As I write this, the economy is hot. When this happens, purchases and labor usually get more expensive. But what do you do if your main vendor is increasing prices at a higher percentage than inflation, or you cannot pass the increase on to your customers?
Some of the reasons why vendors (and why as a supplier, you should) raise prices:
- The vendor has limited competition in your market
- The vendor’s expenses, such as labor, materials, etc. have increased
- The vendor has been selling at a discount to the market and is adjusting to market prices
- The vendor is at current capacity and may increase prices to smaller customers to better serve their main customers
If you are getting price increases, your choices are to accept lower margins, increase your prices, or find other efficiencies.
How to Discover and Evaluate Vendor Price Increases
If you own a small business, you probably know what’s going on in your company. If you’re the president or controller of a medium or large business, you usually do not handle purchasing decisions, so you need to know how to recognize price increases. In my opinion, the best way of doing that is to have a departmental budget.
If you have a budget in place, you will need to evaluate weekly or monthly with departmental managers. When actual costs exceed budgeted costs and sales have not increased respectively, you may have had price increases that were not factored. Having a budget and holding managers responsible will usually result in department managers discussing vendor price increases as they occur and revising the budget.
My preferred method is a weekly meeting that takes 15-20 minutes discussing the weekly and month-to-date results and where the managers expect to end the month.
Other ways to discover price increases:
- The purchasing department notifies you
- Fluctuation analysis (compare current year to prior year (or monthly variation.) If the account is higher and sales are flat, you can drill down to specific purchases/products or vendors.
Affiliate LinkWhat To Do
You can mitigate the risk of price increases if you perform preventative measures in advance:
- Build inventory (especially effective if you have warehouse space and deal with products that fluctuate frequently (ie. Resin.) Purchase additional inventory when the products are historically low priced to give a time buffer to maintain or increase market share as material prices increase. I would not use this option for high end components that could go obsolete or get damaged in storing.
- Enter long-term supply and pricing contracts (futures contracts)
- Maintain alternate suppliers
- Always look for product improvements or production efficiencies
If you could not perform the mitigating measures and cannot raise your prices without losing customers to the competition, there are several other steps you could take.
- Find another supplier of the product or service
- Substitute the product with something different, but similar
- Perform the service or make the product yourself
- Enter into a barter agreement
- Enter a purchasing cooperative with like manufacturers to increase volume and lower prices
For larger companies, there are a couple additional options:
- Purchase the supplier
- Help another manufacturer develop the product with arrangements to sell to you (Amoco Fabrics division did this a lot in the 80s and 90s.)
When prices increase, especially over inflation, you get upset. It’s a psychological response that you cannot help. When Netflix raised their prices, many left for a very short-term or complained. It was still the best deal around, so most stayed or went back.
Remember, when you raise your customer’s prices, they will have the same reaction. Look at the analytics and do not send out price increases without the proper diligence. You do not want to give your competition a toe-hold. I recently left Mediacom for AT&T, a slower service, after I got an unannounced price increase of 23%.
Please comment below if you have questions or anything to share.
