This could be the MOST important episode you listen to in preparing your business for 2022! With economists warning that hyper-inflation will change the small business landscape and business owners oblivious to shrink-flation, it’s the perfect time to ensure you are paying attention to the right numbers in your business and adjusting your pricing to protect your profits. So, grab your pen and paper or print out the transcript and let’s get to work on what you need to know about inflation and pricing for profit.
Did you know that the cost of living has jumped an average of 5.4% in the US and 3.1% in Canada this year? Economists predict it will continue to rise. Why is this important to business owners? Let me tell you. If your cost of doing business increases in the coming year by 5% and you don’t have plans to raise your prices, guess what?! You’ve already lost 5% of your profit for 2022 before the year has even begun. It’s that simple.
In this week’s episode, we are getting real about three important numbers in your business: profit margin, your pricing and the cost of operating your business and diving into how knowing and tracking these metrics will help you keep your profit margin healthy in 2022. Listen in to hear the advice I give my clients on pricing for profit and how to adjust your pricing to ensure your profit margin is not degraded in the face of a big jump in inflation.
It’s time to get your financial house in order for next year… Plugin your headphones and let’s get started!
Next week in episode 32, Stephanie’s back to drill me on how I plan for the upcoming year! Listen in to hear how I craft a vision and set goals for my company and why it ensures we hit the ground running.
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Lisa Larter (00:01):
Welcome to, She Talks Business. If you’re an entrepreneur, business owner or aspiring mogul, chances are you want to learn more about marketing and mastering and monetizing your business. She Talks Business is where you’ll learn all of that and more. My name is Lisa Larter and I’m an entrepreneur, high school dropout, wiener dog enthusiast and your host. Let’s get started.
Lisa Larter (00:25):
This could be one of the most important episodes I have ever recorded. Welcome to She Talks Business. This is Lisa Larter with Episode 31, Season Three, which is all about money metrics and measurements. And today’s show is Pricing for Profit During Inflation. I honestly believe that this could be the most important episode you listen to in preparation for 2022, especially if you are someone who is not in love with your numbers, you don’t look at them on a regular basis, you don’t really understand what your profit margin is, you don’t pay close attention to your expenses. It’s important that you listen to this.
Lisa Larter (01:17):
I would even suggest that you go to the episode on my website, lisalarter.com/e31 and download the transcript so that you can take notes. It’s super, super important in order to protect your business for the upcoming year. Let me give you a little bit of background. First of all, you cannot read any newspaper article today without seeing people talk about rising inflation, supply chain issues, et cetera. And you might look at that stuff and think that it doesn’t affect your business, but I’m going to tell you it really does.
Lisa Larter (01:57):
Jack Dorsey, the CEO and founder of Twitter recently tweeted, “Hyperinflation is going to change everything. It’s happening.” In economics, hyperinflation is when you have a very high, and typically accelerating, rate of inflation. And when that happens, it can erode the value of currency as the price of all goods increase. What that means is your money doesn’t go as far.
Lisa Larter (02:28):
Let me give you a couple examples of things that happen in your everyday life that, I want you to just start paying attention to these things, because there are some things happening that you might not have noticed yet. And I think that if you start to notice these things in your personal life, then it’ll help you to have a more heightened sense of awareness in terms of where you’re seeing the exact same things happen in your business as well.
Lisa Larter (03:00):
My husband loves to drink sparkling water, soda water, flavored soda water, and we typically buy LaCroix or we buy Bubly. And recently, I noticed that Bubly did something different. They have a new box. It’s a sleek, smaller box, and it’s only got eight cans in it instead of 12. But guess what? It’s the same price. That is called shrink-flation. You pay the same, but you get less. Let’s talk about that for a second. Bubly water, let’s say it’s 3.99. It used to be 3.99 for a 12 pack, and LaCroix is still 3.99 for a 12 pack. But now, that same case of Bubly water is only eight cans instead of 12 and you’re still paying 3.99.
Lisa Larter (03:54):
Guess what? That is a 33% increase in cost because you are getting one third less volume. That is what happens with inflation. But what happens in the retail space is people shrink the size of the product because they don’t want you to notice that you’re paying more. They leave the price the same, but they reduce the volume size so that you’re tricked. But you’re smarter than that. Now, you know what to look for. Start to pay attention to the volume size on things. I’m noticing those, and I haven’t looked at the actual MLs on them yet, but I’m noticing these cool, sleek, tall cans that you can buy drinks in. Well, I’m pretty sure those cans have less volume in them than the shorter, fatter cans.
