One of the more difficult tasks a business owner has to face is increasing prices, typically for the same services and products as before the increase. I have never met anyone who looked forward to raising their prices. It invites an open door for the customer to leave. At a minimum, it can raise the specter of a negative conversation.
In this world’s economy, price increases are inevitable. Leland Snow once told me that if you raise your prices a little each year in line with inflation, you will rarely hear a complaint. However, waiting a few years and trying to catch up can be disastrous. This applies in “normal” years with relatively low inflation. When faced with 8-10% inflation, things become touchy. A price increase is unavoidable if you want to survive in business.
How does one calculate the amount needed in a price increase? Assuming you figured out long ago how to charge for your services that allowed for a decent profit, you must figure out how to maintain that profit margin. Or else that margin will decrease exponentially.
Inflation does not affect all businesses the same. I am not an economist or a financial advisor. I write to you from well-paid experience. Take a hard look at your expenses. You could start by weening out frivolous expenses, but that will not fix the underlying problem of paying more for almost everything.
Hopefully, you have your business finances arranged so you can print an expense report. From this report, study each expense and try to predict how much inflation in the upcoming spray season will be affected by inflation and by how much; challenging, if not next to impossible, to do.
In no way will this exercise be especially accurate. Rest in knowing it will be exceedingly more accurate than doing nothing. Working with computer software, or by rote, start with each line item of the report to guesstimate inflation’s effect on that line item’s number. Do you believe the price of fuel will rise 50%? Adjust your trial expense report to reflect this increase. Do you know that the cost of labor is going to go up 100%, from $7.50 to $15 an hour? What about next year’s aircraft annual that will be paid for from this season’s revenue? Its cost will be affected by some of the same influences as yours.
There is no way to predict cost increases for the forthcoming season accurately. Yet, you can make intelligent assumptions with high hopes you will have a manageable average. This is not an exercise that can be ignored. Not doing it will haunt you into failure. Do not stress over being exact because you can’t be. Pick line items in the report that impact your business the most. Do the math for how much of an increase in your prices will cover these forthcoming increases. Some items will cost more than others, but you can rest assured virtually none will cost less.
You can let your competition dictate your prices, whether ground or air applicators, but that will not apply when you figure out your bottom line. Remember, if you are operating on a 20% overall profit margin and your pricing is 5% off, you lose 25% of the net profit. Increased acreage should not account for making up the deficiency. If that was the case, what was the point in increasing the acres flown?
Or, you can take the easy route and raise prices by the “advertised” inflation rate. You could get lucky, and everything works out for you. However, you could just as easily be undercharging or overcharging, inviting disaster either way. Be comfortable knowing inflation’s effect on your business and adjust accordingly.
Until next month, Keep Turning Profitable…