Prices of many commodities, from cotton to corn, are on the rise. As a result, a slew of companies -- clothing retailers, industrial products manufacturers, paint distributors, etc. -- are feeling the pinch. Even the mighty McDonald’s Corp. recently indicated it might have to raise prices, thanks to increases in beef and other costs.
But, while price hikes are one obvious response, it likely won't go over well with customers. What to do?
Boost sales to offset lower margins.
One solution is to try selling more products, which is easier said than done, of course. For example, take Big Feet Pajama Co. According to CEO Valerie Johnson, the five-employee company has been hard hit by increases in cotton prices, with manufacturing costs up 20 percent. To address the problem, the company recently decided to expand into new markets, opening a distribution facility in the U.K. in December. Johnson is hoping to increase sales by 25 percent and to launch operations in Canada and Australia, as well.
Johnson is also tapping into social media to increase sales. She has been using a Facebook page, for example, to run contests and giveaways. For her last promotion, she asked for predictions of the Super Bowl winner and final score, posting pictures of the company’s green pajamas to represent the Green Bay Packers and black pajamas for the Pittsburgh Steelers. “We saw a large increase in sales of those colors leading up into the Super Bowl,” she says.
Find lower cost alternatives.
You might be able to substitute an expensive commodity for a less costly replacement. “Think through all the alternative ingredients and raw material options you can swap,” says Ken Gaebler, a small business expert who heads Gaebler Ventures in Chicago.
He points to a Chicago-based manufacturing company that’s seen a 40 percent increase in linseed oil, a key raw material it uses. To address the problem, the firm recently reengineered its products to use such lower-cost alternatives as blended oils.
Another possibility is reducing the size of your product or the amount of a particular commodity used in that item -- say, making cookies with fewer chocolate chips. In either case, tread carefully. If you tinker with your product’s look or quality too much, you might alienate customers and hurt sales. “You don’t want to debase your quality in the eye of consumers,” says Charles Yacoobian, a partner with B2BCFO.com. “It could backfire -- permanently.”
Look for ways to lower other raw material expenses.
Analyze all the raw materials and components you use to see where you can reduce costs. That Chicago-based manufacturing company? It recently created a task force to evaluate options and ended up deciding to outsource some components to a plant in China, among other changes. The firm has been able to keep its raw material costs flat -- and avoid raising prices.
Do a backdoor price increase.
That means using so-called adders -- keeping your base price the same, but indicating to customers you’ll charge a temporary adjusted amount tied to commodity prices at the time they’re billed. A trucking company, for example, could charge an additional fee for every $.01 over $4 in diesel fuel costs. Or, a steel metal shop might adjust prices according to increases in the wholesale cost of sheet steel for that Monday. “You leave the base alone and simply add an asterisk to your invoice, indicating whatever the pricing difference will be,” says Charles Gibson, a partner with B2BCFO.
If you hear about price increases before they happen, stock up.
When Yacoobian ran a wholesale distributor of arts and crafts products several years ago, manufacturers would often let him know if increasing oil costs were going to force them to raise prices. He then used his line of credit to load up on best sellers. The upshot: He was able to keep his prices lower than competitors, who didn’t act as quickly. “I turned it into a competitive advantage,” he says.