. Faced with unprecedented raw material cost increases that affected several product lines, it needed to improve average selling prices by 6% overall to recover those costs. For many years, the manufacturer took the typical approach of raising prices across all affected products uniformly and hoping for the best. But those historic price increases rarely attained the goal. With double-digit material costs increases ahead, that just wasn’t good enough.
One-size-fits-all Price Increases Don’t Work
Not surprisingly, customers reacted negatively because these one-size-fits-all price increases did not recognize the unique value of the product to each customer, or the value of the customer to the business. Many customers negotiated the price increase downward, while others simply took their business to competitors. The unfortunate result was this manufacturer historically achieved only 60% of the price increase needed to break even on the material cost changes, while also driving significant revenue losses. Nobody was happy.
When the company looked closely at innovative ways to tackle this challenge, the research revealed something unexpected — executing a uniform price increase is exactly the opposite of what it should be doing! Instead, the manufacturer learned it should seek a different price adjustment for each transaction executed. But the idea of doing this with was daunting. How could spreadsheets and manual price reviews possibly keep up with the millions of unique price points needed to take this approach?
Sticky Price Changes Based On How Different Customers Respond
Fortunately, this manufacturer found the breakthrough technology that rapidly calculates optimized prices with the intelligence to capture material cost inflation — Zilliant MarginMax. It’s a powerful type of science that leading companies have been using for the past decade to accurately predict their P&L outcomes before they put prices into the market – with great results.
The science revealed that the company needed to increase some prices by almost 12% — double the 6% targeted increase — while in other cases it needed to decrease prices by as much as 3%. And, of course, there were many price adjustments between these two extremes.
The Numbers: 6.1% Price Increase + 8.8% Revenue Increase
The company was intrigued after seeing detailed P&L predictions based on MarginMax optimized prices, but still needed solid evidence that this approach would really work. The management team agreed to a pilot project which deployed optimized prices to a test group. In just a few weeks the evidence was clear and tremendously positive – the company captured a 6.1% price increase and revenue increased by almost 9%! This performance was far beyond anything ever seen in the business. Without a doubt, MarginMax gives companies the ability to make their numbers under the toughest conditions.