Beating Inflation means you have to maintain profits, despite higher costs. In this area where I live in Pennsylvania, the cost of electricity has gone up probably 10 to 12%, just from one billing cycle to the next, because they said “we need more money. We’re jacking up the price.”
It’s like death by a thousand paper cuts. It’s the situation where you’ve got this little increase here and this little increase here and this little increase here. And you don’t realize it until you go to pay the bills and you look at the numbers at the end of the month. Wow. We’re generating the same sales or even more, but we’re not making as much money.
David: Hi, and welcome to the podcast. In today’s episode, co-host Jay McFarland and I will be discussing the idea of being profitable even with higher costs. Welcome back, Jay.
Jay: Thank you so much, David. What an important topic. So many businesses are experiencing this right now. Their costs have gone up. Inflation is affecting everybody right now. So I love that you’re taking some time to talk about this topic.
David: Yeah. I saw an article recently where they were discussing the fact that in the promotional products industry, in particular, what a lot of businesses are noticing is that even when their sales are even or potentially higher than they were last year, they’re not as profitable because their costs have increased. So keeping at the same sales volume is not going to cut it anymore.
Jay: Yeah. And, we all hope that this is a temporary problem, but in the meantime, people have got to learn how to pivot. And I think that is one of the hardest things for businesses to do, especially quickly. The quick pivot. Like, okay, what are we going to do in the short term while our costs have gone up?
David: Yeah, and I think that word, “pivot,” has probably gotten more use in the past 18 months to two years than it probably got in all of human history before that. Because everybody realized we have to do things differently. And what are we going to do and how are we going to do it? And when it comes to increased costs, the options are relatively limited.
I mean, basically, you either have to be able to increase your overall sales and make up for it with the profit that you’re already getting, or a reduced profit. Or you’ve got to be able to reduce your cost so that you can get that spread back. You’ve got a cost to do things. And you’ve got a cost associated with what you’re going to sell it for.
And the gap is where all the money is made. Without the gap, we’re out of business. And so keeping your sales at a certain level is not going to do it if your costs are approaching that same level.
So a lot of it is really about identifying the primary costs in my business. And unfortunately, it’s really a matter of also being rather relentless about the idea of cutting back on the things that are not currently working.
And that can be really difficult because one of the biggest expenses in a business is very often personnel. And so what that means is looking at the people that you’re working with and saying, okay, who’s pulling their weight? Who is more than pulling their weight? And those who aren’t, what can we do to help them to pull their weight or more than pull their weight so that we can continue to grow to be able to simply offset the costs that have increased so much?
Jay: Yeah. I think the knee-jerk response from most businesses is let’s find a way to increase sales. But you know, they have to understand that depending upon their profit margin, if you increase your sales by $10, that may be $1 to the bottom line.
But if you save a dollar in costs, that’s a dollar to your bottom line. If you save $10 in cost, that’s $10 to your bottom line. And so increasing efficiency, like you said. Maybe help train or implement better systems. I think all of those things go a long way to saving. You know, a dollar saved is a dollar earned, right?
David: Yeah, exactly. I think you’re right, particularly when it comes to small and medium-sized businesses. Generally small and medium-sized businesses, we want to hang onto our staff. We want to keep our people. We recognize that we’ve got responsibilities to people other than ourselves.
What I’ve been seeing though in the news lately, is that a lot of larger companies see this stuff coming and they’re like, okay, we’re cutting costs. We’re laying off 10% of our workforce, that sort of thing.
So it’s different, depending on the size of your business and depending on your mindset, what you are willing to do and how much pain you’re willing to take when it comes to absorbing some of these extra costs.
Jay: Yeah, I’ve seen several industries that have decided, well, in the short term, like in the pandemic, we’re going to look at the services we offer and maybe we’re going to scale down on those services.
So like in the restaurant business, we saw both for health reasons, but I think also for cost reasons, we saw dining rooms shut down.
And I know restaurants right now that aren’t going to reopen their dining room because they pivoted towards delivery and towards maximizing their drive-throughs.
And so now they don’t have the cost. You don’t have to have two people at a cash register every time. You don’t have to have labor in the dining area. So they changed their entire model and saved a ton of money in doing that. And I don’t know that they’re going to go back.
David: Yeah. And similarly, I think there are a lot of restaurants in particular that when they were forced to shut down, and they didn’t pivot, a lot of them just never came back from that.
They just didn’t make it. They closed their doors and they called it a day. And then there are the hybrids. There are the restaurants who did pivot. They switched to take out or delivery. And then when they were allowed to have people back in, now they had the benefit of both.
I know there are places that we go to around here. Normally we would go out to eat and when COVID happened, we started taking advantage of pick-up or take-out. And we even continued to do that afterward. Because I’m used to it now.
Whereas before I would’ve never thought to do that, because it’s like, oh, it’ll be cold by the time it gets home. But then you realize, eh, so what? You heat it up again and I can be home instead of being somewhere else.
So they’ve got the best of both worlds now. Because they can have a full restaurant and they can also have people lining up for takeout. So they can actually be generating more business than they would pre-pandemic.
Jay: Yeah. And I think, unfortunately, and you kind of mentioned this, when costs go up or when you know your profits go down, one of the first things that’s always cut is marketing.
And if you are in certain businesses and you offer those marketing services, you’ve got to convince those businesses to stay with you. And that it’s important that they continue to market.
David: Yeah. And especially if they now have to create a new message for their people. If they have to say, come to us now for takeout, instead of coming into the dining room, that’s a different message.
