Cost Price Increases (CPI) - Don’t be afraid to do what is right for your business
What is a CPI (Cost price increase)?
A Cost Price Increases are when a supplier increases their selling price to their customers. The price increases often get passed along the supply chain all the way to the end user of the product of service. In the Fast Moving Consumer Goods industry this usually means that when a supplier puts up their prices, the retailer puts up their retail prices and the consumer ends up paying a higher retail price.
In an established, stable economy, small and regular price increases are an important part of delivering growth. However, in the most recent months, cost prices are having to move upwards more quickly and to a far higher level than has been seen for decades in the FMCG industry.
Is it something to avoid?
Setting the cost prices for your products is an area that you should have complete control over, along with the confidence to know what is right for your business. Ideally they should be planned in advance - not a last resort to prevent you going bust. They can take time to implement, often constrained by contracts and are a great way to fall out with your customers if not done carefully.
Avoiding or delaying cost price increases usually results in bigger, more riskier and pressured execution with the chances of fall-out increased.
What could go wrong?
Handling a CPI without support, especially when your brand is under other pressures, can be daunting. Make sure that you have someone with experience to help you. Everything from the timing, tone, justification and story is critical to landing a successful cost price increase.
The following are all potential issues if you get your cost price increases wrong:
Delist from an account
Damage to relationship with retailer
Removal from promotions, displays and events
Slow down in consumers purchasing your products
Mis-trust in the brand
Stop-ship (see below)
Drain on resources with negotiations and re-work
What are the alternatives?
Consumers and retailers are a savvy bunch. They recognise value and notice when things change. When prices increase, you are relying on the strength of the value of your brand in relation to other options. But there are alternatives to straight price increases that may help improve your bottom line with upsetting the balance of retail pricing:
Changes to pack sizes - can you reduce the product size? Perhaps make it more efficient for the consumer so they need less?
Improvements to supply chain, packaging and logistics - always make sure that you are running at maximum efficiency for transport costs, materials and partners
Alternatives with retailers - can you agree to deliver in full trucks to mitigate a % off the cost price? Or could they take bigger cases, or improved payment terms? If your CPI is genuine then you should be open to discussions around other areas to save money
Changes to promotions - are promotions really working? Can you reduce the discounts or frequency to save on cash?
Reduction of fixed investments - what does your retail prefer? Cash or margin?
Price hierarchy through sizes or innovation - could NPD deliver the profit required without upsetting your base? Or would a larger size help consumers to find value?
What is Stop Ship?
The ideal scenario for the supplier and customer is that the cost price increase is accepted and orders continue to be processed and stock delivered. However, if the deadline for price increases passes and the customer has not accepted them then it is reasonable for a supplier to stop supplying. If you are confident that the increased prices are a critical part of your businesses success (or survival) then refusing to supply is a fair option.
However, if a ‘stop ship’ situation continues for more than a few days, it is likely it will result in product availability falling. This means your products will no longer be available in-store for consumers. Your marketing spend is now being wasted, consumers may switch to another brand, your sales will suffer and the retailer will have ever increasing leverage over the negotiation as you see your turnover fall.
Avoiding the restriction of supply is usually an important part of the negotiation planning. In addition, making allowances for the likely loss of sales is also important, especially where accounts have a history of refusing price increases. By planning for this scenario you can take the emotion and fear out of the situation when it arises.
Can Sparc Retail help?
We have been through price changes with every retailer in the UK, and many overseas. We can offer full planning services for your existing and future prices, help with selling in price changes and mitigating the risks. We can help train your team and prepare them for tough negotiations.
We would love to talk through the challenges you are facing and see where we can help.
