I've been robbed!

Published on June 5, 2021

Is Inflation 'robbing you' of your Margin? If your costs have risen with inflation of 2.5% in NZ in the last year, then perhaps you've been robbed. Without a corresponding increase in your price, or reduction in your costs, your profit has vanished - without a trace! It doesn't have to be that way.

The recent announcement (April 2021) of Inflation running at 2.5% in New Zealand in the last year has been a bit of a slap in the face for many businesses trying to recover post-Covid. It can feel like "I've been robbed!" - that for the same amount of work and effort in the last 12 months you are mysteriously walking away with 2.5% LESS profit or cash than your did year. It's just disappeared - gone, without a trace!

This presents a dilemma for small-medium business owners in New Zealand. Do they cut their costs, reduce their price to replace the value they've lost with extra volume, increase their price, or ignore it and hope the fairy godmother will fix it! 

Before you slip in to thinking "It's just 2.5%!", consider your business value. When your profit reduces 2.5% (or more depending on your industry), your business value reduces by a multiple of that - maybe 2, 3 or 5-6 times that. OUCH! Furthermore, if there is an inherent weakness in your business model that doesn't resolve the erosion of inflation, the earnings multiple for your business will erode to 'double-down' on the financial impact.

Some work undertaken recently for a client revealed a decline in margin over the last 5-6 years from no price increases. Their supply chain costs had gone up over the years. Whilst only small percentages each year, over 5-6 years it compounded to represent a significant impact. Apply that percentage to $10m sales turnover, and hundred of thousands of dollars had been 'stolen' from their bottom line...and their valuation had declined by an estimated $2m.

Enter the virtues of Pricing Strategy - the process of improving your return or yield from your work so you are making more from the same amount of effort, or maybe making the same from less effort/time.

What is certain is that Inflation is hear to stay, and so it will continue to 'rob' you each year.

Imagine that; the same 'robber' coming back and taking 2.5% of your income or wealth every year. Who lets that happen?

For many, a quick-fix is to put up their prices. However, doing that in isolation, or without a pricing strategy, may result in clients, customers, patients walking out the door. After all, everyone is super-sensitive to price as we re-evaluate our outgoings post-Covid. So, to increase clientele from an increase of price requires a Pricing Strategy that exists on the foundation of intelligent theory that meets proven strategic mastery. That can incorporate;

  • a review of your Brand Strategy, 
  • a review of your Pricing Structures across all your offerings,
  • a review of any changes in 'production' costs,
  • a review of processes for scale/leverage,
  • a review of your business model for innovation opportunities,
  • or all of the above.

Whether we like it or not, developing the ability to combat the effects of inflation on our business is a sign of business maturity. Long-term sustainable success for your business is not possible if you're not prepared to 'go there' on price. Fear of losing clients/customers/patients can be paralysing and prevent you from taking action. An intelligent strategy to increase your margin, whether from increased price, appropriately reduced costs, or both, can recover what has been 'stolen'.

PS: To those who would default to chasing greater volume to replace the 'robbed' value, be careful - that's a race to the bottom! Your dialing the speed up on your treadmill.

Time to quit being 'Treadmill Guy (or Girl)' and get your time back, not giving away more of it for no extra reward!

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