How to deal with price increases

Like night follows day eventually we all have to put our asking price up … the question when and by how much?

Go talk to your accountan and she/he will tell you the best way to get an instant increased in profitability is to put up your price.

Small to medium sized business operators know how hard it is to win a new customer and how easy it is for regulars to stop buying, so naturally they want to be very cautious with price rises.

But your costs steadily rise, little by little they eat away at your profitability and probably more importantly the implicit value you have built in your business.

I am a coffee snob (well I am a bit of an all round food, wine and other beverage snob if the truth be known), so I take an avid interest in Starbucks fortunes since its grand plans for coffee dominance came crashing down in 2008 with the closure of 61 of its 85 Australian stores and divorce of 685 partners (Starbuck euphemism for employees).

With 22 stores left in Oz when I checked this morning (2 stores must have been closed on top of those announced in 2008) Starbucks Australia still lost $4,580,000 last year selling coffee. That’s a whopping average loss of $208,118 per store.

To gloat, 15 years ago I managed to convince a very large conglomerate not to buy the right to own and operate Starbucks in Oz. My other blue-suited pals within the company said it was “very brave advice” (translated .. are you completely mad!.. must avoid being seen around this one too much!). The company MD then went to the USA, got on the turps, and ended up buying “Denney’s” instead. Go figure!

Now, I have set up quite a few coffee operations in my time and I tell you there is real big money in coffee. But not for Starbucks in Oz… this story will have to wait for another time, because I am here to babble about increasing prices.
Conventional micro economic thinking is, when hard times hit cut back on expenses and cut your prices to keep the customers.

Starbucks in the midst of US recession did this. It also increased prices. Both things worked.

For number lovers see junk in box below;

Starbucks Score Card
Fiscal First Quarter 2010

* Consolidated net revenues increased 4% to $2.7 billion.
* Comparable store sales increased 4% driven by 1% increase in traffic and a 4% increase in average ticket.
* U.S. operating margin significantly improved to 17.3% from 5.8% in Q1 FY09.
* International operating margin improved to 7.4% from 2.6% in Q1 FY09.

What did they do?

Howard Schultz, chairman, president and ceo said

“Continued innovation, the successful enhancement of the customer experience and a transformed, more-efficient cost structure have brought Starbucks to a significant milestone—a return to profitable growth,”

But he is just joshing us. He got away with increasing his prices in a terrible recession by lowering those for which he had direct aggressive competition and increasing signature items.

Worked for Starbucks: store sales up 4%, 1% more customers and 4% increase in average spend.

The biggest selling stuff which has direct competition from MacDougal’s got lowered prices.

Their signature items, you know the ones with funny names, went up by 8%.

Note for all restaurateurs, pub owners and club operators.

Your “specials” need to be more expensive than your normal big demand items; otherwise we customers think you are just trying to shift old stuff or to address purchasing mistakes.

Try regular high volume stuff cheap and specialty stuff expensive.

Loyal customers are price sensitive. Howard (hope he won’t mind if I call him by his first name) gave a present to his price conscious regular users by decreasing their prices. They thanked him by staying with his enterprise. Mental note; do not read the popular book ‘The Loyalty Effect”, do give the regulars “mates rates” and they will keep coming back.

An unnamed Australian company spokesman said at end 2009 Starbucks “now believes that it is well positioned for future growth and will support the remaining 23 (sic now 22) Australian stores.”

I doubt it. But I have been wrong before –see Bledisloe Cup 2002 in Christchurch, even paid for an airfare to see us (Wallabies) beat them (whatever) at their place for the first time. As I said I have been wrong before but gosh that was a fun trip. Again, a story for another time.

Give some thoughts to Starbucking your products prices.

Time for another coffee.

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