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:
- Avoid making generic pricing decisions by product category or vendor. Some items are more or less price sensitive than others. Establish a company wide goal for gross margin increase, but make adjustments on an item-by-item basis.
- Observe your competition and their advertising habits. Items that are heavily promoted make customers more sensitive to the price. Go easy when increasing the price on these items, utilizing less price sensitive items to achieve overall gross margin increases.
- Items with sales increases in excess of 5% more than the overall company rate of growth are prime targets. Remember, it is always easier to raise prices when demand is increasing.
- Time your price increases according to seasonal trends. Raise prices during slower sales periods so you can “listen” to the marketplace and correct any missteps before entering a heavier sales period.
- Informing your customers of a pending or implemented price increase varies by company. Those utilizing contracts may be obligated to provide prior notice – another reason to get started now. Even if notice is not required, take the time to arm your staff with good talking points. Oftentimes, the strongest resistance to a price increase is internal, not from the customer. Educating your team is essential for good customer service.
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.