There comes a time to raise prices ..

The other day another AWI linkedin post floated over my desk bemoaning the lack of profit, despite good sales, even in this tough economy. The responses were almost all aimed at chasing out inefficiencies, increasing outputs, embracing more automation, etc. All good thoughts in and of themselves which could perhaps reduce costs and therefore, after great investment expense, reap some profit.

But what should have been an obvious solution was nowhere to be found .. if you’ve got plenty of volume and good production and no profit raise your prices! At least I thought it was obvious. The lack of agreement to raising prices led me to reflect on the state of the industry I’ve known all my life. Where are we going so wrong that even in good times, the average profit for a mid size millwork company is less than 3%?

Built into the fabric of this industry is an aversion to raising prices, even in good times. I can safely say that the price of our goods has stayed flat or declined for at least the last decade, probably longer. Where does this aversion come from? Has the nature of the open competitive bid market whipped us into submission to such a degree that the thought of raising prices is shunned, industry wide?

In this period where I have never seen so many companies shuttered .. there’s a story behind each closing .. some were fraught with terrible luck like being flooded or burned to the ground or their bank going under and loans called, but the vast majority were closed down because they couldn’t make a buck and had no real idea where their costs truly were. Taking on cheap work to feed the overhead is one thing .. taking on work below your actual cost is quite another. Learning what your cost is? Well, some never do and they’re the ones left twisting in the wind of rapidly depleting cash flow while contractors hold back on payments, certain that the shop is going to close shop before their job is done. You see, they know you’re not making any money before you do! They know what price you took that job for.

I think it’s time to admit, as an industry, that in today’s environment we’ve reached the point of diminishing returns in reducing costs. Automation has been widely adapted in the industry. Yes, certainly there’s always more to be gained in fine tuning your efficiencies and it should be a regular process to get the most out of your resources, but without increased profitability why invest more to still fight day in and out for a 3% profit?

So I plead with you all .. when you have a full backlog for a while, try it .. try raising prices .. you will be stunned to learn that nobody will notice an extra 5% .. you may even be stunned to find that you still get the work.

And I leave you with this last thought .. when was the last time you saw the oil industry, the defense industry, the banking industry, the health care industry, the insurance industry .. any of them .. EXPEND EFFORT TO REDUCE COSTS SO THEY COULD CHARGE CUSTOMERS LESS INSTEAD OF MAKE MORE MONEY?

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