What’s the best policy for raising prices to offset the cost of materials?
Norm Brodsky is a veteran entrepreneur.
Dear Norm, Three years ago, I purchased a small manufacturing company that makes elastic yarn and elastic tag string. For the first couple of years, material prices were stable. By finding new vendors and purchasing in bulk, I was able to reduce material costs significantly. During the past year, however, material prices have skyrocketed. I reprice new orders as they come up, but I have a few large customers that place blanket purchase orders specifying monthly deliveries. I have followed the practice of the previous owner in limiting these blanket orders to 12 months. Unfortunately, when my largest customer's order came up six months ago, I didn't raise the price enough. What can I do now to offset the increase in my cost of materials for the next six months?
—Scott Silverman, president Norbut Manufacturing, Fall River, Massachusetts
Most of us are familiar with Murphy's Law—anything that can go wrong, will—but we don't all take it into account when making plans. Experienced business people show their respect for it by asking themselves a ton of "what-if" questions to anticipate how their plans might go awry and to figure out what steps they can take to protect themselves. It's a habit young entrepreneurs would do well to learn.
By the time I spoke to Scott Silverman, he had contacted his large customer, which had agreed to a modest price increase. I complimented him for taking the initiative, explaining the situation, and asking the customer for a break. In dealing with these types of situations, the best policy is always to be open and honest with customers. But I also suggested he could avoid such problems by inserting a simple clause in his customer contracts that would allow him to increase the price if his material costs rose. Most customers won't object. If any do, he can negotiate the specific conditions and terms. He'll thus have one less thing to worry about—which will give him more time to focus on the things that have gone right.
Please send all questions and comments to AskNorm@inc.com. Norm Brodsky is a veteran entrepreneur. His co-author is editor-at-large Bo Burlingham. You can follow them on Twitter at @normbrodsky and @boburlingham. Their book, Street Smarts, is available in paperback.