The price is right ….. or is it?

The price is right ….. or is it?

Throughout some of the recent conversations I’ve been having with other business owners here in South Auckland, I’ve noticed one topic that seems to be on everybody’s radar – price increases.

Now I’m not talking about the price increases we’ve seen for everyday commodities – although that certainly plays a role in all of this. What I’m talking about is business owners debating whether or not to pass the impacts of our current economical state by raising their own prices (whether that be for goods or services) – and thereby passing these impacts onto their customers.

I don’t think I need to sit here and tell any business owner that margins are tough right now. You’re living and breathing this day in and day out. And it’s not just one factor driving these tougher margins, it’s a combination.

You’ve got increasing inflation – which, based on the figures released by Consumer Price Index (CPI) recently, has blown out to a 31-year high of 6.9% for the March Quarter. While the Reserve Bank initially estimated that inflation would peak at 6.6% in the March quarter and stay above 3% in the June quarter, these estimates were given prior to the current war in Ukraine. In light of this, ANZ economists have now predicted that it will peak at 7.4% in the June quarter.

This is naturally having a massive impact on the cost of living. Not only are things you need for your business increasing in price, but this cost of living pressure is also leading to wage inflation. Owners are needing to pay employees more in light of the increase in the cost of living – and in this tight labour market is only driving this wage inflation up higher, with less talent meaning employers are having to do more to recruit and retain staff.

Then you’ve got rising interest rates impacting working capital. As interest rates increase, the amount you have to pay back for your current liabilities (i.e., debt) increases – which, in turn, decreases the working capital available for your business. Having adequate working capital is crucial for business success (a well-run business should aim to have 3 months of working capital) – so if you can’t decrease your liabilities, you need to find some way to increase your current assets instead.

It’s a lot. It’s a lot to think about it, it’s a lot to manage, and it’s a lot to try and solve on your own.

Historically, SME business owners have been hesitant to pass any cost increases onto their customers, out of the fear that this may break their customers’ trust – and lead to their attrition.

This fear seems to come from the well-intentioned idea that, as an SME business owner, your pricing strategy needs to be to match the lowest-price competitor in your market – i.e., the only way to win business is to be the cheapest. But this is a misguided misconception – by competing on price alone, you encourage your customers to only view your product/service as a commodity (and potentially, of worse quality than your competitors), which obscures the real value of what you offer. Which impacts your profitability.

Getting your price right is a balancing act – you don’t want to go too low for the reasons mentioned above, but you also don’t want to go too high. And when customers challenge you on your price, it can be easy to default to offering a discount or a special in order to win their business – but this may not be the best strategy. Instead, what it presents is an opportunity to handle your customer’s objection, educate them on the real value you are providing, and what pain points of theirs you will be able to solve.

In a situation like the one where we are in now, where raising your prices feels like an inevitable eventuality, there are a number of steps you can take in order to ensure you’re not at risk of alienating your customers:

  • Check your costs – if you’re worried about losing customers by raising prices, giving your current costs a once over to see if there’s any room for improvement (i.e., switching electricity providers) could be your first step. You may still need to increase costs after doing so, but it may be to a lesser degree.
  • Stagger increases – if you have multiple products or service offerings, you may want to stagger their price increases over time, instead of all at once.
  • Communicate with your customers – in this economy, a lot of people are going to be incredibly understanding that prices need to go up (I know I didn’t bat an eye at my coffee going up by 30 cents!). As long as you are being transparent about any price increases, your customers will likely be incredibly understanding.
  • Continue to deliver great customer experiences – this, after all, is what will keep your customers coming back.

If you’re thinking about raising your prices but aren’t sure how to get started, the first thing I would recommend doing is figuring out what your business objective is (if you’re not already clear on it) – is it maximising profits, increasing or maintaining your market share, or something else? You can then use a tool like this break-even calculator to figure out the minimum income you need to stay in business, and then adjust your prices in order to meet that requirement while factoring in your business objective.

Planning for continued business disruption

Planning for continued business disruption

It’s 2022 – and I’m sure, like myself, you’re probably at least a little sick of hearing/talking about Covid, which is fair enough. We’re into year 3 of what we all hoped would be a short-lived pandemic. Covid fatigue is alive and well.

However, as much as we may all be tired of Covid…it’s certainly not tired of us – or causing further disruptions to our lives.

With the current rise in Omicron cases we’re seeing across the country – and the implementation of nationwide red-light settings, it’s clear that the impacts of Covid will continue to be felt this year. While the government has said there won’t be large-scale lockdowns like we’ve faced previously, the red-light settings and highly transmissible variant pose the potential to cause further headaches for under-prepared businesses.

While the impacts will differ between businesses and industries, I thought I’d share some of the key areas of disruption expected for businesses – and how you can plan to limit the impacts of them. With modelling suggesting cases may not begin to drop off until the end of May, getting prepared now to ensure business continuity for the next few months is critical.

Employees

Although the symptoms of Omicron are milder than variants past, its much higher rate of transmission has the potential to impact your ability to keep your business staffed.

Employee absenteeism is likely to be the biggest Omicron-related business disruption. Employees will have to isolate if they either have Covid or are a close contact of someone who does. While the definition of a ‘close contact’ has changed throughout the pandemic – as has the difference between that and a ‘casual contact’ – the latest definition is here.

