The margin you lose before the meeting starts
Every year, somewhere between October and December, the same scene plays out in OEM supply. A component supplier sends its customers a letter announcing next year's prices. Procurement reads it, forwards it to the category manager, and replies with a counter-request — usually a reduction, sometimes a polite refusal to accept anything at all. A few weeks of tense emails follow. The supplier eventually settles for half of what it asked, or nothing, and the account manager spends the first quarter repairing a relationship that was fine in September.
The interesting thing about this scene is that the outcome was decided long before the letter was sent. The supplier didn't lose margin in the negotiation. It lost margin by arriving at the negotiation late, without a rationale the customer could defend internally, and without anything to trade other than the price itself.
Annual price updates are one of the few moments in a long OEM relationship where commercial value is explicitly redistributed between supplier and customer. In a design-in business, where a component can stay in a product for five or ten years, the cumulative effect of getting this wrong is enormous. A supplier that concedes one or two points of margin every year doesn't notice it in any single negotiation. It notices it five years later, when the most important product line in the portfolio is barely profitable.
Timing is the negotiation
The most common mistake I see is treating the annual price update as an event rather than a process. The letter goes out when finance has finished its cost review, which is usually late in the year. By then, the customer's position is already fixed.
OEM customers don't build their budgets in December. Most of them set next year's product cost targets and bill-of-materials assumptions during the third quarter, and their procurement teams are measured against those targets. A price increase that arrives after the budget is closed isn't just unwelcome — it creates a personal problem for the buyer, who now has to explain a variance they had no chance to plan for. You have turned your most important commercial counterpart into someone whose objective is to make your increase disappear.
The alternative is to work backwards from the customer's calendar, not yours:
- Second quarter: run your internal cost review early enough to know which direction your prices need to move, and by roughly how much.
- Early third quarter: signal the direction informally — in a business review, through your account manager, to your champion and to procurement — before the customer's budget is locked. No numbers yet, just the trend and the drivers.
- Late third quarter: share the rationale and an indicative range, so the buyer can include it in their planning.
- Fourth quarter: present the formal proposal and negotiate the details, with the effective date aligned to the customer's fiscal year rather than yours.
None of this guarantees acceptance. But it changes the nature of the conversation. A buyer who heard the drivers in July and planned for a range in September is negotiating within their budget. A buyer who first hears about it in December is negotiating against you.
Do the homework with your own team first
The second reason annual price negotiations go badly is that the supplier walks in without a story it can defend. "Costs have gone up" is not a rationale. Every supplier says it every year, and procurement teams are trained to treat it as noise.
A credible rationale is built internally, with finance, operations and product management in the room, before anyone talks to the customer. It answers a small number of specific questions:
- What has actually changed in our cost structure since the last price was set — materials, labour, energy, logistics, currency, yield?
- Which of those changes are external and verifiable, and which are the result of our own decisions?
- What have we done ourselves to absorb part of the increase — process improvements, yield gains, design changes?
- What is our target, what is our opening position, and what is the floor below which we would rather lose volume than accept the price?
- Who is allowed to agree what, and at which level does a concession need approval?
The same discipline applies when prices should go down. If your yields improved or a key material became cheaper, saying so before the customer asks is one of the most powerful credibility investments you can make. A supplier who proactively passes on part of a cost reduction one year is believed when it asks for an increase the next. A supplier who only ever talks about costs when they rise is not.
The output of this internal work should be a short, factual explanation the buyer can forward to their own management without rewriting it. That's the real test: if your procurement counterpart can't use your rationale to justify the increase internally, they will fight it, regardless of whether it's fair.
Trade price for commitment — deliberately
In OEM supply, price and volume commitment are two sides of the same equation, and treating them separately is one of the most expensive habits a supplier can have.
A firm commitment is worth real money to you. It lets operations plan capacity, secure long-lead materials and avoid both overtime and idle time. A forecast is worth much less — every experienced supplier has priced a contract on a forecast that never materialised. Yet many annual negotiations end with the supplier conceding price in exchange for a forecast, and the customer conceding nothing in return.
The better approach is to make the trade explicit and offer the customer a choice:
- A lower increase (or a held price) in exchange for a firm twelve-month commitment, through a blanket order or a framework agreement with scheduled call-offs.
- A higher price on a forecast basis, with the flexibility the customer wants.
- Volume tiers with a clear true-up mechanism, so that if the committed volume isn't reached, the price adjusts — in either direction.
Presented this way, the customer stops seeing the increase as something imposed on them and starts seeing a decision they can make. And you stop giving away margin in exchange for numbers nobody is accountable for.
The customer must not feel robbed
There is an emotional dimension to annual pricing that most suppliers underestimate. Procurement professionals are measured on savings. A price increase, however justified, damages their scorecard, and the way it's presented determines whether they experience it as a business adjustment or as being taken advantage of.
A few principles make a significant difference:
- Show the balance, not just the demand. If raw materials added fifteen percent to your cost and you are asking for nine, explain that you absorbed the rest through productivity. Shared pain is accepted far more readily than full pass-through.
- Acknowledge their constraints. Your customer's customers are squeezing them too. Recognising that openly signals that you understand the relationship as a partnership, not a transaction.
- Be transparent without opening your books. Public indices, commodity prices and published market data are more persuasive than your internal cost sheets, and they don't expose your margin structure.
- Never let the letter be the first conversation. A formal notice should confirm what was already discussed, not introduce it.
