No Not Another US Import Crime Series With a Banging Theme Tune by The Who But Still Plenty of Potential for Blood, Splatter and Gore……….
The world has turned upside down in the past two years. Quite how we can lockdown, stay at home, do nothing, spend nothing and then just when we start to get our freedom back everything runs out or is in short supply!
Wild, wild times.
All of you reading this who are customer facing NAM’s, SD’s, and Account Execs will probably be currently totally consumed with the thorny, knotty issue of landing a cost price increase with your supermarket customers.
Seemingly no category is escaping the ravages of shortage driven inflation. Whether the cause is supply chain frictions, commodity price, oil and currency fluctuations or labour shortages.
Why So Emotive?
Cost price increases are a fact of life so why are they so emotive? Why do buyers react the way they do? And why does the process often become so painful and protracted?
Well, when you land a cost price increase notification on a Buyers desk, second only to either accidentally reversing over their beloved pet or being caught between the sheets with their partner, there is not much more you can do to ruin a Buyers Day and put them in a very dark mood.
Cost price increases go to the very heart of what a Buyers job is all about. Their job is simply to keep prices down to compete in what is a highly competitive market. So a cost price increase notification is a direct challenge to that ability to compete.
All Buyers will instantly go into suspicion mode. Am I being singled out? Why Me?! I bet Tesco aren’t getting such a big increase etc.
So, what is the best way to manage the process of landing an effective cost price increase without creating friction and potential fallout?
It is What it is
Your cost price to a retailer is effectively the same as their retail price to their shoppers. It is for you to decide at what level it is set at and when it changes.
When was the last time you received a 12-week notification from your favourite supermarket to respectfully inform you that the retail price of that yummy Chicken Tikka Masala ready meal that you have every Wednesday evening is going up by 50p? Where is the polite note to say that they are willing to meet you to discuss any concerns and where is the opportunity to negotiate the timing or level of the increase?!
You do not need to give 12 weeks’ notice of a cost price increase. Decide what is sensible, fair and reasonable. It is not in your interest to poke a stick at the Tiger and just annoy it by going for a 1-week notice period. However, 4 weeks is in our view totally fair and reasonable. But remember to factor in any pre-agreed promotional plans. These are usually nailed down 12 weeks or so in advance and are often the excuse they use to insist on a 12-week notice period.
The Two Golden Rules
There are two golden rules of cost price increase management that will give you the best chance of success. Ensure you absolutely stick to them.
- Everyone is treated the same. Don’t try to be clever and put different increases and timings to different customers or channels or routes to market. You will be found out and it will be used against you.
- Stick to your guns, never ever negotiate the increase or the timing but be willing to negotiate almost everything else. Buyers will need to feel they have ‘won’ something after the mental bruising of accepting a cost price increase.
Buyers will look for the slightest chink in your armour. They will be unreasonable that one of their competitors is doing a better job than they are at brushing aside a cost price increase.
If they get the slightest whiff that someone else is not accepting the cost price increase or has a lower percentage increase or has had the implementation date pushed back, they will assume the worst and you are then in a race to the bottom. Your cost price increase plans will be in tatters and will rapidly unravel.
The Six Stages of a Cost Price Increase
Buyers will very typically go through six stages of behaviour during a cost price increase process.
We shall look at these individually as each needs to be recognised, planned for and managed differently if you are to maximise your chances of success.
- Outright rejection.
- Denial.
- Realisation.
- Deadlock.
- Brinkmanship and/or Resolution.
- Aftermath.
1. Outright Rejection
As we have already seen, second only to accidentally running over their favourite pet or being caught under the covers with their partner, there is not much more you can do to ruin a buyer’s day more than land a big, hefty cost price increase on their desk. Their immediate emotive and gut reaction will always be a flat, resounding NO! Guaranteed 100%.
This will be followed with a whole torrent of reasons as to why not – some genuine, some plausible, some outright bonkers!
A Few Examples…
‘We require 12 weeks’ notice of any cost price increase’.
‘You will need to breakdown and justify the increase by constituent part and demonstrate which elements are driving the increase and why’.