Taking a proactive approach now and creating employee bubbles (i.e., having set groups of employees who only work/interact with others in their employee bubble) will mean that if an employee was to test positive, their workplace close contacts would be limited to those in their employee bubble. This means that other employee bubbles would be able to continue working – and keep your business open and operating.

Identifying your mission-critical tasks and roles (i.e., those that are 100% needed to keep the place running) should factor into how you create your employee bubbles – as you wouldn’t want to put all the employees in those roles/who carry out those tasks in one bubble!

If you have business tools and/or vehicles that are taken home at night by employees, it may also be worth planning for how you would recover and clean these assets in the event that they are stuck with an isolating employee.

From an employee perspective, there’s an understandable level of anxiety around how they would be impacted if a colleague or themselves were to test positive. Involving your team in your planning in this area and clearly communicating the final plan is critical.

Equally important is familiarising yourself with the Leave Support Scheme that has been put in place to help support isolating employees or those who have to take time off while they await test results – and deciding if you will top this amount up at all (and if so, by how much) – so that you can answer any questions that come your way! For employment contracts, how you notify close contacts may need to be reviewed and communicated.

Supply Chains

Are there certain items that are more at risk of falling victim to supply chain disruptions than others? Can you stock up on them now to mitigate this risk, or is it worth looking into alternative options if you cannot get them into the country? Are there alternative modes of transportation you should be considering – both in terms of getting items to you and getting them to your customers?

Customers

Some businesses may experience a downturn in customer visits – particularly if there is a high concentration of case numbers in the area where they operate. Communicating your plan to ensure customer safety may help customers feel more comfortable visiting your business.

If your business offers products for purchase/is able to operate via e-commerce (and you don’t already have an e-commerce presence), it may be worth setting this capability up in order to allow customers who do not wish to visit your business in person to have access to what they need/want.

If your business involves employees visiting customer sites, it may also be worth considering setting up a system where those customers can quickly inform you of any potential cases in their business your employees may have been exposed to – rather than waiting for contact tracers to get in touch!

If there are any other areas of your business you’re worried about at the moment, give me a call I’d be happy to lend an ear and see if I can provide any support or advice to help you navigate whatever challenges you are facing.

Why EQ is more important than ever

Why EQ is more important than ever

Tight margins, decreased profitability, increased stress, labour shortages, and supply chain disruptions – these are just some of the issues that business owners have reported on in our latest Pulse Check. And while there’s no doubt that the dial on these has been turned up over the past eighteen months – these pressures are likely to exist after we get back to ‘normal’ (whatever that might look like). So how do you deal with them?

I feel like a lot of what we’ve been seeing over the past eighteen months have been reactive responses to these issues – but in order to enable long-term growth, businesses now need to start thinking about how to be more proactive about these issues moving forward. Those that take a step back and try to think differently about these issues, and are creating strategies to deal with them moving forward will be better positioned than those who don’t.

Easier said than done though! As business owners, we have the tendency to spend too much time working ‘in’’ the business – particularly during tough times like through COVID – rather than working ‘on’ the business.

And, without getting into the political side of things too much, here in Auckland there seems to be a growing consensus that not enough is being done to support our SME community – both from a financial and wellbeing perspective – despite restrictions continuing (if you feel differently though, I’d love to hear your thoughts!).

With all of this, it’s easy to understand why business owners are feeling stressed, anxious, and having sleepless nights.

Now, you might be wondering why I’ve titled this post “why EQ is more important than ever”, and what any of that has to do with what I’ve just spoken about above.

Recent research has shown that, despite trending upwards prior to 2020, there’s been a rather worrying downward trend in EQ over the past year – despite research suggesting that it is even more important than IQ for predicting business success, particularly during times of uncertainty (i.e. a pandemic).

It’s fair to say that EQ has a bit of a ‘soft’ reputation, that it is only about being nice and empathetic to other people – but while empathy certainly is a key component of EQ, it’s actually about being smart with our emotions.

While eight measurable and, importantly, learnable EQ capabilities have been defined, only one has increased over the past year – consequential thinking (i.e. the ability to evaluate the associated risks and benefits of our options).

And while this is typically a useful skill to have, it can also lead to increased risk aversion from business owners – which, consequently, makes it harder to be proactive about solving for some of the struggles they’re facing.

For SMEs, one of the most crucial EQ capabilities to focus on is optimism. Not the kind of optimism that sees us holding hands and dancing round in a circle – but the kind that shifts our thinking to be future-focused, “what are my options?” or “what is my best possible outcome?”.

Understandably, it’s been a struggle for many to tap into that optimistic mindset of late – but with things looking unlikely to change anytime soon, it’s vital that business owners adopt this mindset in order to drive their businesses forward.

There are significant opportunities to be had for those businesses who get ahead of the curve now and start thinking about solving for some of these challenges differently. Lifting up these pressures and planning for them strategically is imperative.

And it’s where optimism comes into play. By analysing and considering these challenges through the lens of “what are my options” and “what is my best possible outcome”, business owners can tap into these opportunities.

At The Alternative Board, a lot of our time is spent helping business owners strategically plan for their businesses – which means a lot of our time is spent adopting this optimistic mindset so we can try and determine the best path forward.

It means that even if you can’t tap into that mindset at the moment – which, believe me, is more than understandable – there’s a support network of peers behind you who can adopt it for you.

Author: Mike Kelliher