You Want Me to Charge How Much?

I don’t know about you, but I am feeling the squeeze. Gas prices are up. That accounts for an extra $30 drain on my budget per week. That comes directly out of the disposable income that I normally use for eating out and other things. I know it is affecting you. I see it in sales. I hear it from you. In talking with many of you, I have sensed a common thread to our conversations as it relates to the state of the economy, and that thread kind of scares me. Almost no one is willing to raise their menu prices. Almost everyone is afraid of losing customers due to price increases. I want to caution you not to try to win the battle at the expense of losing the war. I want to take a minute to share some of my experiences so that perhaps you all won’t have to go through some of the challenges I did.

I had my business humming. I had grown the business to about $4 million in sales. I was living fat and sassy. Things were good, 4 trucks on the road, and a staff of 7. Not bad at all. Then the unthinkable occurred – reshaping the economy. September 11th. The gravy train came to a screeching halt. Everyone’s disposable income shrunk. Drastically. Sales quickly dropped. I panicked. How would I keep this thing afloat? Boy did I learn a very painful lesson. I reacted the wrong way – a way very similar to the tacks that I see many of you taking. I tried to bear the brunt of the impact rather than passing it on to my customers. Looking back, I see that I (in my role of consumer) accepted that things began to cost more. I understood why. Groceries, gas, insurance, essentially everything rose in cost. I (in my role as business owner) refused to believe that my customers would recognize that my products had to increase in price as well. I held my price – in fact I lowered my margins. I thought that I could ease the burden for everyone else. Boy was I WRONG. I thought that I could keep it afloat by being a lower cost option for my customers. I might have been able to weather the storm if consumers had money to spend, but they didn’t. And I didn’t either. Since consumers didn’t have as much money to spend on my products, I was selling less. My overhead didn’t decrease – it went up just like everyone else’s. The route I took resulted in fewer sales, and less profit per item….a deadly combination for a small business owner. I won’t bore you with the gory details, but I will tell you this. I no longer sell trading cards and collectibles for myself; I sell food for a company owned by someone else. It came to an end because I didn’t react appropriately to the changing market conditions.

I don’t want you to learn the same lesson the same way. I want you to succeed. I want you to succeed for a couple of reasons. 1) Failing sucks – there is no other way to put it. 2) I like you and care about you and your success.

We are all afraid of losing customers because we have raised our prices. I understand completely. But I caution you not to lose the war because you tried to win this battle. It is a slow bleed out filled with sleepless nights and hair loss! Your customers (like me) expect to pay more. They pay more for gas, they pay more at the grocery store and they pay more for almost everything. It is not unreasonable for them to pay more for your goods and services. Sales will slow down. They are going to anyway because of the drains on disposable income. Don’t couple that slow down with a decrease in your profitability because it will be disastrous. Don’t ignore this because it costs too much to reprint your menus or because you are afraid that people will go somewhere else because you have raised your prices by a dollar. I have seen the movie and I know how it ends!

I found this in a recent USA Today, and I thought it was pertinent enough to share with everyone:

By Barbara Hagenbaugh USA TODAY
Food and beverage costs rose 3.9% in May from a year earlier, outpacing the overall inflation rate by more than a full percentage point and is the biggest increase in three years, the Labor Department said Friday. Costs for a variety of goods, including meat, milk, soft drinks and fresh fruit all rose from April. Higher prices are being seen not only at grocery stores, but also at restaurants. The cost of dining out has risen 3.3% in the last year. A combination of forces, including bad weather, heightened demand for corn to produce ethanol, strong buying from consumers and higher energy costs, is boosting prices. "I don't see the current commodity pricing in agriculture … turning around and dropping quickly," says Michael Swanson, agricultural economist at Wells Fargo in Minneapolis.
Companies are continuing to raise prices in June. General Mills later this month is reducing the sizes of boxes of many types of cereal, such as Cheerios, Wheaties and Cocoa Puffs. Although the company will sell the boxes for less than it's been charging for the bigger sizes, the change will increase the price per ounce. "This will help offset rising input costs," including higher energy and grain prices, General Mills spokesman Tom Forsythe says.
Prices rising across the board Joe Hall, owner of J.W. Hall's Steak and Seafood Inn in Aliquippa, Pa., recently raised prices for a number of items on his menu, including the prime rib dinner, which went from $19.50 to $21.50. He said his costs for beef, seafood, butter, coffee, even condiments such as ketchup, have risen substantially in recent months. "I just had no choice," says Hall, who says he has rarely seen prices go up this much, this fast, in his 26 years of business. "Prices are going up across the board. I waited a long time to react. I was hoping they would level off a little bit. But it doesn't seem like that's happening."
Behind the increases: Weather. Bad weather has been plaguing farmers for the past year, leading to delayed planting, damaged crops and shrunken harvests. A freeze in California in January caused $1.4 billion in agricultural losses, with severe damage to a number of crops, such as oranges, avocados and broccoli, according to the state's agriculture department. More than one-third of the continental USA is now in a drought, including crop-rich Florida. And recently in the Midwest, the nation's bread basket, "it rained where it didn't need rain, and it didn't rain where it needed rain," says Tom Jackson, agricultural economist at consulting firm Global Insight.
Ethanol.
The food price increase "has a lot to do with corn, and it has a lot to do with ethanol," Wells Fargo's Swanson says. U.S. farmers are estimated to have planted the largest corn crop in decades this year in response to strong demand for corn to make ethanol, a fuel alternative that is blended with gasoline and, in the USA, is most often made by fermenting corn. But even with greater corn supplies, the ethanol surge has led to higher prices for corn. And because farmers are switching acreage from soybeans, rice and other crops to cash in on the corn frenzy, prices for those crops have also risen. Corn and soybeans are used to feed chickens, pigs, cattle and other animals. Higher feed costs have led to increased meat and dairy prices. Corn is also used to make a sweetener, so soft-drink prices have risen.
Demand.
Strength in economies around the globe has led to increased demand for all types of food. That has helped boost prices. In the USA, "We still have got very good income numbers, we have low unemployment, so the demand side remains strong," American Farm Bureau Federation senior economist Terry Francl says.
Energy.
Farming is an energy-intensive business, whether it's fueling tractors, paying to refrigerate trucks to keep food fresh or buying fertilizer, which is derived from natural gas. Even food packaging is typically petroleum-based. Rising energy prices have boosted the cost of producing food, and those costs are being passed on to consumers.

Bigger concern than gasoline
Because food is an item that people cannot do without, higher food costs mean consumers have less money to spend in other parts of the economy. And because consumer spending accounts for more than two-thirds of all U.S. economic activity, reduced spending in non-food segments of the economy could lead to slower growth in those areas. Carl Weinberg, chief economist at High Frequency Economics in Valhalla, N.Y., calls higher food prices "one of the three or four biggest potential risks to our forecast," arguing food prices could have a far more detrimental impact on the economy than higher gasoline costs. U.S. consumers on average spend 15% of their budgets on food and beverages, vs. 4% on gasoline.