‘We will only accept the increase when we see retails in the market move’.
‘No one else is putting their prices up – why is it always you that are the awkward ones’.
‘You really want to think long and hard about the possible downsides to your business if you were to insist on this’.
‘We are not accepting cost price increases this month as it ends s in a Y. It’s company policy nothing I can do about it’.
Be prepared for outright rejection. The meeting, call or email response will be short, brutal and to the point – NO!
So, no need to let it get to you. Accept that it is their natural pre-programmed response. Your job is to remain calm and more importantly try and keep them calm.
Try to calm their instinctive paranoia that they and only they are being singled out. Calmly but firmly land the message that the cost price increase is what it is, it will happen on the date specified and all customers, everywhere are being treated equally.
Don’t expect at this stage to have any meaningful discussion or negotiation with them.
2. Denial
This is the stage where the Buyer reverts to being a four-year-old. They figuratively, if not literally, put their fingers in their ears and starts humming their favourite tune to themselves to drown out any possibility of a discussion about the dreaded cost price increase!
At this stage they will potentially go to extraordinary and almost childish attempts to avoid any discussion about the dreaded C word. They may refuse to meet with you, take phone calls or answer emails. They will certainly not want to engage in anything that allows you to bring the subject of the cost price increase to the table.
Once again it is a time for you to remain calm and accept that this is just a phase they are going through! Reiterate when and if you can that the cost price increase is happening, will not change and will not go away. And that there is more value to be added by engagement rather than ignoring the situation.
This period of denial is dangerous in that you may get very little traction in the account, and little can get done or agreed upon. It is one reason for making your cost price increase notice period as short as realistically possible.
3. Realisation
Eventually, the Buyer will have to face the reality of the forthcoming cost price increase. They will suddenly realise that hiding from and ignoring the situation is no longer viable. The movement into this behavioural phase is usually predicated by the Buyer having to make a future decision about retail prices that postdates the date of the cost price increase.
A promotional deadline, advertising sign off, a piece of in-store activity. All these (and many more) mean that the Buyer has to face up to the prospect of possible retail price movement. This is as a result of your cost price increase (remember retail pricing is always at the sole discretion of the retailer).
At this point, the Buyer realises that however much they don’t want to and would like the cost price increase problem to go away, they must start to engage in a discussion with you.
Be prepared for this engagement. Start to prepare your negotiation plan – there will inevitably be one. Remembering that you will never trade the size or date of the cost price increase. But are willing to discuss and potentially trade anything else that brings mutual value to the table.
4. Deadlock
A guaranteed next response, once the Buyer realises they must face into the cost price increase, is to put you in deadlock.
They will make potentially extreme ‘threats’ (not allowed if they are covered by GSCOP legislation but as you will no doubt have experienced, they can be very cleverly subtle!) and try to put you in an impossible situation.
Once again remain calm, don’t aggravate what is potentially a very dangerous stage in the cost price increase process. Do call out any overt threats as potentially putting you under ‘Duress’ to use the language of the GSCOP legislation.
Explain to them there are two roads that the process can now take. The road of confrontation and disruption that will only add friction to what is an inevitability. That the cost price increase is happening in full and on the date already specified. Or the road of engagement and positive dialogue where you are willing to have a proactive discussion about any aspect of the account providing it adds value to both parties.
5. Brinkmanship and/or Resolution
Moving out of deadlock is dangerous. The discussions can now go one of two very distinctly different ways.
The Buyer may decide to hugely increase the level of pressure you will have felt during the Deadlock phase. Covert or overt ‘threats’ against your range and business may be made. You need to tread extremely carefully during this phase of your cost price increase journey.
Look for signs of ‘corporate’ brinkmanship. Signs that it is not just the Buyer that has decided to take things to the brink. Stock piling of orders, cancelling of meetings, senior-level involvement and pressure, promotional plans put on hold, removal of access to range review and shopper insight information. All signs that this could be brewing into much bigger trouble for you.
