It all seemed so lovely about a month and a half ago, didn’t it? Your strategic plan was pretty and perfect and covered with Corporate Overlord lipstick. Your operating plan was mostly finished, except for those murky bits in the fourth quarter. Your , battered and bruised budget, was finally locked down, and the holidays beckoned.

Scary Santa head at dollarama 2

Just you wait. You don’t even know it yet, but someone you’ve probably never heard of is just discovering that their cost assumptions were wrong last October. Way wrong. By mid-February, your precious strategy will be­­ unravelling faster than Justin Bieber, your operating plan will be skidding sideways and the Keebler Elves will be re-forecasting their butts off, and not in a good way. You need some insurance, my friends.

May I suggest you spend some time now getting very intimate with your pricing? I know, I know, it’s such a dirty word.

The Sales Squirrels view pricing somewhat differently. Their Daddy, in this case, is quota, commission and making it to the fancy sales club trip next Fall. So the price book our product managers worked so hard to build and defend is really just a lovely guideline. They’ll start by knocking ten percent off because ”it’s really tough out there and you just have no idea how brutal the competition is and besides, this deal is a whopper if we can just get in the door with a really great price point we can totally get the rest of the business at full price…” We don’t like to speak of such things. That’s for product managers and sales to fight about, not marketers. But it is our thing, or at least it should be and here’s why: product managers typically own the P&L for their bits and pieces. Their job is to figure out the COGS (cost of goods sold), add in a healthy margin and put a price sticker on the whole thing that more or less matches where you want to position the product in the market.

Then they start the discounting.

Marketers often stand on the sidelines lurching between creating their own P&L threats with random discounts and bundles and trying to create added value with a client golf tournament and a newsletter.

We should be the grown ups I this bun fight, in my view. Not because it’s actually a winnable fight; far from it. But because good pricing is our way out of a plan that’s not working and a budget that’s disappearing faster than common sense at Disney World. The first thing we ought to do is to raise our prices.

Yup, I said it out loud. If you haven’t raised your prices in more than a year, it’s time. Price increases are a much quicker route to profitability than trying to cut costs. If you haven’t seen the diagram below, it’s a good one and part of McKinsey’s excellent Power of Pricing work. Assuming your fixed and variable costs remain more or less constant, and so does your volume, a one percent increase in price will deliver about an eight percent increase in profits. That’s 50 percent more than you’d see if you cut your variable costs and three times more than one percent volume growth. Plus it’s easier to pull off.

McKinsey Price Model

I know the Squirrels will shriek, Customer Abuse will whine, Productivity Prevention will tell you how difficult it is to change the billing system and one or two of your customers may even get a bit irked. But the product managers will like it and waaaaay up at the top of the house, your Overlords will see improved profitability, and that’s your Daddy.

I don’t know why we don’t like to increase prices. We expect salary increases every year. We build in a few points of inflation to planning assumptions, and we routinely suck up minor increases from our own suppliers. For some reason, though, we don’t want to bump our own prices. Perhaps in industries like hair brushes and cheese it’s a point of pride to offer 2007 pricing. I think it reeks of bad planning and poor strategy. Sooner or later, your prices need to go up or you need to shut your doors. It’s far easier to explain a two or three percent bump once a year than a 20 percent jump once a decade.

Big, occasional increases are more or less guaranteed to send your client scurrying out to RFP with your frantic Squirrels in pursuit and blaming you for the whole thing. Remember this when they squeal about the small price increase letter you are about to send. Remind them also that a small increase is not likely to cross the decision maker’s desk, at least in a larger company. That’s because just like in your company, they assumed things were going to cost a little more. As long as you’re within the definition of a” little bit”, they`re going to roll with it. Yes, even if you are having service issues, even if you are coming to the end of the contract, even if it rains, you get to increase your prices.

Next time we`ll explore what those Squirrels are keeping in their cheeks.