Price Hike

Death and taxes aren’t the only guarantees in life. Distributors can add a third certainty — price increases. While they have always been a cost of doing business, price increases have lately become more troublesome thanks to increases in both frequency and severity.

Annual price increases of 0 percent to 5 percent were once the norm in the jan/san industry. Now distributors are growing accustomed to double-digit increases and, in some product categories, jumps happen as often as every other month.

“In the last couple of years, there seem to be steeper increases that are coming more often,” says Sam Colyott, sales manager for AmSan in Streamwood, Ill. In 2007, there were price increases on more than 100 items carried by AmSan.

“It’s been across the board, from mop buckets and equipment to chemicals and paper. Pretty much everything we sell on a daily basis had some increase over the last year.”

When manufacturers raise prices, so must distributors. Figuring out how to pass along increases without losing customers is an age-old problem that is only becoming more challenging as prices skyrocket.

A Changing Market
The reason for the current escalation of prices is not surprising. Crude oil prices have hovered around $70 a barrel (with spikes near $100) since the start of the Iraq War in 2003. For nearly 20 years prior to that, prices had held steady between $20 and $30 a barrel.

Many products, such as solvents and plastics, are made of petroleum-based materials. They cost more to make when oil prices go up and manufacturers must pass those prices down. Even products that aren’t petroleum-based may be packaged in something that is, which also affects pricing.

In addition, fuel accounts for 90 percent of petroleum use in the United States, which means transporting any product — by air, road or water — costs more today than it did five years ago. Energy is also used in the manufacturing process, which makes production of many goods costlier.

“Anyone can claim oil-based derivatives or shipping costs,” says Laurie Sewell, president of Pacifica Consulting Services in Culver City, Calif. “Almost always when the [price-increase] letters come through, they blame it on raw materials and transportation.”

The weakening U.S. dollar has contributed to recent price increases on imported items. Some manufacturers also say they cannot keep up with increased demand for goods from China and others blame increasing minimum wages in certain states for price hikes.

All of this means that prices are up on nearly everything a distributor sells. And 5 percent has gone from the high end to the low end of increases. While some suppliers are still making average increases, many more are delivering bad news.

Paper and chemicals have risen 4 percent to 9 percent per year for the last few years. While these increases are steeper than normal, they have mostly remained annual events. The most volatile category is can liners, which have been on a steady upward tick for nearly three years.

In the past, liner manufacturers would announce price increases (and sometimes decreases) twice a year. Now, prices are going up every 60 days or less. In fact, distributors often receive notices of another increase before the last one has taken effect. All told, liner prices shot up about 15 percent in 2007 alone.

“You can’t get complacent with the price you’re charging because it’s going to change,” says Gary Bright, vice president and general manger of Mission Janitorial Supplies in San Diego. “I don’t know if this is going to become a way of life or if it is just a cycle we are going through. It’s been going on a couple of years. Maybe now it’s a fact of life, not a trend.”

Passing It On
When a manufacturer announces a price hike, distributors must turn around and pass those increases on to their customers. That doesn’t mean, however, that a distributor should take the announced increase at face value.

“There’s always room for negotiation,” says Michelle Ruvola, vice president of The Standard Cos. in Chicago. “If they announce a 10 percent increase, we don’t just say, ‘Okay.’ We try to get no increase, ideally, or the least amount of increase possible.”

A distributor’s best chance for reducing an increase is by being a good customer. That means communicating with your supplier, paying your bills on time, helping with their overstock items, and more.

“Those distributors that don’t have that get the most aggressive price increase,” says Charles Barnes Sr., president of Memphis Chemical & Janitorial Supply in Memphis, Tenn. “Price increases come all the time and it is not a bad word unless you have a bad reputation.”

Having multiple vendors of similar lines also allows a distributor more room to negotiate. Working with a seasoned sales rep may also help; veterans often have more authority to negotiate than rookies.

After settling on a price for a product, distributors must then decide how much of it to pass along to customers (and sometimes how often to do it). A definite no-no is imposing an across-the-board increase on all products.

