Short answer: When material and labor costs rise, margins shrink quickly unless prices keep pace. Manufacturers that track product costs closely, use escalation clauses in contracts and communicate increases clearly can protect margins without damaging customer relationships.
Know your cost changes first
- Track material costs by key input every month
- Update labor rates, including benefits and overtime
- Recalculate product costs and margins on current inputs
- Identify the products and customers most exposed
Pricing tools
| Tool | When it fits |
|---|---|
| General price increase | Broad cost increases across most products |
| Escalation clause | Long-term contracts with volatile inputs |
| Temporary surcharge | Short-term spikes in a specific cost such as freight or energy |
| Minimum order or fee changes | Small orders that cost more to serve |
Communicating increases
- Explain the reason clearly and early
- Give customers notice before the change takes effect
- Prepare sales teams with consistent talking points
- Offer options, such as volume commitments or alternative products
- Track customer response and margin results
How Capstone CFO helps
- Build product costing that reflects current input costs
- Model the margin impact of cost changes and price increases
- Design escalation clauses and surcharge approaches with your team
- Track margin recovery by customer and product
- Update forecasts and budgets as costs change
Frequently asked questions
How often should prices be reviewed?
At least annually, and more often when input costs are volatile.
Will customers accept price increases?
Most accept increases that are explained clearly and supported by real cost changes, especially when given notice.
What if a customer contract fixes prices?
Review the contract terms. For future contracts, consider escalation or review clauses.
Want to protect margins as costs rise? See how we support manufacturers and distributors or book a call with our CFO team.