If you need to – yes!
For many of our clients, surviving this period in our history will be a challenge. Not only has the COVID-19 pandemic resulted in a massive drop of demand, it has also resulted in an increase in overhead.
While many of our clients were able to take advantage of the Pay-Check-Protection loans the complexity and ambiguity has many owners afraid; and they are very reluctant about touching the funds or using them for working capital. It is however a different subject.
What I want to address in this article is the client’s fear of implementing price increases while COVID-19 is raging, even though changes in their cost structure make a price increase an absolute must. While some of the costs may be offset by reduced labor and raw material costs, it is critical that you re-cost all your products.
Overhead is a significant component of your cost structure and it’s the one most often over-looked by management. While initially calculated when a business opens, over the years cost changes tend to be ignored unless they represent a major item such as rent. If you have had an Evergreen contract renewed recently it is usually too much of a bother to fight with the supplier. This is how your overhead goes up.
Very quietly, month by month and year by year the costs have kept creeping up. With the major changes demanded by the virus you cannot ignore that piece of your cost structure. Re-calculate everything! Then add the new costs and see what percentage of your old sales numbers it comes to. You will be surprised!
Now for the Corona factor as an impact on sales. You may be one of the lucky ones whose sales have gone and will go up; but if not, the new lower number will boost the percentage for overhead to an even higher amount!
Here you will have to make some drastic decisions on your expenditure level. Do a zero-base budget and then make allowances for the new normal. Do you increase the Dollar amount or keep it the same? Do you need to lower it? Be realistic.
You have the least amount of control over this segment of your cost structure. Did you need to increase wages because of the risk? How much are you spending on PPE? Did you have to slow down and reconfigure your assembly line?
Re-calculate them all to be sure you are dealing with real numbers.
This is where the rubber meets the road. You will need the courage to re-price based on your actual costs. Do not be tempted to base your prices on what competitors are charging in the market place. Your product or service must be priced correctly in order for you to stay in business.
We urge our clients to maintain an accurate cost profile on each product and to have a price where they make sufficient profit to stay in business. In order to do that, all cost components have to be accurate and the leader must have the courage to face off against competitors charging less. If you know the cost of your product, then you know the value of your product and you are willing to price it accordingly. If you do not price correctly, you will be out of business!
If you cannot get the price you need – consider pivoting into something else. It is better to make the hard decision now than to bleed to death from a thousand cuts over time.