The Expert Podcast

If you're a small business, one of the most important things that you have to worry about is inflation. Even if your customers can afford your product, the cost of your product is affected by the source materials. I'm sure you've seen over the last year or two, prices have increased dramatically on everything from services to materials to inventory to shipping, gasoline, food, and even if all of those components don't directly affect your product. Maybe you're an insurance agent, maybe you are a bookstore—at some level, inflation creeps into your business decisions. If you look at all the different ways that, first of all, you can recognize it and account for it, you'll be ahead of the game, rather than a competitor who's just reacting to things happening in the marketplace.

Let me give you a few examples. If you're a company that looks at your costs and raises your prices maybe once every couple of years, you may find that during that next year and a half cycle, your costs are going to go up and you're going to lose margin. At the same time, customers are expecting price increases because they see it everywhere else on a much more frequent basis. They see the gas price at the local fueling station go up every day, every week—it's higher. They see their real estate values go up on Zillow every month. They're going to see their restaurant have higher prices every month or two. If they're a renter, they're going to see their rents on apartments go up every month or two. So, if you're holding your price the same because you want to try to retain customers, you may be doing yourself and the customer a disservice. Here's why: first of all, your margin during that time when your costs are going up is going to be smaller, which means you won't have enough margin left over to really serve your customer well and retain good employees.

If you're giving away your product or service too cheaply, you're not giving your customer charity; you're actually taking away valuable service. If the customer wanted something for free, they would do it themselves. Whatever you offer, right? If you're a contractor that does electrical work, if the customer wanted something for cheap, they would do their own electrical work. They want to pay you for a valuable service. They're coming to you for expertise, and that should be the focus of your business—being an expert in your field that customers want to pay you money for. Every dollar that you discount your product, you're getting closer to zero. You don't want to overcharge, obviously. You don't want to take advantage of customers. You want to make your product seem like it's a no-brainer to buy for what the value is. But by letting your cost go up and not adjusting your price to the customer, you're having less money internally to pay great people to be part of your organization and give your customer good service.

You're not going to be able to give extra VIP service to customers. Maybe if somebody buys something from you, you give them a little extra. Maybe if they ask a question, you give them an extra combination. Maybe if you're a hotel, you have extra perks for that customer. If you're short on margin, you're going to pull back some of those perks. You're going to cut corners in ways you think don't affect the customer, but that's what retains your customer base. If you have repeat volume customers, they're going to see those little cutbacks and they're going to make decisions about maybe staying with you, maybe jumping ship and going somewhere else.

Also, if you have less margin, you're not going to be able to pay employees a luxury amount. You may not have to cut their pay, but you're not going to be able to give them more, and they're going to see all their expenses going up—their rent goes up, their gas for their car goes up, their food goes up at their house. All the things they pay for are going up, but their salary is not going up. You might be able to say, "Well, we didn't raise prices for our customers." But the employees can say, "I don't care, I still have to pay more."

So, keeping your prices in line with the market is going to help you do all the right things for your business: pay your employees more, pay yourself more, and make more profit. Because the other thing about your business, if you remember, all of the great things you've done to develop and grow your company have to do with investments. Maybe you bought a new computer system, maybe you bought a building with more space, maybe you bought new equipment, maybe you invested in new employees. You were able to do that because of retained earnings that you had from prior months, quarters, or years. If you're cutting short your margin, it's going to be a domino effect. You may not realize the problems with that for weeks, months, or even years later when you find that you're behind and all your competitors are now buying new buildings, new advertising, better employees, better equipment, and now you're behind the eight ball because you thought you were doing your customers a favor by keeping your prices low.

