Inflation is Here... Are You Ready?
In the last quarter of 2020 and the first quarter of 2021 prices across the board have jumped significantly. How are you going to deal with this in your business? Today's tidbit is all about how we as business owners are dealing with it in our personal businesses.
Our cost of supplies have jumped 30% in the past six months. This is due mostly to imports, the lack of ability to fill capacity, and the idea that one should never waste a good crisis. Our company is surely not alone and, as long as people are willing to pay the higher prices, suppliers feel no reason to bring their costs back down. The following are a few concepts that we use in our businesses that you really need to implement in your own.
First off, your sales people should know that the cost of your product and/or service is their job to sell. It isn't their job to perceive the value. Good sales people know that price is just a number, but the value perceived by the person cutting the check is what really counts. Sales people lose millions of dollars in sales because they feel that the price they are trying to justify is outrageous. Unfortunately, those same sales people don’t pay payroll so they don’t understand rising costs needed to run a business. Make sure that your sales team understands that prices across the board are going up and that they most likely aren't coming down again. Encourage them to not be intimidated by selling a higher price. Though the price may be higher, the tried and true process never changes - call the leads, build massive value, deliver the price, and make the sale.
The second thing to keep in mind with these rising prices is the fact that competing to have the lowest price is always the fastest way to lose everything. Price is such a funny thing; people think if they lower their costs to win more business and ‘stay competitive’ that they will somehow end up on top. That is a recipe for disaster. When you lower prices, you then start operating at a lower profit margin making it an uphill battle to overcome your fixed expenses. Learn to fight for the top. Don’t sacrifice your price because you feel that you will run out of work. Focus on your sales process and teach your people to sell a higher price. Customers understand that prices are rising, taxes are rising, and even during recessions, prices are going to rise. Some people will combat this ‘stay on top’ logic with arguments like, “Look at Amazon and Wal-Mart.” The biggest rebuttal to this logic is the fact that Amazon didn’t make money for 20 years. Both Amazon and Wal-Mart sell enough volume to cover their fixed expenses. The only time you can safely compete for the lowest prices around is if you know that your higher volume will consistently be able to cover your fixed expenses.
Lastly, you need to understand your numbers. I hear it from so many business owners that they only look at their PNL and prices a few times a year. As a business owner, you need to understand exactly where your price comes from. One business owner recently told me that he charges his customers extra to help cover the slow periods. Essentially, this business owner charges an exorbitantly higher amount than what is strictly needed so that, when it is slow, he can always cover payroll. This is a great strategy and it has worked very well for the business in question. However, when I asked him exactly how much extra, he couldn’t tell me. You should know the exact amount it costs you to open your doors each day and how that relates to the price you charge your customer. Knowing that magic number of operation gives you a deep understanding of the impact of rising costs. Knowing how your profit is going to be affected is critical when dealing with rising costs and it allows you to make smart increases to your services as you price out new jobs.
Why is this important today? Money is flowing around like it’s 2006. People are paying exorbitant amounts for products and services and when times get like this, it is time to be prepared. Taxes are going up which means less profit for everyone. Less profit for everyone means that, as earnings are shared compared to the prior years, the stock market will go into a correction, and we will all go on with our lives. By understanding your price, you can get through the impending correction and navigate the next recession by making educated decisions. Educated decisions that keep you in business.
Just remember: there are employees who were once owners because they didn’t make the correct decisions in 2007. Let that sink in. Don't end up someone's future employee. Start paying attention to your numbers today.
Enjoy,
