Passing on prices
Many of our CEOs explained that they had made CPIs already this year, but were now in a position whereby another was becoming increasingly necessary. “We implemented a price increase across all customers for the first time ever this year, but this was before the current rises in inflation. We are now wondering when is the moment to raise our prices again.” Given how common this predicament was among our CEOs, here are three strategies from Giles’ discussion with the group that you can use when increasing your prices.
Consider your product offering. It is essential to keep an eye on the profitability of each item in your offering to make sure you are focused on the products that are going to help your business the most. Whilst many products will be negatively affected by inflation, there will be some that are less susceptible to its effects, and will retain their profit margins better. Once you identify these outliers, you should realign your advertising and promotions accordingly. This will prove crucial to the health of your P&L sheet, no matter what industry you’re in.
Adjust average prices, not headline prices. Many products are subject to discounts via deals and promotions. For example, whilst a supermarket might give a can of pop a headline price of £1, only 30% of the units they sell may be bought at that price. The remaining 70% however, could be part of an offer in which the customer can buy two cans together for £1.50. This would mean that the average price of each can is 83p. Now, rather than raising the headline price from £1 to £1.20 to keep pace with inflation, you should try to raise the average price of the item by increasing the prices of your offers and promotions. For instance, if the same supermarket decided to increase the price of their offer to £1.75, the average price of each can would become 91p. This allows you to improve the profit margin of a product without ‘locking horns’ with the customer on the headline price.
Take as much CPI as you can. The process of negotiating price increases with your customers is seldom an easy task, so you should try your best to make them as infrequent as you can. To do so, it is best to take the maximum amount of CPI possible. By doing so, you create a buffer that will absorb future increases to your costs without having to take CPI again. This way, instead of taking CPI three to four times a year and facing resistance from customers, you only have to do so once or twice.* Additionally to this, Giles strongly advised against offering open book pricing. While retailers may be pushing for this, it will never be to your advantage to share this information, especially once things level off again.
*A caveat to this exists in industries where fixed prices are less prevalent. If you are a business within such an industry, consider making use of spot pricing, or three-month pricing, both of which can be extremely useful tools in periods of hyperinflation.
Mitigating your costs
With the cost of raw materials, ingredients, energy, and shipping rising almost daily, it is unsurprising that the group’s second main question was how to mitigate costs. For perspective, a 40ft shipping container cost one of our members $1200 a year ago. Now, however, this cost has increased more than tenfold to a staggering $16000 per container. With such drastic price explosions in mind, here are three ways to keep your costs down:
Think about your production. For years, one of the biggest shortfalls for SMEs competing with larger brands has been the difficulty of shifting production. Large brands have typically been able to move their production overseas, to China and India for instance, to benefit from lower manufacturing costs with greater ease than their smaller counterparts. In the current climate, however, you might be surprised to know that you could be better off confining your production to the UK. With shipping and freight costs escalating so drastically over the last year, overseas production has seen a significant downturn in its profit margins. Therefore, considering your production chain is critical, and could play a serious role in ensuring your business remains profitable.
Constantly communicate with suppliers. Staying in regular contact with your suppliers is crucial in the face inflation, allowing you to forecast fluctuations with more accuracy and prepare accordingly. Furthermore, suppliers are more likely to offer flexible solutions to your issues if you have a garnered a strong relationship with them. Some of our members explained that good links enabled them to extend their payment periods by thirty days, or qualify for similar ‘work arounds’ at their supplier’s discretion.
Buy for your forecast. One member of the group explained how he was buying a greater volume of some goods when restocking than he had done in the past. He was doing this for two reasons: firstly, by buying larger quantities at once, you benefit from greater wholesale discounts. These can then be passed along to consumers for a competitive edge. The second reason is that by buying a greater quantity at a lower price means, this CEO guarantees fewer restocks and therefore benefits from a lower price over a longer period. This might then be where your good supplier relationship comes in, as they might hold some stock for you or offer to drip feed delivery.
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We’d like to say a big thank you to Volunteer Advisor, Giles, for leading this discussion and providing such useful advice on a topic that is affecting us all. If you found this article useful and want more guidance, apply to All Together today for up to five hours of pro bono advice from one of Britain’s leading CEOs.