While I don’t profess to be an economist, I do have the opportunity to listen and participate in many business discussion groups. More conversations these days seem to include the topic of inflation. When might it become a factor and how would it affect our respective businesses?
The most recent CPI (Consumer Price Index) for the United States was up 1.5% over last year. It was lower than our historical average of about 3% and even lower than the current Federal Reserve Target of 2%. But while the actual number is well below traditional inflationary concern, almost everyone agrees the lower number is driven by unusually high unemployment and the corresponding lack of wage pressure.
Many developing countries are already seeing inflation in excess of 4% and the US has seen huge upticks in commodity prices. During the last six months, oil is up 9%, copper up 36% and silver is up over 50%. Agricultural products like cotton is up 100%, wheat up 24% and soybeans up 42% – these increases are already being felt by everyone in the grocery store.
How should we respond?
As small business managers, I believe we should be ahead of the curve. If raw material prices in your business have increased, you should already be calculating price increases. But even without direct cost of goods increases, I believe a review and decision on pricing should be made now.
Even in unique economic conditions, the standard guidelines of pricing still apply:
At a recent CEBI (Chief Executive Boards International) meeting, we discussed a few creative strategies for increasing margins. The airlines have made a science out of indirect price increases: ticketing fees, baggage fees, seat fees, etc., so follow their lead. Consider adding surcharges for shipping and handling, or fuel; negotiate shipping discounts and continue to bill the customer list price; or implement a provision for an automatic price increase based on a recognized published index.
I am certain there are options within your company to generate additional gross margin and encourage you to take a look.