Alternatives to cutting the price
Many OEM customers, especially those with automotive-style purchasing cultures, expect an annual price reduction as a matter of routine. Long-term agreements in automotive commonly include fixed annual reductions in the range of two to three percent, whether or not the supplier's costs have actually fallen. When that expectation arrives, the instinct is to argue about the percentage. The better instinct is to ask what problem the reduction is supposed to solve for the buyer, and whether something else would solve it at a lower cost to you.
In my experience, there is almost always an alternative that is worth more to the customer than it costs the supplier:
- Extended warranty — valuable to a customer worried about field failures, often cheap for a supplier with a mature, well-characterised product.
- Reserved stock — finished goods or critical raw material held for the customer, which protects their production line against supply disruption.
- Guaranteed or faster lead times — a contractual delivery commitment, or an expedite option for a limited number of orders per year.
- Additional application engineering support — a defined number of engineering days for their next product generation, which also keeps you inside their design process.
- Longer price validity — fixing the price for eighteen or twenty-four months gives the buyer planning certainty they can report as a saving.
- Obsolescence protection — a longer last-time-buy notice period, which matters enormously for customers with long product lifecycles.
None of these should be offered reflexively. Each has a real cost, and that cost belongs in the same internal calculation as the price itself. But a supplier who arrives with two or three well-costed alternatives has turned a zero-sum discussion about a percentage into a conversation about value — which is the only conversation where the supplier can win.
A photonics example: the germanium squeeze
The last few years in infrared optics show how quickly these dynamics become real. Germanium is the dominant lens material for thermal imaging, and China controls most of its supply. In August 2023, China introduced an export licensing regime for germanium; in December 2024, it banned exports to the United States entirely. According to the U.S. Geological Survey, the average European price of germanium metal rose from about $1,392 per kilogram in 2023 to $1,991 in 2024, with 2025 estimated at around $4,100. Industry participants reported lead times for germanium of more than forty weeks, and optics manufacturers said openly that rising raw material costs were being passed on to component prices.
The alternative material, chalcogenide glass, exists and is increasingly produced at high quality — but switching to it requires redesigning the optics, which is exactly what an OEM customer with a qualified product wants to avoid. Supplier and customer are therefore locked together: the supplier can't absorb the cost, and the customer can't easily leave.
To see how timing and preparation change the outcome, consider an illustrative supplier of germanium lens assemblies for thermal camera OEMs. The numbers are simplified, but the mechanics are the ones I've seen in practice. Suppose germanium represents around a third of the assembly's cost. A rise of roughly forty percent in the material price adds around thirteen to fifteen percent to the cost of the assembly.
Supplier A finishes its cost review in November and sends a letter announcing a fifteen percent increase from January. The customer's budget is closed. Procurement escalates, refuses the increase for the first half of the year and quietly asks engineering to evaluate a second source and a chalcogenide redesign for the next product generation. Supplier A gets a partial increase — and starts a slow exit from the account.
Supplier B raises the germanium situation in its mid-year business review, shares the public price data in August, and in September presents three options:
- a nine percent increase in exchange for a firm twelve-month volume commitment, with germanium blanks secured and reserved for this customer;
- a twelve percent increase on a forecast basis;
- a lower base price with a quarterly adjustment indexed to the published germanium price.
Supplier B also offers its application engineers to start evaluating chalcogenide designs together with the customer for the next generation. The customer chooses the first option, plans the cost into its budget, and Supplier B remains inside the design process for the product that will eventually replace germanium. Same market, same cost increase — completely different commercial outcome.
A practical annual pricing calendar
- April–June: internal cost review with finance and operations; identify the direction and drivers for each key account.
- July: agree targets, opening positions, floors and approved alternatives for each account; align sales, finance and operations on one story.
- July–August: signal drivers informally to champions and procurement before their budgets close.
- September: share the rationale with public data and an indicative range; propose volume-commitment options.
- October–November: formal proposal and negotiation; use non-price alternatives where they create more value than a concession.
- December: confirm in writing — the letter documents an agreement, it doesn't open a discussion.
The honest conclusion
The annual price update is not a finance exercise with a sales signature at the bottom. It's one of the most important commercial negotiations of the year, and it's decided by preparation, not by negotiating skill on the day. Suppliers who plan it with the customer's calendar in mind, build a rationale the buyer can defend internally, trade price against commitment deliberately and come with alternatives to a price cut protect their margins and strengthen their relationships at the same time.
If your price letters for next year are still being drafted, it's not too late — but the conversation you should have had in July is now the first thing to fix. Start with your three most important accounts, and ask yourself one question for each: does the buyer already know what's coming, and why?
FAQ: Annual price updates in OEM supply
When should a component supplier announce an annual price increase to an OEM customer?
Well before the customer's budget for the following year is closed — in most cases during the third quarter. The formal notice can follow later, but the direction and the drivers should be discussed early enough for the buyer to plan for them.
How do you justify a price increase to an OEM procurement team?
With specific, verifiable drivers — ideally public data such as commodity indices — and with evidence of what you have absorbed yourself. The rationale should be short and factual enough for the buyer to forward to their own management without rewriting it.
What can a supplier offer instead of an annual price reduction?
Alternatives that are worth more to the customer than they cost the supplier: extended warranty, reserved stock, guaranteed lead times, additional application engineering support, longer price validity or better obsolescence protection. Each should be costed internally before it's offered.
Should price concessions be linked to volume commitments?
Yes. A firm commitment has real value for production planning and material procurement; a forecast does not. Making the trade explicit — a better price for a firm commitment, a higher price for flexibility — protects margin and gives the customer a choice instead of an imposition.