And so if you eliminate the marketing that conveys that messaging, you’re not going to be able to pivot because nobody’s going to know what it is that they need to know about how to do business with you going forward.
But that’s a great point. And when we think about the costs, again, a lot of times it’s personnel, it’s marketing, and it’s overhead. What are the costs that I’m running into on a consistent basis that are costing money?
Nearly everything! The cost of internet service, the cost of phone service, and the cost of electricity. I know in this area where I live in Pennsylvania, the cost of electricity has gone up probably 10 to 12%, just from one billing cycle to the next, because they said “we need more money. We’re jacking up the price.”
It’s like death by a thousand paper cuts. It’s the situation where you’ve got this little increase here and this little increase here and this little increase here.
And you don’t realize it until you go to pay the bills and you look at the numbers at the end of the month. Wow. We’re generating the same sales or even more, but we’re not making as much money.
Jay: Yeah. And I think one of the hardest parts about this is I think most businesses know that inflation is going to go down, that this was caused mostly by the pandemic.
And so it’s like, how do I? I don’t want to cut staff because I know, and I hope, that six months from now, three months from now, whatever demand will be up and costs will be down. And so, how do I navigate this madness in the short term?
David: And I think for small and medium-sized businesses, in particular, there are sometimes situations where somebody has been sort of hanging on by a thread.
There might be employees that maybe have not been pulling their weight for a long time. And when things are going well, you can afford to carry them. But when things are not going as well, you have to look at that and say, okay, can we continue to essentially subsidize this person?
Because the other people in the organization are having to pick up the slack. Can we do that? Can we continue to do that? And it’s an individual decision for each person in business.
But for everybody who is still working, and I’ve been hearing a lot lately about the big resignation, is that what they’re calling it? The fact that there are so many people who have just left jobs over the course of the past year and a half?
And it has an impact. It has an impact on the business. It has an impact on coworkers, and it has an impact on the way that a business is able to deliver the products and services they offer.
So there are a lot of moving parts with this. But looking at the primary costs in the business and saying, okay, what is really important? What is critical? Who are the people who really continue to deliver in my organization? Because you really want to reward those people. The ones who need a little help, you want to get them the help they need to get where they need to be.
You want to look at the idea of, okay, as far as marketing, what should I do? Is my marketing paying for itself? Is it more than paying for itself? Are there areas where it is and areas where it’s not? Because if we know where it’s working, then you can allocate the funds more toward where it’s working.
I think it was John Wanamaker, the famous Philadelphia retailer, who said, “I know that half my advertising costs are wasted. Trouble is, I don’t know which half.” And it’s such a great quote. But making your advertising and marketing more accountable. Recognizing, okay, where are my leads coming from?
Some of that starts with just simple lead tracking. When you get somebody who’s calling into your organization for the first time asking, where did you hear about us?
Was it a referral? Was it some sort of ad? Where did they come from? And documenting that, so you can keep track of it and know where your money is being spent well and where it is being wasted.
Jay: I think really what I’m hearing is having good systems because you talked about identifying the employee that’s not carrying his or her weight. Well, there are a lot of companies that don’t have a way to track that.
Or you talk about, where your sales are coming from. You know, if you’re just running haphazardly, you’re not going to be able to identify these issues, whether it’s in your customer base, whether it’s in your employee base.
I see a lot of companies looking at KPIs, key performance indicators, and having systems where they know really quickly if an employee’s production is going down so that they can be reactive and even proactive. They can catch the problem before it becomes a major issue. So I think having good systems is so important, especially in inflationary times.
David: Very true. and just knowing what’s what in your business. It seems really obvious, but it’s often overlooked. Particularly when things are going well. Because when things are going well, you don’t really have to pay attention to that stuff as much. But then when things take a downturn or when you run into a situation where your costs are increasing a lot faster than your ability to generate revenue and profit, you have to start looking at those things.
And so if you’re looking at personnel, if you’re looking at marketing, you’re looking at overhead, you’re looking at other areas. A lot of times the smaller stuff and the incremental stuff with overhead might not cut it. Because your overhead’s going to go up. You still have to have a phone, right? You can’t get rid of that.
You’re still going to need electricity. You’re going to need a lot of these things. And so, in some sense, it’s going to be about finding the types of customers who are still able and willing to pay what you need to charge to generate what you need to operate a successful business. And to some extent, there’s going to be some belt-tightening involved.
Jay: Yeah. It reminds me of that saying in sports that the best deodorant is winning. You know, when things are going good, you’re just not paying attention to these things.
I think a lot of businesses are reluctant to do this. There’s pain associated with it. Like you said, I think most employers would rather keep their staff. But I also think that if you do take the time right now to put in these systems, to put in these cost-cutting measures if you’re able to retain them as you come out of this period, then when the money starts to really flow again, you’ve really positioned yourself in a much better place. The pivot can be highly beneficial to your business in the long run.
David: And if this is something you would like to pursue further… if you need a little help growing your business or offsetting some of the costs you’re encountering, go to TopSecrets.com/call. That’s TopSecrets.com/call.
We can talk about what you’re dealing with in your business. Try to determine if we can help you with some things. If we can, we’ll let you know that. If we can’t, we’ll let you know that too. But either way, I think you’ll get great value from the conversation. So look forward to talking with you.
Jay: Yeah, absolutely. David. So great to talk to you about this topic.
David: Thanks Jay. Appreciate it. Talk to you next time.
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