Any time you write something and send it out into the world, it can be difficult to know if anyone paid any attention to it. While it’s always gratifying to see how many people hit the “Like” button on a blog, or how many views it gets, we think the real mark of whether a piece hits home or not is when people take the time to write comments or questions. When you get those, you know you might have hit a nerve.
That’s why it’s been interesting to see the traction we’ve seen on the blog we recently wrote titled, “Why We’re Focused On Protecting Margins in 2022 (And Why You Should, Too).” In this case, a couple of our readers posed some challenging questions for us around the topic of inflation—and how to stay ahead of it. What we quickly realized in trying to answer these excellent questions was that we had a lot to say! So, rather than overwhelm the comment section, we decide to spin our answers to the questions in this blog. As always, we love to read your comments and questions, so please keep ‘em coming!
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Jack and Darren, I couldn't agree more about protecting margins and keeping pace with inflation (at least). It is a different world than I have seen in more than 20 years in manufacturing, where raising prices to keep pace with the rising costs of materials, labor, overheads, etc. is critical to protecting margins. Usually, we just knuckle down and work to become more efficient. But that isn't working when materials are skyrocketing as well as wage needs for front liners. What is one strategy to build up pricing in a way that is consumable by customers? We have communicated successfully for the most recent two rounds of increases, but it is looking like we may need to address these almost quarterly. One thought is to peg ourselves to our industry index (3M) with their quarterly inflation adjusted pricing. What have you seen as successful strategies to communicate the inflationary pinch to customers so they agree that we have no choice? ~ Daniel
Daniel, thanks so much for your question. For the past 39 years, our practice has been to use forecasting to help figure out the timing of our price increases rather than pegging them to any specific index. Indexes are typically behind schedule when it comes to setting expectations. We also think we’ll see indexes going in all kinds of directions in the near future, and that’s going to confuse everyone. Your customers will be looking for more certainty than that kind of variability. Any time you’re forced to protect your margins through a price increase, you have to feel for your customer.
Timing is everything when it comes to passing on price increases. If we are dealing directly with an end customer, we’ll try to understand when it might be most difficult for them to absorb a price hike. We will avoid doing that over the holidays or during peak vacation season, when we know people are stretched—when a price increase would really hurt. If we’re dealing with an original equipment manufacturer or OEM, we need to understand the accountabilities of the buyer. For example, we need to be aware of things like when they issue their pricing books to their customers. The last thing we want to do is surprise them. You need to give them enough lead time to price the increase into the marketplace.
We’d also be wary of issuing too many price increases too frequently. Again, you want to decrease the variability for your customers. If you’re going to raise prices, you’re better off with one larger increase than multiple smaller ones.
That’s why we try to forecast to see where inflation is heading so we know where our pricing needs to be ahead of time. We want to help ensure we price our products in a way that they protect our margins by absorbing rising material and labor costs. Three data points we use to try and predict those trends are:
- The unemployment rate: Is it declining or rising?
- The number of hours worked per associate.
- The lead times for materials and services.
By looking ahead, you can begin to guess at when inflation will begin to flatten and come down. If you’re starting to see lead times shorten, for instance, you can bet that inflation will begin to flatten as well. You can also use your forecasts of where material costs are headed to help pass on short-term price hikes that you can reverse later on. For example, if higher fuel prices are killing you, you can add a fuel surcharge to your orders. Then, as gas prices come down, you can take away the surcharge—and your customers will love you for it.
Great article. We've been spending a lot of time as a company on this subject. We typically do an annual price increase but were forced to do 3 last year and 1 already this year. My question though is, how do we ensure that by raising prices, we don't just continue to cause more inflation? What can we do as companies to try and stave off more inflation? ~ James
James, we applaud you for thinking long and hard about how you might be contributing to runaway inflation. Nobody wants to play a role in that. But we must adapt to the reality we face. You have to keep focused on maintaining your payroll and staying on top of your expenses. This is not the time to get greedy and massage yourself with margins. But it is time to protect yourself by blending in price increases.
It might seem that this will lead to an endless loop where every price hike leads to more inflation, which then leads to more price hikes. But we will reach a point where people will stop buying. It’s important to recognize how much money is out there chasing a limited supply of products and services. People’s savings tripled from something like $1 trillion to more than $3 trillion during the pandemic. Now, they’re eager to spend—and they’re driving up demand. At some point, prices will be high enough where demand diminishes. Consumers will tighten their belts. Eventually, as they deplete their savings, they’ll stop buying. Then, we’ll start to see inflation reversing itself.
What’s been remarkable to watch so far has been how companies have been able to stave off some price hikes by increasing their productivity. Some of those tremendous productivity gains have yet to be recorded. With 11.5 million open jobs, we’ve all had to find ways to do more work with fewer hands. Ultimately, as we move past this inflationary period, those productivity gains will be a good thing for the long-term health of the organization.