Price Gouging or Smart Business: High Margins' During Inflation

Are you tired of soaring prices? Do you believe companies are gouging during these challenging times??Typical commentary on inflation and price increases is short-term thinking. Decisions about taking profits, setting margins, and cutting costs are much more complex.

When a business increases margin during tough times (especially when more challenging times are coming), it's not unjustified. It's wise business practice. A company that doesn't take profits when it can be not serving shareholders.

Having an ethical discussion without addressing "Who is the shareholder?" is disingenuous. Every worker who has any kind of retirement account is in the whole of the S&P 500. Millions of private companies depend on mutual economic success.

Not getting the money when available may mean you won't have a company to provide a service when clients need it most. Decisions about setting prices depend on hundreds of projections; rarely is it as simple as "because they can." This is especially the case in competitive markets.

It's easy to get the consumer to be upset. Any reasonable person will be livid if costs go up 25% in a brief period. The wrong solution is advocating price controls or fixing margins from a government level.

Every business facing tough times must address potential risks of increasing, decreasing or keeping margins the same. I advocate maximizing profits by whom you serve as customers, what you offer, and how you position the company.

Yes, higher margins create more inflation, but it also solves inflation-related problems for that business.

For example: Realizing a higher margin going into a potential supply chain disruption or shortage in the marketplace. The company has a zero margin when there are no products to sell. The higher profits realized help pay for the increased cost of goods.

Raising margins ahead of inflation is necessary because those dollars will soon buy less.

This is NOT a popular position, but higher margins are the correct position from an economical and intelligent business perspective. Customers will be upset in the short term, but they will have the company's output over the long term.

It becomes unethical when legislation manipulates the market with regulations, controls, and conditions. Setting regulated margins at a governmental level discourages innovation and competition that may bring down rising prices.

Also, companies that lower supply to increase margins isn't helping themselves. A competitor with a better marketing plan can reveal your deception, circumvent your market share, and steal your customers.

Businesses on the receiving end of rising costs must hedge against it. You will need to consider the same strategies your vendors consider when boosting margins to remain competitive. Your choice is to give up, do nothing, or adjust to the changing market.

Raising your margin into a coming storm is best regulated by market conditions. Be transparent with your customers about why you made this decision. Understand that when a competitor holds out on raising prices, they fill market demand.

Another approach of holding margins low may cause the underlying business to fail or not because customers may be more loyal. In either case, marketing communications matter. Because the future is hard to predict, each company is careful about margins.

If you are on the receiving end of price increases, then hedging with your own price increase may be necessary. Other solutions include managing inventory, what you offer as a product, and using contracts like futures to fix costs.

·????????A good procurement professional helps review and negotiate contracts.

·????????Finance professionals do cash flow analysis and look at the cost of capital.

·????????Risk management can look at the impact on reputation, regulation, and laws.

·????????Strategic analysts will look for synergistic and competitive solutions.

Because there are so many options, each choice is unique to your business strategy.

This issue is so complex that many variables exist depending on your industry. In a regulated industry, you may have to make a difference in other areas. It's easy to make money when the economy is good. Bad economics, political conflict, and bad policy are a real test of your strategy.

For some, giving your customers a lower price works too. Then again, a business that goes into negative cash flow may not be able to meet future obligations. It is weak thinking to believe there will be a straightforward solution. You will model, test, and measure to find options that work.

The political approach will leverage advocacy groups against the industry to sway election results. Some industries will do this too. The latest information warfare is bleeding over into the corporate world. Reputation management and corporate espionage are becoming a big business.

Consumers don't ask questions when a factory moves to a low-wage country if the consumer still gets the cheap products. But when costs increase due to economic factors, shortages, or politics, they demand domestic production. The biggest whiners will be the least informed.

Because consumers aren't thinking, they don't realize new prices are what they asked for in the first place. Can you see how complex the real world is? The best approach is to educate your customers, clearly communicate challenges, and internally run a better business.

The media is full of specific commentary that seeks to boil the problem of profits down to talking points. Remember, the purpose of media is to sell advertising. More finger-pointing means more eyeballs and higher advertising rates. Public relations matters.

For decision-makers with complex problems like this, take a moment to outline a written plan. There are many options; some may pay out better than others. Economic conditions are neutral to your business survival.

How you hedge it isn't only about the payout. You must also review risks. Right now, a large margin in petroleum could be feeding a push for electric cars. Investors in new energy and electric transportation will use margins as a talking point against fossil fuels.

Fuel prices increase when refineries reduce production capacity or natural disasters even worse by government intervention or policy. Today I paid $4.9199 at the pump; some areas are paying $6.00 a gallon. Nobody likes to spend what they believe is a high price.

[FUN FACT: The highest fuel price during the 1970s gas shortage in the United States was $4.00 a gallon. Inflation-adjusted that May 1974 fuel cost in 2021 is around $25.28. Low prices in 1973 were $0.50 a gallon or $3.30 today. Calculations depend on a lot, so these are estimates.]

Even a push for electric cars could drive an increase in pollution to provide consumers with a perceived lower cost. If you didn't know, electric cars are low emitters of greenhouse gases but high in heavy metals and plastics pollution over their lifetime.

Charging stations seem to cost less than fuel, but very few consumers calculate their cost per mile to include vehicle costs. Your value comes in knowing how to make decisions with complex datasets such as these. It's all about how you measure costs, make decisions, and make tradeoffs.

What one person sees as gouging hardly covers costs in another model's calculations. One of the ways you win is by having an accurate costing model. Which model you choose is multidimensional to consider reputation, market strategy, and much more.

You can make it in any market condition when you know how to make money. I help clients recover losses, reduce risks, and improve business processes. Often there are more profits to be made with improvements in project management, supply chain, and risk management than simply increasing margin.

It's okay that you can get more significant margins during a panic. But if you aren't working across your business to make it better, you won't last when things get worse. What some see as price gouging is only a temporary measure, whether justified or not.

During inflation, expect prices to go up everywhere. If the market bears higher prices, then let yours increase if you continue to deliver value to buyers. Yet know those margins will dry up, and higher prices in your business will flow down the overall supply chain. Map this.

Push too hard with margins, and you'll lose that money in the court of public opinion, maybe even with regulators. There is an election coming. Price gouging (while a necessary evil) is a rallying point because consumers can be made to hate those who have resources.

Not getting the correct percentage of profits today could mean losing thousands of jobs when things worsen. Please carefully consider your common good arguments. It's a recession when others lose their job, but a depression when you lose your job.

Intelligent companies will invest in analysts who see the world differently and can offer an innovative approach to finding a solution best for you. Data mining, artificial intelligence, and critical thinking make all the difference.

This is a quick note from a private conversation. Reply with your specific questions, comments, and concerns.

The world is way more complex than the talking points media slings around. What's fantastic to know is the options available to you can be mapped out, measured, and tested to do what's right in changing markets. What are your thoughts?