Lisa Larter (04:47):
So, pay attention to the changes that you see in packaging and compare the volume that you used to get to the volume you’re getting now. And I am going to bet you a dollar that you will notice that you are paying the same price but you are getting less, which means you are paying more. Let me give you another example, Hint water. Hint water is one of my favorite bottled waters to drink. I love that it’s all natural and that there’s just a hint of flavoring in it. I love that there’s different types of water available. I love Kara, I met her at a Trust event, I read her book. And last year, when I was in Florida, I used to buy Hint water all the time because you can’t buy it in Canada.
Lisa Larter (05:33):
And every time I would go to Publix, which is the grocery store here, I would buy 10 bottles of water, 10 per week, 10 bottles, 10 bucks. And every day, I would drink a bottle of Hint water. Well, I walked into Publix the other day, and guess what? Hint water is a $1.59 a bottle. That is a 60% increase in cost. Now, I know the cost of water didn’t go up by 60%. This is being driven by the cost of plastics going up. Plastics are going up, glass is going up, freight charges when it comes to getting packaging from China to North America is gone up. And these retailers, these producers of things like Hint water, manufacturers, have no choice but to pass the costs along to you. Let me give you another example.
Lisa Larter (06:32):
I love buying a tenderloin, a nice big beef tenderloin at Costco, and I always buy the good one. There’s two, one that’s cleaned and one that’s not. And when I buy the good one, when I’m in the United States, I’m paying in US dollars instead of Canadian dollars, it’s usually a $100 to $129 for a decent size. Now, it’s over $200. That’s huge. Now, you might be thinking, “Okay, Lisa, you’re talking about Bubly water and Hint water and beef tenderloin. What’s that got to do with my business?” You’re probably thinking, “Well, that doesn’t really affect me.” What about the price of gas?
Lisa Larter (07:12):
In 2019 at this particular time, it was $2.50 per gallon. Yesterday’s average at the time of recording this podcast was $3.31. That is a 32% increase. It is happening everywhere. Go look at the things that you are buying in your business and compare what you were paying a year ago, two years ago, to what you’re paying now. I’m even seeing it in my book club, Thought Readers. We are increasing the price of Thought Readers to $1,200 a year from a thousand dollars a year because the price of books have gone up and the price of delivery has gone up.
Lisa Larter (07:53):
It is happening all over the place, but here’s the truth. The real risk is for business owners that are not paying attention to the numbers and they don’t know how to price for profit, and they have really, really skinny profit margins. Some of these people might not even know what their profit margins are.
Lisa Larter (08:17):
Let me give you an example and I’m going to work with a hundred thousand dollars as an example, because it’s easy for me to use and it’s easy for you to follow. It doesn’t matter whether your business is a hundred thousand, a hundred million, this example is translatable. If you generate a hundred thousand dollars in sales in your business and you have a 15% net profit margin, that means after you pay for all of the costs of operating your business, whether you have cost of goods or just cost of operations and salaries, whatever, you have $15,000 leftover in net profit. What that means is it costs you $85,000 to generate a hundred thousand so that you could keep 15,000 in profit.
Lisa Larter (09:10):
I just gave you some examples, and the percent increases were really anywhere from 30 to 60%. Let’s take 30 on the low end and just make an assumption that the cost of doing business may go up by 30% next year, your $85,000 that it costs to generate those hundred thousand dollars in sales, if you multiply that $85,000 by 30%, it’s an additional $25,000. Do you know what that means?
Lisa Larter (09:44):
That means 85,000 plus 25,000, it will now cost you 110,000 to generate the same hundred thousand dollars in sales if you don’t adjust your pricing now. Instead of you having $15,000 left in profit at the end of 2022, you’ll be $10,000 in the hole. Think about that for a second. That’s the cost of not paying attention. That’s the cost of not being willing to get a little bit uncomfortable and learn about money and measurements and metrics in your business.
Lisa Larter (10:26):
Let’s talk about how do you generate the exact same profit. You need to charge 25% more, because in order for you to offset that increase, you would have to generate $125,000 in sales for the same thing, and then subtract your 110,000 in costs and you would be left over with 15,000. Pricing for profit means you need to know three very important things.
Lisa Larter (10:56):
One, what is the profit you want to generate in your business? Two, what is the cost of doing business? And you need to know this on a macro and a micro level. You need to know big picture cost of doing business, and then if you’re a retailer, you need to know at the smallest level for every item you sell, what is the cost of goods, the cost of doing business for those things. If you have services, you want to look at each service in isolation and look at what are the costs of doing business.
