PEMBROKE, Mass. — Raising prices is a major question for many dry cleaning businesses. “I can’t do that now,” says one dry cleaner. Another, more vocal, says, “We’re in a recession. No one is raising prices. Better to hold down costs, and wait until things turn around.” A third offers this comment: “If I increased prices, my customers would go to a competitor.”
Is this conventional wisdom—in tough times, don’t tamper with prices—stopping you from raising prices? Perhaps now is the time to challenge that assumption. For one thing, the economy is improving. The stock market has regained much of the ground lost since 2000. Houses are starting to sell, triggering rising prices in the housing market. Unemployment is still high, but 90% of the labor force is working. These folks are living their usual lifestyle—eating out, taking vacations, and saving for retirement. Meanwhile, the fixed incomes haven’t declined for retired folks, and their capital has grown 15% this year.
Poorer classes have safety net provisions—Earned Income Credit, free health insurance, welfare allotments, Supplemental Security Income, food stamps, and housing assistance—to prop them up. Perhaps the only class that is really hurting includes recent high school and college graduates who can’t find appropriate jobs. Fortunately, many of these young people are being helped by their families. So, a large portion of your customer base is doing OK.
Second, despite the recession, prices are going up all the time. Examples include gas for your vehicles, heating costs and medical expenses (insurance plans require us to pay more of the bill). Restaurant fare is increasing all the time (spending $50 on dinner for two is common). Meanwhile, many households have hundreds of thousands of dollars of higher education expenses to pay off. (The average price of a private four-year college exceeds $200,000.)
My point is that a large portion of the population does not suffer during a recession. If you haven’t raised prices for a while, a pulling-out-of-recession period is an excellent time to push up prices.
WHY RAISE PRICES?
Your competitors aren’t altering their fees. That seems to be a real stumbling block. But, you know, everyone raises prices sooner or later. That’s why the average house was $12,500 in 1960 and is $225,000 today. So you raise your prices this time, and they do it next time. It is just the flow of commerce.
Besides, price is only one of many factors in choosing where one shops. Consider the supermarket industry. Most chains emphasize price. But Whole Foods, a Texas-based chain that emphasizes organic and high-quality foodstuffs, is transforming the market. Do you think Whole Foods worries about raising its prices? Absolutely not. Its nickname, ‘Whole Paycheck,’ underscores this. This growing giant has determined that a sizable customer base will pay higher prices for higher quality. In our industry, higher quality translates to better service. With the confidence that you offer better service, you will not hesitate to raise prices.
Another stumbling block is that certain customers will be angry. In fact, a few might make unpleasant noises, although most will not say a thing. Fully 80% of your client base won’t even notice the price increase.
To those who protest and put up a fuss at your counter, you have an answer. “I have nine employees who make such a modest living it pains me. These people work hard to clean your clothes, and I want to give them a modest raise. I can only do it by raising prices. Surely you can understand my wish. If you can’t, spend an hour in the plant, and you will see the care my workers take to make your garments look like new. Then, I’m sure, you won’t deny them.”
Such an explanation is meant to tug at the heartstrings, and it succeeds. Even the most hard-boiled customer will be hard-pressed to challenge your good intentions.
If you don’t like that explanation, come up with one of your own. Perhaps utility cost increases are forcing you to act. Perhaps environmental requirements have hit your firm. What you want is a scenario that explains your actions.
Then there is the problem of inertia. We’re managing, so why rock the boat? If you examine your books and see that profit is down, you’re managing, but you’re not managing well. You are not hitting target. Don’t ignore that responsibility in bad times. The bold businessman acts and so should you.
LOOK CLOSELY AT YOUR COST STRUCTURE
The exercise of raising prices forces a dry cleaner to confront the business’ cost structure. Getting a grip on costs is a key characteristic of good management. You’ll make decisions on firmer ground. You’ll know which costs have increased and why. You’ll spot areas in which you need to be more efficient. You’ll spot weaknesses in your staff.
What you gain by raising prices modestly and selectively is a chance to catch up and overtake increasing costs. The math is telling. A dry cleaner with flat costs who operates on a 3% profit margin, and then increases prices an average of 3% will double his profit. For example, if a firm does $400,000 and makes $12,000 profit, a price increase ($12,000) would double profit ($12,000 + $12,000 = $24,000). A 3% increase in prices creates a 100% increase in profits. But even if costs have increased, a 3% price increase is likely to bump up profits.
Of course, we’re not talking about a huge jump in prices. Raising shirts from $1.75 to $1.95 is not such a large shift. Neither is marking up slacks from $5.95 to $6.45, nor raising sports jackets from $6.25 to $6.50. Selective price increases is the way to attune your company to the market.
Check your costs today and figure out your profit margin. Has it been slipping? Perhaps this is the time to introduce a modest round of price increases, despite the economic times.