The danger of absorbing inflation into price

Last week that dreaded message popped up on my dashboard: Warning! Tyre pressure alert!

Just a few days earlier I’d topped up the air so this one looked like being a slow puncture. Yes, there was enough air to get home, but the diary was packed for the next 48 hours with little chance of squeezing in a visit to the tyre fitter. 

Worse, Wednesday’s client was in Sussex. A quick Google suggested the furthest you should travel on a run-flat was 100 miles, some suggested no more than 50. So now I had a tyre problem, diary pressure and a client to let down (gently). 

Yet as so often happens when faced with “crisis”, this one sorted itself out. The client was very understanding (perhaps relieved at re-gaining half a day in the run up to Christmas), the garage then offered a quick booking and all was fixed within a couple of days. 

Though as it played out this tyre problem was the simplest inflation problem faced at the moment.

It’s only recently the country pulled out of the fuel crisis and gaps remain on supermarket shelves. If you’re recruiting you know how hard it is to find staff, and in certain sectors wages continue to jump upwards.

If you’ve checked your utility bills recently you’ll know too that talk of rising prices for gas and electric isn’t just hot air.

In fact, inflation hit 4.2% in October, the highest rate for ten years. Anybody running a business needs to factor this into their plans for 2022.

Sales Myth #3 in our book, Untangle Your Sales, is “We can absorb cost price increases this year”. 

There are lots of reasons why you might want to absorb input costs: Maybe changing price is an administrative headache; perhaps you’re worried about the competition, or truthfully, don’t like these uncomfortable conversations with customers.

Yet choosing to absorb a price increase versus passing it on can make or break your business.

Accepting increased costs for ingredients or materials without inflating your own prices can easily wipe out all profit in your business within three years.

In contrast, find smart ways of holding down input costs (like product re-engineering or better negotiating) whilst increasing the prices you charge can double your profits in the same time period.

That’s a whopping difference of plus or minus 100%. Which one gets you most pumped up?

It’s not easy to push through price increases, we’d all prefer not to do it. But it has perhaps the biggest impact on profitability of any single lever you can pull in the sales environment. 

If you make one new year resolution this month please promise yourself you won’t be caught out by inflation!