Why raising every price by 5% loses margin

Every year or two, most of the companies we meet put their prices up by the same percentage across the whole range. It feels fair to customers and easy to explain to the board. It’s also the most common reason we find margins slipping while sales look healthy.

The cause is mix. In a typical range a dozen products carry most of the volume, and they’re often the ones priced closest to cost, because someone priced them to win customers years ago. A flat 5% on those barely keeps up with inflation. A flat 5% on the slow sellers, where customers would happily have paid more, earns very little because so few of them leave the shelf.

Price by role

We sort a range into four roles. Some products bring customers in. Some carry the margin. Some are the ones customers compare with a competitor’s, and the rest are the ones nobody compares at all. Each role can take a different kind of rise, and the last group can usually take the most.

At Strathlinn Distillery we went through forty bottlings with three years of sales by bottling and channel. Three of the forty carried most of the change. Gross margin rose from 31% to 37% within a year, and volume stayed flat.

A price rise is a message. Decide what it should say before you decide the number.

Give the sales team rules

The analysis takes about a week. Turning it into something the sales team can use takes longer. Every new price needs a reason a salesperson can give at a customer’s counter, in one sentence, without opening a spreadsheet.

So the deliverable is a short set of rules: which products can be discounted and by how much, which ones never are, and what a customer has to do to earn a better price. Strathlinn’s list took three weeks to build, and they haven’t needed to change it since.

If you only change one thing this year, look at your ten best sellers and ask when each was last priced on purpose. In most companies we visit, the answer is longer ago than anyone thought.