I recently had a café owner come to me upset that that his business was not making a profit. Three years ago I had met this same café owner when his business had been trading well and making a nice profit ($150,000 profit on sales of $1.5m – a return of 10% on turnover).
Over a coffee, we discussed his business in a bit more detail. The café was busy, there was the usual staff turnover, but of most interest was that the profit margin had been reducing. It appeared that both staff costs and food costs had been increasing faster than his revenue had been. The business owner had put this down to increased award wage rates and problems in the kitchen.
We talked for a bit longer, and I happened to ask when was the last time he had increased his prices. His reply “oh not for a while, maybe three or four years ago. It is pretty competitive in my industry, so I can’t really increase them”.
And there it was! With inflation running at 2.5 – 3%, over that three to four-year period his costs had increased by around 10% and wiped out his profit. Now this café owner is in the position that he has to have a big price increase and, if not done correctly, will likely create a few unhappy customers.
This situation could have been avoided if the café owner had made small annual increases to his prices. Customers would have had an expectation that this would happen and therefore any resistance would have been minimal.
However, like my friend with the café, many business owners believe they cannot increase their prices. If this is the case, you need to be innovative and find a way to increase the value you give your customer and offer that at the same time you raise your price. Better still, if you can provide this value at little cost, then you have a great solution.
For example, a café could offer a wider range of coffee flavours or a slightly larger cup size at the time of increasing their price. Alternatively, a new menu offers the opportunity to reduce food costs or increase prices by offering something not directly comparable to what was offered on the previous menu. This type of strategy would have certainly helped the café owner.
So when did you last raise your prices?