Lisa Larter (11:25):
It’s great to have an average, an overarching average that you use for forecasting, but you want to pay attention to all the different verticals of products and services that you offer and know what does it cost me to do business with these things. Then, you need to know what sales volume do you need to generate that profit because profit is the result of sales minus expenses. If you don’t understand your cost in correlation to your sales and profit, it’s almost impossible to price for profit. Let’s look at the example.
Lisa Larter (12:05):
If you generate 15% margin on a 100K, and let’s say you’ve decided now you want to generate 30% margin. You want a $30,000 pay out. And you know the cost of doing business has gone up by 30%. Here’s what you want to do. 30,000 in profit plus 85,000 cost of doing business times 30% because of the inflation rate, which is now 110,000, means that you need to do 140,000 in the same sales volume to generate that new profit margin at $30,000. Profit plus cost of doing business equals sales volume. But you cannot do this if you don’t know what your costs are or what your profit margins are.
Lisa Larter (13:03):
If you don’t press pause right now, I don’t mean right now on the podcast, but I mean in your business, if you don’t take time to do these calculations, there are three things that I want to warn you could happen to you next year. And I am not trying to be all doom and gloom. I am trying to make you stop and think because I want you to have a good year next year, but there are three risks that you are facing if you do not do this.
Lisa Larter (13:30):
One, you will likely finish 2022 with significantly less profit than you have before because of this. Two, you will likely be priced lower than your competitors. If your competitors are doing this work and you’re not, you are now going to be under priced in the marketplace. And three, you are going to erode your cashflow.
Lisa Larter (13:51):
So, think about it. If your costs go up by 30% and instead of it costing you 85,000 to do business, it costs you 110,000, where do you think that extra 25,000 is going to come from? It’s going to come out of your bank account. But it’s not going to happen quickly. It’s going to trickle out on a daily basis as you pay for different things. It’s not going to be one lump sum $25,000 thud. That would make it too easy.
Lisa Larter (14:23):
Instead, it’s going to be 25,000 divided by 365 days of spending or $68 a day. $68 a day is going to take money that you have in your bank account right now and it’s going to make it go away. So, you have to pay attention to this if you want to preserve your cashflow, price for profit and be prepared for rising costs.
Lisa Larter (14:53):
Here are a few things that I really would like you to do. One, you should review your profit and loss or your income statement, whatever you call it, they’re the same, on a monthly basis, and not just monthly, but compare this month to last year’s month. Do this right now for 2021 compared to 2020 and figure out what the difference in costs are right now from last year to this year.
Lisa Larter (15:22):
Then, what I want you to do, I want you to do this monthly, and I want you to do it on a year to date basis. And I want it to become a habit that you do every single month. Then, I want you to project what you anticipate the increase in cost to be from inflation so that you can see what the effect will be on your business.
Lisa Larter (15:41):
Then, I want you to adjust your pricing to offset that potential loss. The next thing I want you to do is pay attention to your cashflow religiously. I log into my bank account almost on a daily basis and I look at how much money I have because I want to know is my cashflow situation on my balance sheet getting better, or is it getting worse? The valuation of your company is tied to the value on your balance sheet.
Lisa Larter (16:15):
The value on your balance sheet is tied to the amount of cashflow that you have in the bank. If you are someone who is actually considering selling your business in the next couple of years, paying attention to this is really important because if you cannibalize your cashflow, you’ve just reduced the valuation of your company too.
Lisa Larter (16:35):
The next thing you should be doing is pay attention to unnecessary spending. Print out all of your credit card statements for the past year and all of your bank statements, and grab a highlighter and go through and look for spending that is unnecessary. Think old subscriptions, McAfee Virus or, oh, maybe you subscribed to some game on Facebook and you don’t play it anymore. I’m not trying to put you in a scarcity mentality situation here, but what I’m trying to get you to do is look at where you’re spending money that maybe you forgot you were spending money and pull back on those things that you don’t use or you don’t need anymore.
Lisa Larter (17:15):
And then, the last thing that you need to do is really, really, really try to avoid debt. Now, I am not an economist. I am not an expert on this stuff at all. So, do your own due diligence and research. All I can tell you is I have a successful business that has been profitable every year for over a decade and my business does well. I don’t need to worry about the financial position of my company because I am monitoring it all the time.
Lisa Larter (17:50):
But the research that I have done shows that typically there can be a relationship that exists between interest rates and inflation. And I have read that one way to control inflation when inflation starts to rise is to raise interest rates, because if you raise interest rates, then you can actually bring inflation down. Still costs you more money if you have a lot of debt.
