Small to medium sized companies are less apt to pass on higher cost resulting in margin erosion
We are beginning to see the high cost of fuel and
commodity prices reverberate through the marketplace. In an article by the
Associated Press, Dean Baker, co-director of the Center for Economic and Policy
Research states, “While these increases have not for the most part been passed
on at the retail level, it is inevitable that they will be at some point”. article
As stated in
the article Sherman Williams, Dow Chemical and Kimberly-Clark Corp. has chosen
to increase prices; contrarily Walmart and Costco have been selective with
their price increases but suspect that they will not be able to hold this
position for very long.
Small and medium sized companies, which comprise the
backbone of the American economy, are less apt to raise prices as they
experience increased cost. Sound business decision making is often overruled by
the fear of losing a sale or alienating their customers, whether this is
reality based or simply an emotional response. Furthermore, competitive pricing
wars are commonplace amongst these sized firms with neither side identifying a
financial stop loss. The reasoning—we will make it up on volume, as I have
often heard the CEO say. However, this is a fallacy; increases in the core cost
of doing business do not lead to economies of scale. The company may not feel
the impact immediately and will find comfort in the look and feel of a “busy
staff” but eventually prolonged exposure to dwindling profit margins will
impact the bottom line, depleting cash flow, retained earnings and the
company’s ability to borrow capital.
Small to med-sized companies should make note of the
actions taken by the larger companies and consider making similar moves to battle
this economic storm. As a defensive move companies can: seek new customers and
markets, change pricing structures by unbundling products and services and
charge for add-on services. If necessary, it is even better to intelligently
downsize. Although these moves can be difficult and painful, the alternative is
much worse. I give the following words of advice to these companies: review
cost structures, monitor margins and when the next low margin bid comes
knocking at the front door it may be
better not to answer it.
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