For companies that are used to calm waters, it can take some getting used to the turbulence, and the constant need to reassess both supplier costs and pricing.
Like river rapids, an inflationary economy doesn’t present a steady current. There are eddies and flows – prices for some things rise faster than for others, often in hard to predict ways.
This lack of predictability doesn’t just apply to business planning. Customers will know that your prices will probably rise, but not by how much. Crucially, they also won’t know what’s happening to your costs.
To some companies, this can present an apparent opportunity to go beyond simply passing their cost increases onto customers, towards actually raising their margins in the confusion. Indeed, a recent report by the union Unite says this is exactly what is happening in the FTSE 350.
The picture is more complex than unions might suggest – it is easier to have sympathy for companies that have struggled over the past couple of years seeking to turn a healthier profit now that they are able to. But it is also true that this is a time for long-term thinking rather than opportunism.
Overcharging customers now may result in bumper profits today and a juicy bonus in 2023, but it’s not exactly going to encourage people to come back year after year.
Look at Disney in the US. Its CEO recently boasted that the average spend per customer at its theme parks division was 40% higher than before the pandemic. They’re busy too, so it looks like a win-win for a company that had to shut large parts of its business over lockdowns.
But maybe loyal customers are only willing to pay those rates because there was pent-up demand from 2020-21. Maybe they will look at competitors (hello Universal Studios) that haven’t increased prices as much. Maybe they will see the business news and realise that margins have been hiked well above inflation. Maybe new customers won’t turn up to turn into loyal customers five or ten years down the line.
This isn’t to say that price rises above inflation are never the right strategy, but it does mean it pays to think very carefully about how you treat your customers (and your workers – see the wave of strikes descending across the land).
If you need to pass on higher costs to remain healthy and viable, be upfront about it. If you have a good relationship with customers – whether you’re in B2B or B2C – they will respect it. But if your price rises are disproportionate, it isn’t safe to assume they won’t realise, or won’t care.
And if that happens, all you’re really doing is robbing Peter to pay Paul.