Lisa Larter (18:17):
If you have a lot of debt, you want to try to pay down some of that debt and not take on more debt, because what happens is there’s typically an inverse relationship between interest rates and inflation. If inflation is going up, interest rates are going down. But how much lower can they get? In order to make inflation go down, interest rates will have to come up. And if interest rates come up, then you’re going to pay a lot more on the debt that you have right now, and if you take on additional debt because of inflation, you will be in a worse, worse situation. So, just really get your financial house in order.
Lisa Larter (18:59):
If I could say one thing about today’s show, it’s pay attention to your numbers. Become aware of where the costs are rising in your business and become aware of whether or not your bank balance is shrinking before it is too late. Prioritize looking at what you are currently charging for your goods and services today and get ahead of the curve. We are going into the last couple of months of the last quarter of 2021. It’s a great time to reassess your pricing for 2022 and increase some of your fees on services and products that you sell right now.
Lisa Larter (19:46):
It’s also a good time for you to look at the 80/20 rule and determine what are the 20% of products or services that are generating 80% of your sales and what are the 80% products or services that are only generating 20? Can you get rid of some of the lower margin, higher labor items that maybe are not helping you to be lean and as profitable as you could be? You want to find, especially if you’re not comfortable with numbers, a community of like-minded people, like the Strategy Lab. We talk about numbers in the Strategy Lab all the time. Every quarter, we look at numbers. Find a community of people who are not afraid to talk about money and numbers and get comfortable with this yourself.
Lisa Larter (20:32):
If you have a business coach who isn’t comfortable talking about things like this, or isn’t talking to you about things like this, you should find a new coach because your business coach should be advising you right now to be considering these things as you start to plan your strategy moving forward. During every season of economic uncertainty, there are opportunities to thrive. I want you to thrive. I am not trying to scare you. What I am trying to do is put you in a position where you can look ahead and prepare, because those who look ahead and prepare are typically the people and the businesses that fare well.
Lisa Larter (21:17):
Now is the time to think plan, and act so that 2022 can be your best year yet. If you would like me to help you with that, if you haven’t started planning for 2022, our next planning sprint is December 6th. If you want to be invited to that planning sprint, and you want to be part of the Strategy Lab, go to lisalarter.com/thelab to get on the wait list and you’ll learn more about it. If you have questions that you would like me to cover on this show, I’m doing some Q&A calls around these topics. Please email them to me, lisa@Lisalarter.com. I would be happy to answer your questions and not use your name on the show.
Lisa Larter (22:00):
And if you feel overwhelmed or intimidated by this, please don’t. Be grateful that you have the awareness right now that you need to be looking at these things in your business and find someone to help you navigate this. I want you to end 2022 in a better situation because of listening to this podcast than if you keep your head buried in the sand and you don’t look at the numbers. You have time to make changes in your business right now so that next year is a good year for you. That’s what I really want for you. And in order to build on this, on next week’s show, Stephanie’s going to come back and we’re going to talk about planning your numbers for 2022.
Lisa Larter (22:49):
We’re going to talk about some of the different things that I have done over the years, Stephanie is going to remind me of things that I’ve done, and we’re going to just have a really good conversation about where you should start in terms of that planning. Please join us for next week’s show too. There’s a lot that you can learn in this season of She Talks Business about money, metrics and measurements to put yourself in a really good financial situation.
Lisa Larter (23:16):
If you enjoyed this week’s show, here’s my humble beg as always, please leave a review. And more importantly, if this was a wake up call for you, if this show made you think, if this show made you take notes, if this show made you consider your business from a different vantage point going into next year, do me a favor and share it with somebody else that you know, who runs a business. Being an entrepreneur, being a small business owner is such a huge responsibility. Small businesses employ the vast majority of people in North America. And a lot of small business owners don’t have the time, energy or expertise to really understand the numbers in their business.
Lisa Larter (24:06):
And if you can do one thing to help a fellow colleague have a better year next year, it would be raising the flag on this so that they are prepared, so they don’t go into the next year blindfolded, thinking that inflation is not going to impact their business when it may very well already be doing so. Thank you so much for listening and I look forward to seeing you on next week’s show. Bye for now.
Lisa Larter (24:34):
Thank you for joining me for this episode of She Talks Business. If you enjoyed the show, you know the drill, leave us a review, tell someone about it and join the conversation on social media. Thanks for listening and until next time remember, done is always better than perfect.