The “Hidden” Costs in Your Business, Inflation and Increasing Your Prices

Everything is increasing in price and we are considering what effect this will have on our business. 

This started back last year when we purchased, what we thought was, a year’s worth of key stocks (ACM, PVC, Banner, Vinyl).  This was largely to allow us to avoid any temporary price hikes and shortages.  This decision was based on factors like the Suez Canal blockage, delays from China, container shortages, depleted European stocks, Covid-19 and my wife saying that she had a conversation in the supermarket with an employee.

Nine months down the road and the situation is not appearing to improve, although the problems is different.  In January we received our energy renewal notification, and the variable rate of electricity was 60p per KWH and our previous contract rate was 13.7p per KWH.  We eventually entered contract for 2 years on 27p, through gritted teeth. 

I’m the vice president for Print Scotland and this gives a great insight into our neighbouring industries.  Paper has seen a 50% increase in the last year.  This is particularly worrying as many of these businesses will struggle to gain repeat orders of annual reports and further education prospectuses as this will now become more digitally focused. 

Now in March we have the world in turmoil as Ukraine is invaded by Russia and as political leaders turn their eyes on trade and economic embargoes with Russia, does this affect our businesses? 

There is no doubt we are and will see further price disruption to our business supplies, the obvious ones being material and energy driven by oil, gas and wheat.  What we are also seeing is the other overheads rising and with inflation at its highest rate in many years what impact will this have on employee pay expectations? 

We will also see on our customers invoices surcharges on fuel but not just couriers.  Last week we purchased glass and it had an energy surcharge, which I had not noticed in the past. 

We run management reports that are published on the 10^th of each month, and it is becoming more important now to watch how “hidden” areas of our business are seeing creep in costs.  For example, we probably all use nitril gloves, blades, packaging and many other things that are not entered into our quoting system to cover these consumables.  All of these “hidden costs” are going up in price and are likely not accounted for when working out our prices.  For those of us that have installation crews, I urge you to look at your costs to run a van, our annual fuel bill was eye-watering and that cost is increasing daily. 

So, the obvious answer is to increase prices.  This is always a daunting consideration, let alone activity but the long and short of it is that if we do not increase price then our own net profit will decrease.  Our business overheads are going to increase. 

My point is, don’t just look at the materials when working out pricing, it’s everything, from office stationery, diesel in your van, inflation that will raise questions about pay increases and the many other things I have not noticed and probably, neither will you. 

However, there may be a non-confrontational bright side to this.  Those of us who have a business model which is based on “many transactions for many customers” will find that the jobs are not repeats – Each client places a different order each time, of a different product and this a different price.  Therefore, these customers may not identify price increases, other than commoditised products, like banner and roll up banner stands (although you will notice that the £21 roll up banner appears to have disappeared, you know who I am talking about).  These customers will simply accept the price offered, especially if there is a positive relationship there. 

And that leads me to my conclusion, prices must increase to sustain our businesses and now, more than ever, relationships must be rock-solid to discourage our customers from shopping around. 

But we had a look at the customer activity and noticed that almost every job we print is unique in shape and size. 

Last week we wrote a blog about Square Meterage Rates, and why they don’t work.  They don’t work because display graphics and signage are not all 1mx1m variable, there is waste from a sheet or roll that must be accounted for. 

So, if many signs and graphics are variable in size and they are not repeat orders (we mainly deal with short to medium runs) then will anyone notice a price increase? 

This leads us to the matter of sustaining our customers, if they are only purchasing from us based on price then they are not loyal, they are not buying the other stuff: service and quality.  These are the things that make our brand, it’s a mix.