Tom Nagle, author and strategic pricing expert, answers your pricing questions. This month's theme is rising commodity costs.
Q: Is including an escalation clause in customer contracts a good way to handle rising commodity costs?
Tom: Yes, I love that for a couple reasons: 1) it says you are going to be really transparent and fair about this (i.e., an escalation clause is also a de-escalation clause) and 2) it happens very quickly, especially if you can tie this to an index that is updated frequently. Doing that allows you to tremendously cut the amount of time between the cost increases and the price increase.
Q: We sell a premium product versus low-priced competitors. Should we maintain stable prices in the face of rising commodity costs, or raise/lower our prices to maintain our value-based spread?
Tom: I suspect that as the premium product you are the company that the cheaper products sell against. If that's the case, you absolutely need to be adjusting your prices quickly and very visibly so that competitors, who are facing the same cost squeeze, can use your price increase to justify theirs. As the market leader you need to establish the principle that it's in everyone's interest when you raise prices. Unfortunately, if the buyers’ benchmark is the cheaper competing product and you are trying to get them to “trade up”, you may have to just wait for the leader to increase prices. However, if you are a public company, you have lots of opportunities to make public that you are eager to take a price increase whenever competitive conditions are ripe.
Q: How much of an advanced warning should you give customers about an impending price increase?
Tom: That really depends on the nature of your customers' business. If they are producing and selling products immediately and therefore change prices quickly, then I'd be less concerned. But for customers that want a fixed price for something you are delivering six months down the line, then you need to communicate prices increases as quickly as possible.
For more information, see Tom's recent webinar, Dealing with Rising Commodity Prices.
Do you have a pricing question for Tom Nagle? Send it to AskTom@leveragepoint.com