Whatever the signs stay calm, do not waiver on the implementation of the price increase – either scale or timing. Repeat the ‘we have two roads we can go down’ mantra from the Deadlock phase.
Table a specific ‘road two’ proposal to them showing them that if they move on from this fixation on the cost price increase then there is additional value for them. This gives the Buyer a potential way to climb down and be seen to ‘save face’ internally. Always ensure you get as much from the proposal as they will if not more! and don’t break the all-important second rule of cost price increase management.
You may get traction on your proposal – it won’t be met with open arms and shrieks of glee – they will make it tough, want more and haggle hard. But the fact they are negotiating means you are on the road to resolution. It is just a question of patience and skill.
Reaching an Agreement
If you do reach an agreement, get them to confirm that the new cost prices will be loaded onto their system on the date specified. If needed, remind them that there will be no stock available at the old price after the cost price change date. Be clear whether this is orders placed or deliveries made. Especially in long lead time non-food categories.
If there is no agreement and the Brinkmanship persists or intensifies you need to prepare your business for a potential cessation of supply.
Ensure you have full alignment across and up and down your business – any wavering anywhere they will spot and exploit.
The question to ask of your Sales Director or MD, or both is – ‘are you prepared to stop the trucks to customer X who represents Y% of our UK turnover. Very often when we run cost price increase workshops and ask that question in real time the answer is NO to the biggest two customers of a particular supplier. But Yes to all others.
6. Aftermath
Whichever way stage five goes there is always another day after the cost price increase deadline. The sun will rise, the day will happen. Hopefully, you have successfully circumnavigated the five preceding stages and emerged with a locked-in cost price increase and no damage to the account.
Do however check for compliance. With 45 plus day payment terms the norm, you do not want to wait the best part of 7 weeks to find that the Buyer ‘accidentally’ forgot to update the system. And you then have 7 weeks of mismatching invoices that won’t be paid anytime soon.
Also, closely monitor retail price movements in the marketplace. You cannot have a discussion with any retailer about either their retail pricing or anyone else’s. But you should be aware of who has moved retails and to what level.
Further down the line also watch out for other ‘punitive’ actions. Especially if Deadlock and Brinkmanship were particularly difficult, emotional and challenging. Watch out for losing out on promotional slots or promotional feature space. Beware future category and range reviews for signs of ‘payback’ to your range.
Overly manage the account in these first few vital weeks post cost price increase. They will inevitably be feeling a little ‘bruised’ by the experience (as will you!). A bit of TLC on your part will go a long way.
Maybe This Time it Will be Easier…….and Pigs May Fly….
The sheer scale and volume of price inflation across the market at present means that retailers are fully aware of and to some degree expectant and accepting of cost price increase pressures. Whilst they will never make it easy for you there is probably not an easier time (in a perverse way) to get a cost price increase agreed.
Most importantly treat any cost price increase as a business-critical initiative. Have a clear thought through plan with full risk analysis and mitigation options. Have a clear negotiation plan with fully costed variables to offer and to ask for back. Stay calm and professional throughout but always be firm and crystal clear with them.
Follow the two golden rules – absolutely do not compromise them.
Plan to succeed, hope for good fortune.
Good luck!
Additional Top Tips (From Darren A. Smith)
- If you have a number of customers/clients, create a Boston Matrix using the axis of 1. Value to you, and 2. Ease to get the cost increase. This will help you to identify who to start with – those that are easier, and how to best use your resources, e.g. role-play the biggest 7 toughest customers.
- Do the same with your team. Provide more support to those members of your team that will struggle the most and have the biggest customers.
- Create a whiteboard/chart ‘church thermometer’ to trach the overall gains. For example, if your team needs to get £2.3m of cost increases, track the amount of a weekly basis with your team.
- Have motivational rewards available to give your team. Not necessarily monetary, but a recognised reward to give on a weekly basis.
- Don’t use price increase levels of ‘5%’. Instead, use ‘5.1%’ because it seems more thought through.
- Be aware of competition law as you must not have the intent to keep retail prices artificially high.
- Train your team with negotiation skills training!
