National Clothesline

hen we shared an office some years ago, Stan Golomb and I would regularly play the “what if” game. For example, what if Steve, the owner of our mailing company and a competitive racecar driver, suffered a debilitating catastrophe? What would we do?

Or what if something suddenly happened to Barbara who oversees every detail of our

mailing programs? Could we maintain the same level of organization?

And what if there was a fire in the office and we lost our computers and all of our records? Would we be able to stay in business?

We thought long, hard and often about these and other scenarios having to do with our business as well as our personal lives.

If you’ve never played the “what if” game, perhaps you should. It’s a good way to prepare for the unexpected. On the other hand, if you’re already a player, here’s something to think about.

What if tomorrow, out of the blue, you get news of a sudden price increase in perc, poly, and pins? Given the economy and the skyrocketing price of fuel, this possibility is not far-fetched. What do you do? Do you absorb the extra cost or do you pass it on to the customer in the form of higher prices?

Let’s say that over time you’ve faithfully practiced the art of strategically injecting small incremental price increases on a regular basis. If so, you’ll have no problem. In fact, depending on the actual increase in perc, poly and pins, you may not have to boost prices at all.

On the other hand, if you haven’t raised your prices in years, you may have a problem on your hands. Why? Because not raising prices will erode your margins and ultimately undermine the value of your company.

Several years ago, I was attracted to a new hair salon on my way to work. It was easy to get to and the price was right. Five bucks! In fact, the establishment was named Image 5. When I mentioned this fantastic discovery to my wife, she just laughed and said “Yeah, and I bet what you get looks like a $5 haircut, too.” I didn’t care. To me, the difference between a good haircut and a bad one is about three days. Besides, I’m not that fussy when it comes to haircuts.

What I don’t like, though, are surprises. One afternoon, after patronizing this salon for almost eight months, I was informed that I owed $12 for the same haircut I had been paying $5 for. Slightly shocked, I paid and left. Three weeks later I returned to Image 5 for my next cut and was charged $17.

In both cases I was not told of the price increases until after the service was given. When I asked the owner what was going on, she said her costs were going up and she had no choice but to raise prices dramatically in order to remain in business.

The wrong approach

In my opinion, she did everything wrong.

First of all, she priced herself too low when she went into business. There’s no way she could hope to be profitable at $5 a haircut. A $5 haircut would have been a fabulous grand opening offer, but she shouldn’t have named the business based on the price of a haircut.

Second, she made drastic, multiple increases in price within a brief time span to make up for the fact that she was not profitable.

And third, she failed to inform her regular clientele, prior to giving service, that they would be charged significantly more than they were used to paying.

Raising prices is always a difficult decision to make because you put at risk your customers… the most important relationships you have.

When it comes to responding to increases in cost, cleaners adjust in a variety of ways.

Same price, lower profit

First of all, small price increases are more likely to be absorbed than larger ones are. In other words, most cleaners will simply absorb the increase in the form of lower earnings and profits. They’ll take it on the chin instead of alienating their customer with a price increase to offset the higher cost.

Absorbing cost increases, however, cannot be sustained over the long haul unless a cleaner’s productivity constantly rises faster than the rate of the cost increase.

Larger price increases, on the other hand, especially those given without advance notice, are likely to be met with steps focused on reducing payroll costs or business investment. With sufficient advance notice or knowledge of a cost increase, it’s more likely that a cleaner will be able to pass on cost increases in the form of higher selling prices. In this regard, remember, no one likes to pay higher prices, but if you know price increases are coming and you don’t make the most of the opportunity to prepare your customers, you can expect and probably deserve their negative feelings.

Back to the perc, poly and pins…

If you are faced with higher supply costs tomorrow and choose to forgo a price increase or decide to put it off as long as possible, you can be hurting yourself in two ways.

First, your profit margins will shrink because your costs will continue to go up. Things like payroll, utilities and escalating insurance costs can be added to your increased supply costs.

In combination, these will push up the average cost per dollar of sales. It may only amount to 2 percent annually, but if you compound these increases over 5 or 10 years, it will be tough for you to make a decent profit unless you raise your prices.

Second, by not raising prices, you risk undermining the value of your business as a whole. After all, your business isn’t simply a source of income, it’s also your most valuable asset and as such, it needs to be maintained. In part, it requires making sure your company has strong profit margins.

Letting the margins erode will lower the value of your business and make it more difficult to sell when the time comes.

Bill Bishop, an industry consultant with the Golomb Group for 14 years, is now president of Mak Marketing, Inc. He can be reached at 630-456-4195 or by e-mail at bish8@comcast.net