How to respond to a supplier price increase: a reply letter, a cost check and an AI prompt

Fictional exampleExample Pump Co., its suppliers and every number in this example are made up for illustration. Don't paste real supplier quotes, NDA pricing, personal data or export-controlled data into an AI tool. Anonymize first and follow your company's AI policy.

A price-increase letter usually lands with an effective date a few weeks out and a line about "rising raw material and labor costs." The worst replies are "OK" and "no." The best reply buys time and asks for evidence, and then you negotiate only what the evidence supports. Here is that process in five steps, with a worked example, a holding letter you can copy and an AI prompt.

Step 1: Send a holding reply today

Acknowledge the letter, ask for a cost breakdown by driver with evidence, ask why the effective date was chosen, and point to the contract clause that governs price changes. Don't accept or reject anything yet. Edit the clause wording to match your actual contract.

Subject: Your price adjustment notice dated [DATE]

Hi [NAME],

Thank you for your letter of [DATE] about a [X]% price change on [ITEMS], effective [DATE].

Before we can review it, please send:
1. A cost breakdown for these items showing each driver (material, labor, energy, freight, other) as a share of the current price.
2. For each driver you say has increased, the index or evidence you used, with the dates it covers.
3. The basis for the proposed effective date.

Under section [X] of our agreement, current pricing stays in effect until changes are agreed in writing. We'll review promptly once we have the breakdown.

Best regards,
[YOUR NAME]

Asking for evidence works. ProPurchaser, which sells purchasing software, describes a sourcing director who answered form letters by asking for a table of the key raw material and labor costs. He reported that in 80% of cases the suppliers who sent form letters didn't, or couldn't, justify the increase, and that he saved more than 2% on material costs in the first year. That's one practitioner's account, not an industry statistic, but the method behind it is the one used below.

Step 2: Check the contract

Find the price-adjustment clause. Look for whether price changes are allowed at all during the term, the notice period, any cap, and whether prices are tied to a named index. If the contract fixes prices for the term, that changes the conversation. This isn't legal advice. If the terms are unclear, ask your legal team.

Step 3: Test the increase against its cost drivers

An increase is only as justified as its drivers. Multiply each driver's share of the price by how much that cost actually moved. The result is the increase that driver supports.

Worked example

Example Pump Co. buys a machined steel fitting from Supplier A at $4.00 a unit, 40,000 units a year ($160,000 a year). Supplier A asks for 9%, citing raw material and labor costs. The buyer sends the holding reply, and Supplier A answers that steel is 35% of the price and labor is 25%. The buyer then looks up matching indexes for the same period. In this example the steel index rose 6% and the labor index rose 4%. These index changes are fictional, chosen for the example.

Read the result: the evidence supports about 3.1%, not 9%. The other 5.9 points need their own evidence or they come off the table.

Where to look up indexes: in the US, the Bureau of Labor Statistics publishes the Producer Price Index, which measures the average change over time in the selling prices domestic producers receive for their output. Individual series include PPI commodity data for iron and steel (series WPU101). For labor, the BLS Employment Cost Index has series such as wages and salaries for all private industry workers. Use the series that best matches the supplier's cost, and make sure the dates match the period they're claiming.

Step 4: Choose your counter

• Reduce: accept only the supported part (here, 3.1%).
• Delay: move the effective date, for example by 90 days, to cover open POs and planning.
• Cap: accept up to a ceiling, with anything more needing new evidence.
• Index-link: tie future changes to a named index in both directions, so the price comes back down when the index falls.
• Trade: accept part of it in return for something, such as a longer price hold, better payment terms or more volume visibility.

In the example, a reasonable counter is 3.1% effective in 90 days with a 12-month price hold, or evidence for the remaining 5.9 points.

Step 5: Record the outcome

Send a recap email that states the agreed price, the effective date, the date the price hold ends and the next review date, and update the price in your system. If you accepted an increase as an exception, write down why and when you'll revisit it.

Do it with AI

You are a senior buyer. Here is a supplier's price-increase letter and the cost-share table they provided [PASTE]. Here are index changes I looked up [PASTE, with source and dates]. 1) Calculate the increase each driver supports (share of price × index change). 2) List claims with no evidence. 3) Draft a 150-word reply that accepts only the supported part, proposes an effective date and a price hold, and asks for evidence on the rest. Do not invent index values; if one is missing, say so. Show your math.

What good output looks like: a driver table like the one above with the math shown, a list of claims without evidence, and a short reply that accepts only the supported part.

What to check: do the math yourself, make sure the index dates match the period the supplier is talking about, and check that the reply doesn't commit to anything beyond your authority. Remove supplier names and prices before you paste.

When should you accept the increase?

Accept it when the evidence supports it, when you're single-sourced and the relationship matters more than the gap, or when switching would cost more than the increase. Even then, make it a documented decision with a review date, not a default. A should-cost model helps you judge whether the new price is reasonable. For more negotiation prompts, see ChatGPT prompts for procurement and the supplier negotiation use case.