CPI

I received an old-fashioned letter in my post box just after the start of the New Year. It was a letter from a tradesman I deal with semi-regularly. It was extremely apologetic and almost had a tone of embarrassment. The owner of the business sent out a letter to all of his regular clients and explained that he hasn’t put his prices up for four years but he is now putting them up by only ten per cent. He went on to explain about tough economic conditions and how prices of other items have gone up. It all sounded like a justification letter rather than a business letter.

There were two main points that I noted from this letter. The first one was that no business should ever apologize for putting prices up. Wages go up, rent goes up, petrol goes up – if a business that I am dealing with never puts its prices up, I worry about the long-term viability of that business. Inflation is difficult to explain – my ten-year-old daughter asked me why prices keep going up and when I tried to explain inflation she asked if it would be simpler if everyone just left wages and rents and other items at the same price then inflation would be zero. Interesting hypothesis from a young mind – but for the moment we know inflation exists so accept it or depart the business world. There is no need to apologise for world macro-economic conditions. To quote Queen Gertrude from Shakespeare’s Hamlet, “The lady doth protest too much, methinks.” If you over-emphasise all the reasons for the price increase, it sounds as if you are trying to cover up some business failings. Simply explain price increases in a matter-of-fact and confident manner.

The second point that hit me like a hammer from this letter was why this particular business owner waited four years before putting up his prices. The beginning of a new calendar year – or the beginning of a new financial year – is the perfect time to put your prices up by at least the CPI. People often tell me they are scared they will lose all of their clients when they announce a price increase – so they do what any sensible person does when they are scared about doing something – they avoid it. They put it off. For years and years and years. Then when they finally have to put their prices up to avoid going broke, it has been so long since they put their prices up that they have to put them up by fifteen or twenty per cent. Some clients are not happy with that huge price jump so they leave – hence creating a self-fulfilling prophecy on price increases. The reality is that if an organisation is getting all the basics right and delivering value to their clients then they will not lose clients when they raise prices on an annual basis by an amount roughly equal to the CPI. If clients do leave you when you put your prices up, it is usually something to do with the perceived value you are providing to them.

I have always found that, depending on a range of variables, I use the current CPI figure as a MINIMUM value to raise my prices. I want to provide better services than average and I want to continually increase my profitability. Why should I therefore settle for just the average inflation rate? I have spoken before about the McKinsey data in relation to increasing profitability by increasing margins. Look at some simple mathematics. Assume you currently charged $200 for a certain service. Also assume that the average inflation rate is three per cent. If you put your rates up by three per cent each year over five years, that figure would turn into $231.85. If you aimed to increase your prices at four percent each year, the compound effect would result in a final price of $243.33 and at five per cent the figure would be $255.26. Just by a simple one per cent increase above inflation each year for five years, you have increased your prices by 4.95 per cent above inflation. If you can increase your prices by two per cent above inflation each year, you result in an overall increase in prices of 10.09 per cent. If you told your clients you wanted to suddenly put your prices up by ten per cent, you might receive a negative reaction. If you put your prices up by five per cent each year, the chances are your clients won’t even notice. Combine those price increases with the McKinsey data and you have a business that has increased net profits dramatically.

Don’t be scared to put your prices up each year. In fact, it is bad business not to put your prices up each year. Your clients will accept it and probably will actually expect it. And if you really want to increase your overall profitability, try and squeeze just that little bit extra above inflation. Your long-term profits will thank you.

Tell me when you last increased your prices at [email protected].

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