Are Price Increases Leaving You Feeling Empty?Nov 27, 2023
Each week, I talk with a handful of prospective mastermind members about their outlook for future growth – both in revenue and profit. We discuss how to do this while building their teams to take care of daily operations.
There have been some positive trends over the past couple of years from these talks – we received government assistance (PPP and ERTC) from Covid, many of the smaller operators have closed their doors leaving market share opportunities, and drycleaners have been forced to increase their prices if they want to stay in business.
There is a growing, uneasy feeling about price increases. How sustainable is it to raise prices twice or four times per year? Is that a reaction to inflation, or are we just getting our price right after it being too low for too many years? When do we price ourselves too high and our prices become seen as unreasonable by our clients?
Let’s look at an example. Meet Mark, one of the prospects who I talked to this past week. He does about one million in top-line annual sales and is dropping about 10% (roughly the industry average) to the profit line. He wants to double the profit he gets from his company.
I asked him a question: If your profit percent stayed the same at 10%, how much would you have to increase top-line sales by double profit? Pretty easy math. He would need to double his sales, adding one million dollars in top-line sales.
Then I asked, if your sales stay the same and you wanted to double your profit, how much would you need to cut your expenses? Again, pretty easy math. You would need to cut 10% of your expenses.
In reality, you would not do just one or the other. You would likely do both. Mark understood the point when I asked him what was going to be easier – adding one million in sales or cutting 10% of expenses? Obviously, cutting 10% of expenses would be easier. A lot easier. In fact, I’ve never seen a company where I couldn’t cut 10% of expenses over a 60-day period and it’s usually more than just 10%.
That is why I know our industry is concerned about the sustainability of increasing sales with price increases. We know deep down that it is easier (and necessary) to cut expenses but I have found most drycleaning owners are unwilling to do this. They think they will increase sales which will put all of their expenses in line. They are putting off the hard work that needs to be done - trimming down expenses so you can take more profit home.
If you run a franchise, you face an even more challenging situation. That is because franchisors are rewarded by top-line sales increases (royalty is a percentage of top-line), but you as the franchisee put food on your table with profit. You have to tune in your expenses, especially since you have the added costs of a royalty (and typically) marketing fund fee. Smart franchisors know this, and they invest in systems to help manage expenses and increase profit.
Manufacturers are making some notable advancements in automated equipment that allow for less reliance on labor – your number one expense/investment. Companies like Metalprogetti and Garment Management Systems have created automated assembly systems and retail kiosks to decrease our labor line and companies like Sankosha and Macpi are introducing more effective steam tunnels and finishing equipment to increase productivity and reduce training.
These innovations require a large investment, so I think it is going to be more challenging for drycleaners that do less than a million dollars in annual sales to reduce key expense lines as they might not be able to afford these innovations. Small, incremental sales increases are not going to cut it. It is time to put systems in place to increase top-line sales and also keep expenses in line. If you are not already, you need to position yourself as a large player in your market. Price increases are not going to be enough.
Do you need help installing these systems in your business? That is exactly what we do at Maverick Drycleaners. Reach out and I will be excited to jump on a call with you and tell you more.
Have a great week!
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