What is worse, having your wisdom teeth removed or telling your buyer that their price just went up?
I began my career in the 1980s as a salesperson, and as a result, have gone through inflation, recession, and retail bankruptcies – more than once. I remember, like clockwork, announcing a price increase every year. Buyers, for the most part, accepted the increases as part of business. There was no, as the Germans call it, sturm and drang (storm and stress).
That changed in the early 20th century. Led by Walmart, retailers began refusing price increases. The only option for a toy company, other than giving in, was to put pressure on the company’s O.E.M. manufacturers in China. As a result, we have a generation of salespeople and buyers who have never had to deal with price increases or inflation – until now.
There is no place to go on the supply side. Western companies have wrung out just about all the cost they can out of Chinese manufacturing. That means that price increases are on the table for the first time in decades.
For those who have never gone through a period of economic turmoil like we are experiencing now, here are some thoughts on selling price increases:
Acknowledge the Salesperson’s Fear
It is typically a salesperson who must deliver the bad news. The problem is that salespeople (independent salespeople in particular) are far more dependent on their customer’s goodwill than the company they represent. Why? Because the toy line can be replaced but not the customer.
They fear a price increase will cause them to lose the listing and even damage their relationship with the buyer. Savvy executives will, therefore, try to remove the fear element by providing the sales representative with the research and analysis necessary to move from the emotional to the analytical.
Join Them on the Call
The salesperson should set up a top-to-top call between their national sales
manager and the buyer’s manager. The purpose is to do a business review which
will look at how the company’s products are faring. Using that approach opens
the door to a discussion about price increases
MSRP (Manufacturer Suggested Retail Price)
Inform buyers of your MSRP. They want to know for what price their competition will sell your item. Once they know, they can price the product so that they continue to make their profit margins without worrying about being undercut.
Explain Why the Price Is Going Up
Start by selling the salesperson on the increase. Provide them with a detailed accounting of why the increase is necessary. Currency exchange rates, ocean, domestic freight, resins, other raw material, and labor costs are all relevant.
The more the salesperson knows, the more likely they will be able to sell the increase.
Explain the Up Side for the Buyers, the Salesperson, and the Company
Provide the salesperson with insight into potential outcomes from a price increase. In other words, demonstrate how a price increase can potentially have a positive result, generating profit and revenue increases.
That means running some scenarios that look at what will happen to the unit sales when a price increase goes into action.
Let’s say the retailer is currently selling a product for $10.00.
1,000 customers at 10.00 = $10,000
He now must absorb, for example, a 10% increase in price. If he sells the same number of units, the retailer makes an additional $1,000 in revenue.
1000 customers at $11.00 = $11,000
Of course, there may well be a cost in unit sales as some consumers s will refuse to pay the price. Still, a 5% loss in unit sales will result in additional revenue of $450.
950 customers at $11.00 = $10,450
Where is the breakeven point? A retailer would have to lose almost 10% of their unit sales to match the pre-increase price revenue.
910 customers at $11.00 = $10,010
By running scenarios, you can provide a clearer picture of potential outcomes that will reduce stress levels for buyer and seller.
Manage Buyer Objections
Will a buyer throw your item out and replace it with another, cheaper version? Maybe. It will depend upon your company and product.
Suppose your product is patent protected and popular. In that case, it is highly doubtful that the buyer can replace your product, particularly if you have an established brand, advertising support, and strong brand awareness.
However, if a product is not I.P. protected, a knock-off is probably waiting
to take your product’s place. But let’s not forget that your competitor is
experiencing the same price pressures that you are. Expect to do some negotiating.
The Toy Industry is Recession and Inflation Resistant
Remind the salesperson and the buyer that the toy industry is recession and inflation-resistant.
The toy industry has weathered many a storm. Even in the toughest of times, parents will buy toys for their children.
Bottom line, if you are a toy company forced to take a price increase, provide quantitative analysis to those who interface with the retail buyer. If possible, join them on the call. It will give the buyer and the salesperson a sense of your commitment to the relationship and your company. And may just get that price increase.
Great article!
One other thought: Starting with the emergence of the big boxes as competition for TRU, virtually all of them used toys as a loss leader, to entice customers into their stores and make up margins on other products. It was a market-basket play, rather than category play. That continued even after TRU went out. (For years TRU played that game by having the lowest prices on diapers…at the very back of the store.)
Given how market forces have impacted all categories, it’s not really feasible to play that game any longer, nor is it smart. Retailers potentially sacrifice margin on toys that consumers would have bought anyway because kids asked for them. And in an industry where something like 60 percent of the products are new every year, the consumer has very little frame of reference for increases. Even for continuing brands, it’s a new market of kids every couple of years anyway.
I go to Trader Joe’s for cheaper eggs, but even those have had price increases in the last year.