Price Increases: Pass It On
Building service contractors don’t have to look hard to see what issues they will be facing with distribution. Just by reading the newspaper or looking at the gas pump, it’s obvious to see that prices are steadily rising — and no one is in the clear.
Distributors are being hit with price increases from manufacturers, and in order to remain profitable, they have no choice but to turn around and pass along these same increases to their customers. Of course, this is not what a BSC wants to hear.
“There’s always resentment when it comes to price increases,” says Ken Abrams, general manager for Janet Oriole Supply, a distribution company in Phoenix. “BSCs think distributors are out to get rich quick, but we are just stuck in the middle. We have multi-billion-dollar corporations telling us what to do.”
While cynical BSCs may think differently, distributors say that the new prices reflect only the increased costs they receive from manufacturers and not a penny more. They also promise that when they see a break, so will their customers. Until then, they will continue to explain the reasons for the increases and offer suggestions to help BSCs manage their business despite the increased cost of supplies.
What’s to blame?
The rising cost of products starts with the product manufacturers. In 2004, U.S. manufacturers saw an increase of 11.2 percent for prices paid, according to the 68th Semiannual Economic Forecast report by the Business Survey Committee of the Institute for Supply Management (ISM), Tempe, Ariz.
“China, India and crude oil — the three variables everyone is talking about,” says Andrew Brahms, president, Armchem International, Fort Lauderdale, Fla.
China and India’s demand for raw materials such as steel and oil has reduced supply and increased prices for these materials here at home. Similarly, the rise in the price of crude oil affects the manufacturing costs of virtually any product, especially paper and plastic. Then, there are the rising fuel prices and government regulations limiting the amount of time truckers can be on the road that are creating higher shipping costs. Even the rising cost of health-care insurance is causing higher product prices from the manufacturers.
But, distributors feel the new pricing should come as no surprise.
“Our customers have seen their own bills go up for gas and insurance. They should expect the price of toilet paper to go up, too,” says Barbara Casse-Bender, president, BCB Janitorial Supply, Hackensack, N.J.
Jump ship or stay put?
When product prices rise, the typical reaction for most BSCs is to shop around for a cheaper price — but distributors warn this may not be the best option.
“I’ve had customers say they’re going to shop around and I say fine. You shopped around before, that’s how you found me,” says Casse-Bender. “If you tell my competitor how much I’m charging, of course they’re going to provide the products for less. But you’ll be giving up value-added services.”
Services such as inventory management, on-time delivery and product training give BSCs the business boost they need. A lower price isn’t always the best thing for their business, says Casse-Bender.
But, distributors know that value is a tougher sell than a lower price.
“If they want to stay, they’ll stay. But for a quarter, if they want to change, they’ll change. But these people probably would have jumped ship anyway,” says Abrams. “There’s no loyalty anymore. Not like there used to be. A customer I had for 20 years just changed distributors because a competitor was offering 30 cents less for a case of paper.”
Jumping to a new distributor may give BSCs a cheaper price today, but not necessarily in the long run. Customer loyalty, however, can lead to lower prices in addition to value-added services. Distributors desire customers who are loyal, pay on time and are interested in learning about new innovations — and they go out of their way to help these good customers during difficult times. For example, if Casse-Bender knows her customers are struggling with the price increases, she might freeze products at the old price list a little longer, or gradually increase prices to give them more time to negotiate new prices for their own accounts.
Cutting costs elsewhere
Just because products cost more money, doesn’t mean BSCs have to see a dip in profits. When product prices are high, BSCs should thoroughly examine their own operations to look for ways to save money on labor, says Casse-Bender.
“Take a good hard look at what your roadmap is for each building and see where you’re not being efficient,” she says.
Distributors can help BSCs identify ways to cut back on labor by providing training and the more efficient tools — and they might find some cheaper alternatives in the process. For example, if a BSC currently buys ready-to-use chemical products, switching to proportioning systems to dilute chemical concentrates can save upwards of 70 percent.
Relief in sight
2004 was an unprecedented year for price increases, but as 2005 heads into the halfway point, distributors are starting to catch a break. ISM predicated only a 4.4 percent increase for total prices paid by manufacturers in 2005, which would result in fewer or lower price increases. So far, this prediction has held relatively true.
“We are now seeing a small increase from some of our chemical suppliers, while paper and can liners have seemed to stabilize or even soften,” says Gary Bright, vice president, Mission Janitorial Supplies, San Diego.
This is welcome news for BSCs who are trying to balance the increased costs with their own profit margins.
And, distributors are sympathetic to BSCs’ needs. Instead of spiking the prices on products hit the hardest such as paper, chemicals and plastic liners, some distributors are slightly increasing prices on other products that have remained stable, says Casse-Bender. This still results in higher prices across the board, but BSCs should expect price increases from time to time and most contractors can handle a small change.
Brahms offers a different solution: if the BSC refuses to pay a higher price, then he asks for more business. As a single-source provider, he can sell more products helping him to balance his margins. Using one distributor to bundle all products together also has rewards for the BSC. They save time and money by requiring fewer checks and only one product delivery.
BSCs should plan on passing on a portion, if not all, of these costs, too. Since contractors are paying more for supplies, customers will have to gradually pay more for service. While it’s never easy to ask clients for a pay increase, BSCs don’t have much of a choice if they don’t want to see a loss in profits.
To help BSCs justify a new price request, distributors have been supplying them with copies of the letters they receive from manufacturers explaining the price increases, says Casse-Bender.
And, these price increases are not happening overnight. Distributors are giving BSCs enough notice to allow them ample time to talk to their customers about possible price changes.
2005 is looking promising for lower product prices once again, but with so many variables at stake, there is never a guarantee. Distributors ask that in the meantime their customers remain understanding.
“Nobody wants a price increase. But it’s not a perfect world, you have to do it,” says Brahms. “So why get upset about something you can’t control?”
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