By Tom Grandy,
Have you been to the grocery store lately? If so, you have probably noticed a few changes. Products you have been buying for years have changed in one of two ways, or perhaps both. The obvious change is the price. Nearly everything you buy has gone up. What you may, or may not, have noticed are the packaging changes. What used to be a 16-ounce can, package, or bottle is now only 12 or 14 ounces. Many items have done both. The quantity has gone down AND the price has gone up. Ouch!
I really wish there were more business owners in government. How many times has the government increased taxes on those filthy rich large corporations? The government’s perspective is to tax more so those horrible companies will have to pay more taxes and make less profit. That will show them…right? Wrong! Those large corporations understand business. Any increase in costs, be it raw materials, freight, wages, utilizes, gasoline or higher taxes will NOT hurt the corporation’s bottom line. They will simply pass it on to the consumer, in the form of a price increase, to maintain their profitability.
As small business owners we need to do the same. The problem is that many small business owners are slow to react, for several reasons. Here are just a few.
Seldom Review Financial Statements – A company needs to be aware there is a profitability problem to “fix” it. Big corporations know they have a problem because they are constantly watching their P/L Statement. When profits begin to fall red lights start blinking. They know decreased profitability means their stock price will soon begin to fall followed by unhappy stockholders calling asking why their investment is not making money. Most small business owners only look at their P/L Statement once a year when their CPA tells them how much tax they owe. It’s a bit late at that point to effectively change the outcome. Like large companies, small companies need to review their P/L Statement each month either internally or with their CPA. If profits are down adjustments need to be made to turn things around.
Unaware of Price Increases for Parts, Materials or Equipment – Smart individuals, that shop at the grocery every week, most likely will notice significant price changes. However, company owners typically do not look at the price of parts, materials or equipment closely. Their time is typically invested in employee issues, sales, customer complaints or simply putting out fires. Most do not review specific items on parts, material or equipment invoices. The bottom line is predictable. Costs go up, pricing stays the same and profits fall. How those increased costs are affecting the bottom line is seldom known until the P/L Statement is reviewed. As stated earlier, that normally takes place once a year, which is way too late. Review the P/L monthly and make adjustments as needed.
Scared to Increase Pricing – Ah, the age-old problem. The fear of raising hourly rates! The big corporations don’t fret or worry about increasing their pricing. Does Kellog’s check with Post before raising cereal prices. No, they each adjust pricing once they notice their bottom-line profitability is falling. They are fully aware that if they don’t increase their pricing profits will fall. If the trend is not reversed, they will eventually go out of business!
Guess what? The same principles apply to your business. Ignoring increased costs will NOT solve the problem. Always keep in mind the basic principle of “The fear factor of raising hourly rates is on the part of the company, not the customer”. For those that may not have been in one of my earlier classes we do a little exercise of raising hourly rates 10%. We then assume the price increase results in a loss of 30% of our customer base. The end result surprises most of the class. Overall profitability STILL increased. Will you lose 30% of your customer base when you raise your rates? Absolutely not. Do it…or go out of business!
Don’t Understand How to Price for Profit – Let’s assume you are a very good business owner. You review your P/L Statement monthly and have staff keeping an eye on price increases for materials, parts and equipment. You are fully aware that a price increase is needed, but how much is enough? Picking an arbitrary number out of the air may be right or may be wrong. As the owner you need to know exactly what hourly rate is profitable in each department to generate the profit you desire. If you need some help in that area, consider attending one of Grandy & Associate’s in person, or online, two-day Planning for Profit workshops.
I may not like the way the manufacturer tries to sneak in the price increase, or the packaging change to reduce the volume, but I do understand the overall need. Like any business, large or small, the overall need to make a profit remains. No profit – No company.