Small businesses are finding themselves between a rock and hard place.
For several quarters, rising inflation has pushed up marginal costs and operating expenses. Some increases are dramatic, like hikes in raw materials. Others are more subtle, like increases in copy paper, which aren’t noticeable every month, but add up over the year.
The mother of all price increases is petroleum. The doubling of fuel prices in the past three years has compounded the inflation of cost of goods sold, because every tangible product has a delivery fuel ticket applied to it. And, of course, the fuel bill for company vehicles is burning cash and eating profit.
The hard place is a lack of pricing power.
A business has pricing power if it can raise prices when needed or desired; most often employed to pass along cost increases. Having pricing power is a good thing for any business, but alas, as you will see below, most small businesses don’t have it – or at least as much as they need.
Recently, in our weekly online poll, we asked small business owners this question about inflation and pricing power: “Are you able to raise prices to offset increases in costs and expenses?” Here’s what we learned.
Almost half, 49%, said, “Somewhat - but it’s difficult to match every increase.” Slightly fewer, 46%, reported that they were “not able to pass through cost increases.” And just 5% said, “Inflation is not hurting us.”
When a business experiences inflation without pricing power it puts pressure on cash flow and profitability. Younger businesses are the most vulnerable, because they don’t have the equity to withstand the cash-eating effects of this dangerous dynamic. Older companies that have retained profits can endure longer, but every day spent in the inflation-without-pricing-power vortex is an equity-eroding day closer to failure. So why don’t small businesses have more pricing power and how do they get it?
The reason is, while small businesses have many advantages, most are associated with being versatile and nimble, not with power. And the way to acquire at least some pricing power is to develop a strategy that includes the three pricing power imperatives: Communicate, Educate and Execute. This means reminding and explaining to customers in advance that your price increases are associated with the same inflation they are experiencing.
Small business pricing power requires discipline, planning and courage.
Click on one of the links below to listen or download my recent conversations with Bob Phibbs, author of You Can Compete: Double Sales Without Discounting, on how to develop a pricing strategy for your small business.
Is it time to get serious about raising prices? with Bob Phibbs
Why every small business needs a pricing strategy with Bob Phibbs