Dealing With Cost Hikes
Lots of people will tell you now is the best time to raise prices. Don't follow them!
Published August 2005
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BUY A REPRINTPeople often ask me what it takes to be an entrepreneur. The most important quality, I tell them, is resilience—the ability to bounce back from failures and learn from mistakes. But another quality is almost as important: a contrarian streak. Most successful entrepreneurs I know are constitutionally incapable of going along with the crowd. When everybody is doing something one way, they automatically start looking for another. They can’t help themselves. It’s in their blood.
I’ve been thinking about this lately because of all the articles I’ve been seeing (including an article in the June Inc.) suggesting that now is the best time in years to raise prices. In my document storage business, I’ve concluded the opposite. I believe that now is the best time in years not to raise prices, or rather not to pass along cost increases to customers. Why? Because that’s what everybody is doing, and you can make a statement, build customer loyalty, and lay the groundwork for future price increases by handling the situation differently.
I hasten to add that I’m not talking about regular price increases here. I believe that you should increase prices every year or whenever a contract comes up for renewal, depending on how your industry works. (See “The Case for Higher Prices,” May 2000.) Even if the increases are small, it’s important to get them. Over time, costs always go up. I’d rather raise prices a little every year or with every new contract than be forced to demand a big increase down the road.
These days, however, we’re dealing with unusual circumstances: huge cost increases in several areas. To begin with, skyrocketing fuel costs have hit my company hard because we have our own truck fleet and do lots of pickups and deliveries. Meanwhile, thanks largely to China’s economic boom, the cost of steel has soared. That’s a problem for us because we buy hundreds of steel racks every year for holding boxes. And, of course, we also face the continuing explosion of health care costs, which have risen annually at double-digit rates for as long as I can remember.
When costs rise as much they have over the past year or two, profit margins inevitably fall. Different people will suggest different ways to deal with that. A bean counter will say you should respond by cutting in other places, which usually means shifting the burden onto other people, especially your employees. A pricing consultant will advise you to raise prices. When you have a hammer, as they say, everything looks like a nail. But entrepreneurs look for opportunities amid problems—and try to avoid doing anything that will hurt or alienate the two groups of people they most depend upon, namely, their employees and customers.
Let me explain how we’ve handled the situation. First, we recognized that we faced not one problem—rising costs—but three problems, each requiring a different response. The health insurance cost problem was not the same as the fuel cost problem or the steel cost problem, and it would be a mistake to try to solve all three in one fell swoop by jacking up our prices. If we did, we’d succeed only in giving our customers a major incentive to look for another supplier. In any case, we couldn’t do it without violating the spirit of the five-year contracts that we, like other records storage companies, have with almost all of our customers.
The contracts haven’t stopped our competitors, however. Most of them have added a fuel surcharge to their bills—which has presented us with a great opportunity. By not adding a fuel surcharge, we can separate ourselves from the pack, gaining a powerful sales tool in the process. When we compete with other records storage companies for a new account, we can tell the prospect, “They’re good companies, but they’ve all added a fuel surcharge. We found other ways to deal with the problem. When we say the price is fixed for five years, we mean it, and you can count on it.”
In fact, that pitch wound up getting us several new accounts. Our competitors’ customers were furious to discover that the surcharge they’d been forced to pay could have been averted if the other companies had done what we did. Yes, the higher fuel prices hurt our margins, but the new accounts contributed a substantial number of dollars to our bottom line, thereby cushioning the blow. We also used the surcharge issue to build loyalty among our customers, which we believe will pay dividends in the future. When a contract comes up for renewal, our competitors might offer a lower price, but we can point out what they did during the fuel crisis. We can say, “The next time there’s a crisis, who would you rather be with, them or us?”
