COMMENTARY ONLINE EXCLUSIVE

The golden rules for managing price increases in construction

In Latin, the words for price and value were more or less the same thing, because nothing should be given a price without considering its value to the buyer. However, many companies today still think of price in basic terms by defaulting to a cost-plus-profit mentality. This often leads to price wars and difficulty in increasing prices, because sellers haven’t considered the value of their products and what buyers are willing to pay for them.

This applies to the building and construction industry. Global construction costs continue to rise due to the increasing price of raw materials. According to research from Source International in January 2018, in the fourth quarter of 2017, most raw materials in Asia saw a continued increase in price. These materials include essentials such as plastics, rubber, steel, other metals, wood, paper and ceramic.

Amidst rising costs, it is important for building materials suppliers to critically consider the best way to position their products to buyers, so that they can increase prices without losing market share when needed.  

Suppliers are often afraid to increase prices more than once a year for fear of losing customers—research by Simon-Kucher & Partners shows that three out of five suppliers only increase prices once a year. The first rule of successful price increases is to be more flexible with price increases to avoid market erosion. It might be a habit to cling to old industry practices of annual increases, but adapting to more frequent increases, such as every six months, permits more responsive pricing as the market fluctuates. It also supports flexibility in price alterations, allows price risks to be shared and supports mutual contract responsibilities. As one industry CEO noted, “What the industry needs are healthier margin levels. We counter increased volatility of raw material prices with contract terms of six months.”

The next step is to determine how much to increase prices. According to Simon-Kucher research, fewer than 10 per cent of suppliers dare to increase prices by more than 5 per cent, and a third increase by under 2 per cent, leaving no real difference after the implementation. This is happening even under increased pressure due to rising raw material costs. Suppliers need to get comfortable with speaking up and keeping customers informed of these challenges. Open lines of communication about what is happening will make price increments easier if customers can understand the market drivers.

The next rule of successful price increments is to make sure to fully communicate product value, instead of just price. Beyond the rationale of passing on increasing costs to customers, suppliers can better justify price increases if they are able to explain or remind customers of the value of their products. Suppliers can also consider alternative price metrics to justify price increases and value. For example, a supplier might explain that a product such as gas concrete might appear too expensive to some builders, however, it can be highlighted that it is easier and faster to handle than alternative building materials, such as bricks, and requires less insulation, therefore saving time and overall resources.

Oftentimes, suppliers revert to blaming price increases on market forces, and face both internal and external factors that prevent them from successfully implementing a price increase. Internally, sales people are too nervous to stand firm about changes in price, as they are afraid of losing customers. At the same time, too many exceptions are made for customers (i.e. not inflicting price increases on loyal, long-standing customers), leading to more exceptions than rules. Externally, suppliers are keeping an eye on the competition, who may not be increasing prices, discouraging suppliers from increasing theirs. There is also often a belief that the market is not able to accept price increases to their fullest extent.

So how can suppliers combat these factors and reap the benefits of top line growth? First, it is critical to encourage and train salespeople to build confidence when it comes to communicating price increases. Monitor any customer exemptions closely through price-effect reporting and push back if clients don’t meet the criteria for an exception. Regarding external factors, to counter hearsay on competitor price increases, provide clients with market price intelligence. Finally, when determining what the market can or cannot handle when it comes to price increases, suppliers need to take to lead in moving out of the past and into the present. Instead of basing future decisions on reactions of the past, suppliers can change the game by setting new standards.

As with most successful business decisions, thorough preparation is key. Failure to prepare reinforces all the perceived negativity that comes with a price increase. Thorough preparation is not just about sales training or communication through the media, but also about personalised outreach to customers. In doing this, those conducting outreach will be ready with clear answers to anticipated questions—such as why prices are increasing if at the time, the cost of raw materials is going down—and ready to reiterate value beyond cost by highlighting product quality and reliability.

Another rule is to ensure that suppliers differentiate price increases at both the customer and product level. To do this, suppliers need to identify products with relatively low attention and sensitivity towards price. For example, commodities and products with unique selling points get high attention and lead to more sensitivity around price. Spare parts and service charges/surcharges are on the opposite end of this scale, with accessories just about in the middle.

On the topic of service charges and surcharges, these can be used as additional price elements and can prove to be useful tools. Surcharges are tied directly to raw material costs and allow for price to be increased in a timely and efficient way. They also tend to be questioned less often and are regularly accepted with no discussion. Service charges make the value of services transparent and tangible and help to justify product prices. It is helpful for suppliers to make sure that they have a service manifest to set the benchmark, and then make it clear that any deviation from the standard will be charged for, such as express delivery versus standard delivery.

The last golden rule of effective price increases is to make sure that sales is involved in the process and is recognised as part of success. Once the sales force has been trained, continue to incentivise the team to implement its new skills, and be sure to recognise and reward their achievements to continue to encourage them. An inspired sales team will continue to build their confidence to speak to customers about price increases on a regular basis, allowing the business to ultimately keep up with volatile market movements.


DR JOCHEN KRAUSS
Partner, Simon-Kucher
Dr Krauss is a Partner at Simon-Kucher and heads the company’s operations in Singapore. He has more than 10 years of experience in consulting national and international clients in various industries. He specialises in developing market entry strategies and pricing strategies, optimising pricing-processes and designing innovative price- and product-structures. Dr Krauss’s views are highly sought-after by the press and he is often invited to speak on TV news segments to share his insights on recent trends and events. Prior to his consulting work, he was managing director of the Singapore-based German Institute of Science and Technology (GIST), a joint venture research and education centre of the Munich University of Technology (TUM), the National University of Singapore (NUS) and Nanyang Technological University (NTU). Dr Krauss received a PhD from the Munich University of Technology. He studied Business Administration at the Ludwig-Maximilians-Universitaet in Munich, the School of Information Management and Systems (SIMS) at UC Berkeley and the Rotterdam School of Economics.

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