The Right Way (and the Wrong Way) to Increase Prices

Certainly the business environment we're experiencing supports the ability to raise prices. Yet many price increase announcements are poorly executed and set the stage for future price sensitivity and demands for price concessions.

The way to better manage pricing changes is to separate the value component from the cost component. But successful implementation requires integrity, discipline and fairness.

An improving economy creates a problem

Looking back at the forecasts for 2004, there's an almost tangible feeling of relief: for some companies, the widely predicted economic recovery is beginning to materialize. Along with the recovery, many firms are now trying to grow profits through price increases. One trade journal editor recently told me that they've had to stop printing price-increase announcements—they're receiving an average of 67 daily.

Yes, the current business environment supports the ability to raise prices. And that's where the challenge emerges: many of the price increase announcements are being poorly executed. The majority of announcements cite higher costs as the reason for increasing prices. The problem with this approach is that it sets the stage for future price sensitivity and demands for price concessions.

Across most industries, product and operating costs (e.g., raw materials, energy, and freight) are rapidly increasing. If companies are to achieve profit growth, they will need to recover these costs.

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George E. Cressman, Jr. is vice-president and senior fellow at Strategic Pricing Group (www.strategicpricinggroup.com). He can be reached at gcressman@strategicpricinggroup.com.