Keeping them low is one thing, but keeping them artificially low is not doing you or your customers any good because now they have to go to a competitor. If you honestly believe you're the best company out there, you're the best provider, you don't want your customers going somewhere else because you don't think they're going to be taken care of as well as you could. If you believe that you are a great business provider for your customer, you want to make sure that they don't go somewhere else because they don't know any better. And the only way you're going to do that is to make sure that you retain them and offer the best product, service, employees that you can. By letting your costs creep up and eat away at your margin, you're going to have less power to give the extra service, have the good employees, and maybe increase the quality of your product. While everybody else is cutting back on quality, maybe using cheaper materials, smaller portions, whatever they do, you're out there giving more. It doesn't cost you that much for most businesses. Your actual cost basis, cost of sale, is less than 50 percent. Sometimes it's 20 or 30 percent.

So, if you produce a product and it costs a hundred dollars and it costs you 20 or 25 dollars to make that product (not counting overhead or labor or service or employees, those kinds of fixed costs), by adding on 20 percent more material, better material, 20 percent of, let's say, 25, is only five bucks. So now you're going to 30. So if you do that and raise your price to 125, your margin's still the same. You might think, "Well, I don't want to raise my price in this market because everybody's short on cash." Everybody is short on cash, but you want to be the one that they give their cash to. They're going to make decisions about where to give their cash. Some of those decisions are based on cost, but some of them are based on quality. In fact, when it comes to financial strain and pressure, most of the time, people give up the low-quality things first and keep the things that are most productive, especially in a B2B environment.

If your product is a luxury, you want to keep it a luxury. You don't want to make it a commodity because a commodity can be replaced. If you lose some customers that can't afford the luxury, that's fine. When it comes out the other side, you will be the luxury provider. It's a strategy in business. Maybe it might not work for everybody, but make sure that if you do make the decision to become a commodity or the lowest price provider, you're doing it intentionally. You're not accidentally letting yourself get left behind on price increases to where you don't have the horsepower, the finances, the capital to stay in the pack, running with the big dogs. And that's where that power comes from. It comes from capital, working capital. The working capital all comes from your customers.

Again, we're not talking about ripping people off or gouging or jacking up prices. We're talking about maintaining pace with the market, at least making your product better. It's a bold thing to do in business. It's a bold thing to do when there's inflation. It's easy to cut prices and cut costs to try to get more business, but if the business is not sustainable for today or more importantly, for tomorrow, there's going to come a time you're going to run out of gas. You are going to train your customers that you are the low-cost provider, the bucket shop, the cheap place, the discount blue light special. You want to be the one the customer looks at as high quality. In the face of all this, you're still giving good service while they're seeing right now everybody else has bad service.

Think about your own experience as a consumer or as a business client. Every company that you call up, every agency you call up, places you communicate with—what's their customer service like? Do you get people on the phone? Do they know what you're talking about? Do they have good customer service compared to even four years ago? Think about that. Think about how hard it is to get somebody on the phone. Even airlines, big companies—they don't have customer service on the phone anymore. So, you can very easily make yourself different and stand above and beyond the typical average defensive fearful company by just providing a little bit more. It doesn't have to cost you a fortune. You don't want to break your bank doing it, but by keeping your prices in line with inflation, you're going to be able to have that capital.

What's it going to do for your volume? Well, we did a very recent business development experiment with one of our business entities where we had a product that was being sold for about 80 dollars. It was a service, a convenient service being sold for about 80 dollars, and that was the price for seven or eight years. About a year and a half ago, we knew that the cost was going to go up. Labor was going to go up, some of the fees we had to pay on certain services were going to go up. You could see the way inflation was driving prices up. We raised the price by 20 percent. It took the price from 80 bucks to 100 bucks. We raised it quietly and then let our customers know ahead of time. No real problems—well, we had some complaints. We always have complaints. But the volume stayed the same. And in fact, in the next year or two, we saw it grow. As the other providers raised their prices, we maintained that edge in service, quality, and delivery. And that made all the difference in retaining customers, so those customers kept coming back, bringing others with them. If you continue to add more services, more value, but you keep your prices competitive, that's what's going to make you stand apart from your competition.