How to Adjust to Cost Increases
© 2006 Door & Access Systems
Publish Date: Fall 2006
Author: Bruce McConnell
How to Adjust to Cost Increases
By Bruce McConnell
The recent worldwide steel and fuel cost increases have once again found their way to the door dealer’s doorstep. Just when you thought your revised pricing was fine-tuned for the 2006 busy fall season, this summer’s price increase announcements by nearly all door manufacturers have sent everyone back to the drawing board.
If you are like most dealers, some of your summer fun was spent changing your prices to compensate for the increased material costs from your vendors. This process has been made even more challenging by the fairly volatile economy, nagged by rising fuel prices and world unrest. Both of these continue to contribute to short-term uncertainty for local garage door dealers.
A Successful Pricing Strategy
Raising your prices to stay in step with your vendor material and freight increases is an obvious response. But your long-term profitability, and perhaps survival, will require that you also consider many other cost increases that you have been absorbing (or not passing on to your customers).
The constant challenge is to balance your prices in a way that allows you to maintain a sales volume that sustains profitable operations. Raising your prices too high can steer customers elsewhere, while keeping prices too low may prevent you from making a profit.
In addition, raising all prices across the board may be fine in one segment of your business but detrimental to another. Each segment may thus require a different pricing strategy that results in a healthy and profitable sales mix. Begin by evaluating your retail, new construction, and service segments in both the residential and commercial arenas.
It is important that you stay true to your own profit objectives. Don’t ignore local economic and competitive pressures, but don’t let them be the primary reason for establishing your prices.
Your prices and rates should be set at the highest level possible. In addition to covering the door vendor costs above, the new prices must also cover the many increases in your overhead expenses such as payroll, insurance, utilities, and operational vehicle costs. Any increase in expenses must be compensated for, either by cutting other costs or by raising your prices.
Getting a higher price often requires that you put more emphasis and energy into explaining the added value that you uniquely provide. Price only represents a portion of the value that you offer. Reliability, quality, and safety are also important to the customer.
Try Alternative Products
If your ability to raise prices is limited, which is especially true in the builder segment, then you may need to consider an alternative or lower-cost product that still meets the needs of these customers. Whether this is done with the same or different manufacturer, give consideration to the quality, installation efficiency, and serviceability aspects so that you still meet your customers’ expectations.
Don’t be afraid to ask your vendors for additional pricing assistance for your key accounts or large volume customers. Vendors are facing similar challenges, and are often receptive to maintaining relationships with their volume accounts, too.
Spread the Burden
If you have a diversified sales mix, just raising residential door prices may only achieve part of your desired average gross margin increase. Price limitations set by your customers may make it difficult to achieve your desired margins through one segment alone.
For this reason, you should increase your service rates, parts prices, and applicable trip charges. This will help you spread the burden of increased costs over all segments, rather than burdening just one. Getting a little more out of each transaction, both small and large, can contribute greatly to the bottom line.
Failure to Raise Prices
An increase of some sort is critical, whether you raise your prices to cover all your business costs or just those in vendor materials. Failure to raise your prices in a timely manner can be very detrimental to your overall profitability.
Left unchecked, a 5 percent increase from your vendor will reduce your gross margin rate by the same amount. Few businesses can take a hit like that in today’s environment.
Understand Your Costs
There are many ways to develop a price for your products. Regardless of what formula you use, you must know your true costs before changing your prices. If you know how your material, freight, and labor costs affect your prices, you will be better able to adjust your prices more effectively.
Bruce McConnell, a financial consultant (815-288-3556, firstname.lastname@example.org), has been helping door and access systems dealers since 1992.