Expense Creep – Victim Or Victorious?

My wife and I, who have been self-insured for the last 20 years, had something remarkable happen. Believe it or not, our health care premium went DOWN! A combination of moving to a new state and having rates overall drop in 2020 led us to experience something I had often wondered if possible. As a long-time business owner and penny pincher, I did not see this as a windfall to be spent monthly on another night on the town. Instead, I viewed it as more money to save.

As a business owner, you need to always be on the winning side of expense fluctuations.

The concept is simple. Have an expense go up; you have to cover that expense. If you have gone with the flow for years and not adjusted service pricing, for example, even as the wages you are paying your service staff have risen, you are losing. Thinking the big dollar “profits” on that particular order you are ordering can outweigh the incredibly high freight costs coupled with the relatively low margin, you are losing. Product pricing may be creeping up on SKUs that have been in your POS for years, and you are still charging the same retail price = a loss. MSRP and MAP pricing has two keywords you should key in on your system. You were suggested and minimum.

If you follow the suggestions, you will get the minimum profits. Not only can you price items higher, in many cases, but you also have to maintain your benefits. Can you price everything higher? Of course not, but you may be surprised at how easy it is to mark items above MSRP/MAP pricing with very little to no pushback. I feel that service pricing and service parts are the most easily raised prices. It is incredible to view the enormous disparity in service pricing around the country or even in the same town.

Spend some time lurking around your peers’ websites and see for yourself. Can it be that simple? Of course, it is. Constant attention to your bottom line, margins and expenses will keep you moving in the right direction. For every retailer who says they cannot compete with the internet, another one proves them wrong. For every retailer who thinks they cannot command those higher service prices, someone will.

Your mindset has to change so that you have to understand the basics of your business and act on them on a day to day basis. Do you have a category that is stinking up your cash flow, yet you feel it is critical to your store’s image, ego, or has to be supported because that’s “who” your shop is? That by either eliminating or right-sizing that category will send the wrong impression to your employees or customers. This real issue that I have heard many retailers provide as the reasoning they continue to invest time, shop space, and cash flow into underperforming areas of their business (well, the ego part is usually avoided).

Here’s what you need to do: each time you have a price increase in freight, inventory, wages, or any other expenses in your business, you need to sit down and decide whether you want to make less money and necessarily pay for the increase out of your pocket, or do you maintain your margins and subsequent cash flow by finding an item or service that needs to increase to cover the increased cost. You can also revisit your expenses and see if you can reduce them in a particular area. By thinking you are working daily to stem the million little paper cuts one at a time, versus finding out your profits dipped at years end. Being proactive is the easiest way to stay on the ball.

Finally, if you have items or a vendor whose margins are not in keeping with your desires as they relate to profits, you have two choices. First, you can raise the prices to mostly stress test them to determine if your market will bear the (needed) increase in pricing. Second, you can search for products/vendors that may deliver the higher margins you need and still be desirable to your customers. Remember, you are ultimately captaining your ship, and it is up to you to avoid sinking that ship. I’d love to hear from you – if you have questions or comments regarding these ideas, email me at david@nbda.com.

Words by David DeKeyser