It’s Time: Ask Your Customers for a Price Increase

Dan Sharkey says that, given the confluence of inflation, supply chain pain and high raw material costs, this is the best time over the span of his 27-year career for machine shops to ask customers for a price increase.

Sharkey is an attorney and member at Brooks Wilkins Sharkey and Turco, PLLC (bwst-law.com). He concentrates his practice on business contracts and litigation with a special emphasis on supply chain issues, and has tried more than 60 cases in U.S. district, bankruptcy, military and state courts. Sharkey addressed this topic at the Precision Machined Products Association’s (PMPA) annual meeting I attended late last year.

He recognizes that asking customers for a price increase — especially from those with whom you’ve had longstanding relationships — is never easy. But, given current economic conditions, it’s important to consider the effect that keeping a bad customer will continue to have on your company’s bottom line. The key, as Sharkey notes, is presenting the idea of a price increase to your customer in the proper way.

The first step he suggests is reviewing your applicable contracts and then meeting with your managerial team to list customers in order of profitability, ease with which to work and so on. This enables you to determine which customers (the worst being at the bottom of the list) will be the first you approach asking for a price increase, starting at the bottom and eventually working your way upward.

Sharkey says it’s important to next consider how you present your request to your customers. For example, it’s vital to provide a firm deadline for the implementation of the price increase and enforce it (i.e., include “or else” wording). Your customers have probably already received similar requests. Without providing a deadline — a firm date that you will cease delivering product without the price increase going into effect — their purchasing representatives, as likely instructed, could ignore your request or send it to the bottom of the pile of others in an effort to buy time.

However, in your first message to a customer, don’t insist that you’ll halt product delivery if the customer doesn’t immediately agree to a price increase. That, Sharkey says, is an impossible stance to defend. Outline the reasons for your request and then give the customer a deadline that is defensible in terms of the contract, relationship and customer’s ability to move the business.

But how might they react? The two extremes would be you lose the business (in Sharkey’s experience this happens only 10% of the time) or your customer immediately agrees to the price increase (this is atypical). Here, he describes more likely customer responses:

• Some might pay you under protest. This means, the customer will pay the original amount as well as an additional cost — which brings the total to the price increase you requested. But, being that the customer is issuing that purchase order under protest, it reserves the right to object to the additional cost at a later date. The question is how will the customer recoup the additional cost.
• Some might want to issue debit notes to recoup the price increase. This your customer is permitted to do. However, if it would constitute a breach of your contract, you can counter this action by communicating that it is your right to then suspend product shipment unless the full purchase price is paid. In many cases, there’s no answer to that because your customer needs your product and can’t pivot quickly enough to another supplier.  
• Some might want to negotiate. Customers might be willing to agree on a price increase for some work for certain contracts, but would like some degree of reimbursement for other product previously purchased. In this case, the supplier normally has significant leverage, Sharkey notes. It’s up to you how much you might want to give back to your customer, if anything at all, perhaps depending on how big and valuable the customer is to your business. Good will is important, but hard to quantify.
• Some might choose to sue. Although this is a possibility, in reality, few customers want to go through the process of suing another given the necessary work of gathering documentation, engaging attorneys and so on. Plus, with the COVID-19 backlog in the courts, it can take several years to get to trial. Not many will want to wait that long for recovery.

There’s more to such negotiations than could be described here, but I hope you heed Sharkey’s advice. And, if this is an endeavor that you have recently undertaken, email me and let me know about your experiences.