How to ease the pain of cost price increases

Well, we are all aware that ‘Brexit’ has left the value of the pound weakened to levels not seen since 1985, making imports of products sold in the UK cost more than usual. As a result, we can expect a bit of heavy going in the foreseeable future for the office supplies industry.

Our CFO, Nick Wilson, shares his advice below on how independent dealers can ease the pain of cost price increases.

Examining the situation

The UK office supplies industry relies heavily on imports manufactured overseas, mostly in Eastern Europe and the Far East. As a result of devalued currency wholesalers purchasing office products in US Dollars and Euros will see an increase in costs. The bottom line being; purchases will cost more than before the drop.

This situation looks set to continue due to the uncertainty of Brexit, making it extremely difficult for wholesalers to endlessly absorb these higher costs. So increases have unavoidably been passed through to the dealer base.

Up until now, the industry has experienced an increase of 5 – 10% on paper products and up to10 – 15% on EOS. These price rises are being felt across the board at various levels of the supply chain in the UK.

Are some independent dealers facing larger increases than others?

The impact of the cost price increases will vary depending on the contractual agreements dealers have in place with their wholesaler. Some wholesalers may choose to make the most of this situation and pass on other cost price increases to dealers (for example transport/employment costs).

Dealers who have partnered with Office Power have access to our wholesaler relationships and buying power. Therefore, the contractual agreements we have in place reduce the impact and risk of unexpected cost price rises for our dealer partners.

Mix and gap analysis to identify new growth areas

It is extremely important to carry out mix and gap analysis regularly, however, when cost price increases occur it is essential. If you are concerned about losing customers when you push through price increases, first analyse how much value they provide.

Do you have the full wallet spend of your customers, or is a customer you consider valuable already buying products elsewhere? By using gap analysis data, you will have more time and clarity to create targeted strategies and embrace new methods to grow your customers and maintain (or improve) profitability.

Our partner Mark Rostock from Just Office explains how the Office Power gap analysis tools help him: “Based on the new data we have on our system we have identified that we have in excess of £47k as additional sales opportunity for this month alone.”

Pricing Strategies

It is imperative to use your back office system to set the right pricing strategies for your various customer segments. If you continually quote on the last price paid, you are at risk of eroding your margins. In addition, if you delay passing on costs for the time being, you may find your customers become more resistant when you eventually push through a cost increase.

Our advice is to start educating customers as soon as possible on the reasons why they will experience a cost price increase. Current affairs will make your customers aware of the increases seen on raw materials, for example, the Marmite cost price rise was well publicised and makes this topic more understandable.

Customers will surely be experiencing similar cost price rises in their industries too, and in much the same way as you need to pass on the costs, they may well have had to do the same.

Variable cost model

As well as looking at pricing, mix and gap analysis, maybe you could also consider moving to a variable cost model. This would allow the reduction of fixed costs to a much smaller amount and give more flexibility in terms of finances when such issues like cost price increases occur. So for example, during the transition period, even if you need to reduce margins for some products, you can do so knowing that business overall can remain profitable.

Cost price rises are not a time to sit back or attempt to ride out the storm. We need to take action and be pro-active, invoking business strategies that will continue to help us be successful.