In case you haven’t noticed, we are experiencing the greatest amount of inflation since 2008. Inflation for the past three months has topped 5%. Inflation changes business as usual. Here are eight things to change so your plumbing company will continue to prosper in an inflationary environment.
Understanding Inflation
Inflation occurs when the central bank prints money in excess of the growth in productivity and population. The result is more money chasing the same or fewer products. That means products will cost more going forward. Or, the dollar will buy less in the future. With inflation, the dollar you hold in your hand today will buy less tomorrow. The dollar will be worth less.
1. Price Up
Do not be afraid to raise prices... NOW! Instead, be afraid to keep prices at their current level. Keeping prices at the current level means your margins will fall in the future. They will fall because your input costs will increase while your pricing is unchanged.
Instead, price ahead of inflation. If you haven’t raised prices this year, raise them immediately. Raise them in anticipation of future inflation.
2. Do Not Price Down
At some point, inflation might break. When it does, do not rescind your inflationary price increases. Use this as an opportunity to hold prices and become more profitable. Manufacturers are unlikely to reduce the price increases they’ve been enacting all year. Why should you?
3. Stock Up
Under normal times, it is better to let supply houses keep inventory while you buy when needed. These are not normal times. Stock up on the inventory you know you will sell over the next year. In three to six months, the same inventory will cost more than today during inflationary times. Just make sure the inventory is kept in a secure location. You do not want it to grow legs and walk off.
4. Collect-On-Delivery
If you do not collect-on-delivery, start now. Billing customers means extending customers short-term loans. That is bad enough when inflation is in check. It is tantamount to a discount today.
Be especially careful with commercial customers who like to delay payments. If you let them, some commercial accounts will stretch payments out to 90 days or longer. Plus, many commercial customers have their own credit challenges related to the consequences of the government shutdowns during the pandemic. This adds to the risk of serving commercial customers and the risk of extending them credit.
5. Delay Payments
For your part, pay invoices on the due date unless you receive an attractive early pay discount. Extend your payments by paying with credit cards to buy another 30 days. Of course, you should be sure to pay the outstanding balance in full on the due date. And, you should use credit cards that get you miles, points, or cash back.
6. Lock in Vendor Pricing
Negotiate with vendors to lock in pricing. They will likely be reluctant to do it, but by balancing future purchase commitments against stable pricing, it might be possible to contractually hold pricing for a year.
7. Borrow
Inflation devalues debt. Because you borrow money today and pay it back with future money that is worth less after inflation, debt is devalued. Accordingly, today is an opportune time to borrow money to use for the purchase of buildings, trucks, jetters, cable machines, and so on.
8. Keep Pay Competitive
Inflation does not merely affect what you pay for material. It affects what you pay for labor. Be sensitive to changes in pay by your competitors and stand ready to bump pay if necessary. Just remember to pass any pay increases along in your pricing.
Are you coming to the Service World Expo? It’s the biggest and best get together for residential service and replacement contractors in the industry. Aren’t you ready to get back together? Come for the training. Come for the networking. Come for the trade show. Come to Louisville, KY September 21-24. Learn more at www.ServiceWorldExpo.com.