Time to Raise Prices

Despite the reports from the Fed that inflation is in check, everyone realizes that the cost of materials is, and has been, increasing.

Several of my fabrication company clients have asked me recently how they can raise their prices. They have held their prices for close to 5 years and they can’t do it anymore. Most of my clients provide finished product to print for their customers. This means they acquire the raw material and fabricate it to the print. The cost of raw material alone is increasing almost daily. Projections for most of my clients are that if they don’t increase prices, the actual cost of their work will exceed the selling price by year end. Not a pretty picture.
So now what? If your back is against the wall, you have to stop living in denial and take action. But what action? There are several options you can consider. First, recognize that there is no inflation going on, prices are just going up. Despite the reports from the Fed that inflation is in check, everyone realizes that the cost of materials is, and has been, increasing. This means your customers know it, too. They are being pushed on by other vendors for price increases, and they are passing on their own to their customers.
That does not mean increasing your prices will be easy, it just means that your customers are expecting you to try.
There are a couple of ways to approach this task. One is to use a “material cost adder.” If the materials you are using are volatile, this may be a good approach. Volatile means they fluctuate up and down frequently. Oil is doing that now. If your material is perceived to be volatile, you can use a “cost adder” for material price variations above a set base price. This can work if the material has a visible price. The key is to negotiate an acceptable base price. 
Today’s price cannot be your base, as it is unlikely the price you used when you priced the job to begin with. So the negotiation here is really about the base price and the amount that affects the price you charge. Be careful about exposing too much information so your buyer can calculate your shop rates, overhead, and so on, and then attempt to negotiate those as well.
In the alternative, or if your materials are not volatile, but increasing, you need to simply raise your prices. The airlines are raising their fares currently because of the cost of fuel, but they are not calling it a fuel adder in the hopes it will stick when fuel prices come down. 
How much should you raise your prices? First, you have to raise them enough to make sure you don’t have to do it again this year. (If you think you will need to, consider the volatile price approach I described here.) Second, nobody ever says your price is too low, could you raise it, so if you don’t raise it enough, nobody is going to complain. And no matter how much you try to raise them, your customer will push back, just because they are negotiating.
Once you know how much you need to raise them, how do you get at least that much? If you don’t ask, you won’t get. So step 1 is to ask, but step 0 is to think this through before you ask, so you know what to ask for and why. No matter what you ask for, the customer is going to push back. There are some things you must consider before entering this negotiation:
What is the cost to your customer to change shops? There may still be a shop out there that is going to try to not raise prices to steal business, but if your calculations are right, they are going to go broke with that strategy. Can your customer afford to risk that? And if they find a shop willing to price a bit less than you, what is the risk of changing shops? Will it really be worth the 3 to 5 percent price difference? If you get that 3 to 5 percent price difference, that is profit for you.
What can you trade off rather than lower your price from what you asked for? How’s cash flow? Can you offer better terms, or would you prefer they pay you more promptly for the lower price they are asking for? What about lead time? Can you offer better lead time in exchange for the higher price you want? There are likely other options as well. Think about them, rather than just price to price.
It’s past time to raise your prices, so just do it.