Repricing when input costs move faster than your contracts

Feb 24, 2022

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Repricing when input costs move faster than your contracts

A fixed price is a bet that your costs will not move much. That bet was reasonable for years and is not currently. Companies discovering this are finding the problem is not pricing skill but contract structure.

Find the exposure before it finds you

List the agreements that commit you to a price for a period, with the volume and the remaining term. Then identify, for each, the input whose movement would hurt most.

Most companies have never assembled this list, and are surprised by how much revenue is committed at prices set under different conditions.

Indexation is the structural answer

For future contracts, tie price to something observable: a published index, a stated input cost, an exchange rate. Define the reference, the review frequency, and the threshold below which no adjustment happens — small frequent changes irritate customers for little gain.

Buyers resist this less than expected, particularly if the mechanism cuts both ways. A clause that reduces price when the index falls is far easier to agree than one that only rises.

For existing contracts, lead with information

You are usually asking for a variation rather than exercising a right. The approach that works is evidence: show the input cost movement, show what it does to the economics of serving them, and propose something specific.

Consider alternatives to a straight increase — a shorter term in exchange for holding price, a volume commitment, faster payment, or changed specification. Customers who will not accept a higher price will often accept a different deal.

Know which contracts you would let go

Some agreements are now worth less than the capacity they consume. Work out which, before you negotiate, so you know where you can decline.

Keeping a loss-making contract to protect a relationship is a legitimate decision. Keeping one because you never calculated it is not.

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