“Any supplier that does that is taking a shortcut and you can get burned that way,” Barnes says. “If we have a 3 percent increase on paper and an 8 percent on can liners and 5 percent on chemicals, then we take those increases as they are.”

Open to more debate, however, is whether it is ever okay to absorb some or all of an increase. It may be tempting to do so to appease a customer, but some distributors say it can actually do more harm than good.

“If you skip one increase, what can happen is six months later you get another increase and now you have to increase it twice to make it back up,” Colyott says. “The customer definitely won’t understand why it went from $22 to $32 in six months instead of $22 up to $24 and then to $26, and eventually up $32 over 18 months.”

Some distributors will not pass along an increase as long as they still hit their expected margins. For example, when Pacifica Consulting Services is given new pricing from a manufacturer, the distributor evaluates each of its client’s margins. If not passing on the increase means they lose money on one line item but still meet their margin goals for the client, they may be willing to eat the cost in order to keep the client happy.

“I think the customer appreciates that because you are looking at the total picture of them as a customer versus, ‘Am I making money on soap from customer A,’” Sewell says. “If I’m making my margins, I don’t care if I’m losing $.50 a case on soap. I do know there are companies out there that do not like any line item to go at a loss or break even.”

Sewell has discovered that sometimes it is not increases that bother clients but the frequency at which they come, particularly with liners. To avoid going to accounts every two months with new rates, The Standard Cos. may raise its prices above an announced increase so it can eat the next increase without losing money.

The Standard Cos. also stockpiles extra inventory of certain items before a large price increase goes into effect. This strategy buys the distributor time before it must impose the increase.

“If it is a 10 percent price increase, it may be smart to bring an extra 30 or 60 days worth into your warehouse,” Ruvola says. “If the customer is sensitive to the increase they are generally more amenable to it if you give them 45 days to get used to the idea of paying more for the product.”

Unfortunately, absorbing increases is unavoidable when it comes to contract bids, such as those with government or educational customers. Historically, manufacturers have offered one-year rates for these situations, however, long-term contracts are becoming rare (or they now come at a premium rate above current market conditions).

Breaking The News
The biggest mistake a distributor can make when it comes to price increases is not communicating the news to its customers in a timely, personal and honest manner.

Just as you demand 30 to 45 days notice of price increases from your suppliers, your customers appreciate advance notice before you raise their rates. Likewise, if a faxed form letter about increases annoys you, it will probably upset your customers. Finally, be truthful about why the price is going up; use the same reasons your manufacturers gave you.

“Good relationships make it easier to have difficult conversations with your customers,” Barnes says. “And introducing price increases are always difficult conversations.”

Luckily, customers have been fairly understanding of the recent bout of price increases. They see the effects of escalating oil prices in their personal lives at the gas pump and in their energy bills.

If a customer is not receptive to a proposed change, however, an in-person delivery allows the salesperson to present backup materials from the manufacturers that validate the increase.

“The documentation they send us is very good,” Bright says. “It ought to be good, they’ve been writing enough of it!”

When all the documentation in the world isn’t enough to mollify an angry customer, a distributor should encourage them to shop around. If you’ve negotiated the lowest possible increase and are confident in the service you provide, your customers will quickly see that leaving you is a mistake.

“If you feel [the need] to justify to your boss that you need to test the market, go ahead because you’ll find we’re still competitive,” Sewell tells her customers. “Sometimes even telling them to look at the market gives them extra comfort.”

It may sound counterintuitive, but price increases can actually be an opportunity to grow your business. Just as your clients may shop around, so might your competitors. Everyone is jacking up prices (increases are never an isolated event) and if you have more to offer than the other guys, such as a superior on-time delivery record or a more comprehensive training program, you may be able to gain more customers than you lose.

“It forces our sales team to go in and present different solutions,” Ruvola says. “It’s a chance to present products using new technology or to do an audit of a customer’s workplace to see if they are using the most efficient and economical products. When it comes to price increases, we’ve picked up more new business than we’ve lost with that presentation.”

Becky Mollenkamp is a freelancer based in Des Moines, Iowa. She is a frequent contributor to SM.