Costs are rising in all areas. How do you know if a price increase is justified?
New Zealand outdoor clothing company Cactus did not beat around the bush when it came to informing customers of its price hike earlier this year.
“Nobody likes a price increase, but sometimes there’s no other option,” the email began.
Rather than face blind customers, Cactus wanted to “call a spade a spade” and explain how it sets its prices and why a raise was needed.
The email explained how Cactus had recalculated the time it took to make each product and found that its timing was a bit off. On top of that, wages, transportation costs, and the price of raw materials had all gone up.
* Retailers warn shoppers to prepare for further price hikes
* Fonterra tells wholesalers it is raising dairy prices due to inflation and record raw material prices
* ‘Perfect storm’: Inflation set to hit 30-year high as cost of living soars
He said he had three options:
- Keep prices the same and decrease profit margins.
- Keep the prices the same, but decrease the quality of the products, so they are faster to manufacture
- Adjust prices “so everyone gets their fair share of the pie”, and hope customers stick around
He went with option three.
Cactus founder Ben Kepes says sometimes people don’t take the time to understand price increases.
Cactus prides itself on being transparent and doesn’t want to drive up prices on the sly, he says.
“I’m all for consumer understanding and transparency, so people really know what makes up the prices.”
People may not realize that some companies have to raise prices “to keep the lights on,” he says.
He says it was not possible for Cactus to absorb the costs, otherwise there would be no more profit.
The rising cost of inflation is being felt by businesses and customers around the world, and in New Zealand it is at 6.9%, its highest level in 30 years.
Consumer NZ spokeswoman Gemma Rasmussen said her research found the cost of living is now the top national concern, overtaking other issues like Covid-19 and house prices.
The consumer watchdog says companies should offer customers clear information about price hikes or any changes to pricing models, she says.
“We would consider this good customer service and fair business practice.”
It’s typical for big companies to announce price increases and justifications, she says.
When customers are locked into a subscription service, whether it’s a gym membership or a Netflix subscription, the company has an obligation to notify them of price increases.
“Customers should not hesitate to ask companies to justify a price increase if they believe it is unreasonable.”
If a customer is unsure of how much they are being charged for a product or service, Consumer NZ recommends that they do some price shopping to determine if the price they are paying is similar to that charged by other retailers.
Businesses are free to set their own prices, and it’s not illegal to raise prices, but fair trade law prohibits misleading and misleading behavior, so false reasoning for price increases would be against the law. fair trade law, she said.
Sense Partners economist Shamubeel Eaqub says most sectors pass cost increases on to customers, but some sectors will feel the effects of inflation more than others due to higher input costs that they incur.
Data from Stats NZ for the December quarter shows that in the retail sector, gross margin (total revenue minus cost of goods sold, divided by total revenue) is close to historical norms, suggesting that cost increases are passed on, he says.
“The cost of living crisis is very real. Our price increases are similar to many other parts of the world, but the reasons are different,” says Eaqub.
He says that in the United States, where inflation is above 8%, corporate profit margins have increased, but this is not happening to the same extent in New Zealand.
“Overall, we’re not seeing the big increase in profit margins.”
Data from Stats NZ shows that corporate profits fell in the September quarter, but returned to historical norms in the December quarter, albeit on the rise.
“I would say companies are using the inflationary environment to raise prices and protect earnings, but not blatantly.”
There may be instances where New Zealand companies try to increase their profit margins, but Eaqub does not believe this will become widespread as those that do risk losing market share.
He says most increases in the cost of living are the result of “cost-push”.
The cost push results from the increase in production costs such as wages and raw materials.
Econ Talks – New Zealand’s economy is stressed as we pay the inflated price of too much stimulus (April 14, 2022)
Eaqub says inflation in the construction sector is particularly high due to strong demand for housing and a shortage of materials and labor.
He says other sectors, like hospitality, are feeling the effects of inflation and labor shortages, but prices aren’t rising as much because demand isn’t as strong due to the lack of tourists.
He says customers need to stay alert and not expect prices to rise or companies will take every opportunity to raise prices if competitive pressures aren’t strong enough.
“We should always question.”
Being a small economy, New Zealand suffers to some extent from a lack of competition, he says.
Consumers should be “hyper aware” of what’s going on with pricing from a range of vendors, Eaqub says.
“There is a cost to this, but you shouldn’t accept that just because prices go up doesn’t mean all prices will go up, because not all commodities have gone up by the same amount.”
According to independent economist Benje Patterson, at the start of this inflationary cycle, price increases generally followed a more verifiable track, driven mainly by commodity prices, supply chain disruptions and labor shortages. work.
That means a lot of inflation in New Zealand is centered on things like construction, food and transport, he says.
However, inflationary pressures have recently begun to spread across almost all industries, including those that less justify price increases, he says.
Patterson points to the latest CPI figures from Stats NZ which show the price of inflation for ‘other miscellaneous services’, which includes professions such as lawyers, operating at 11% a year.
“It seems to me that many organizations in the professional services industry are starting to take advantage of a higher inflationary environment and relatively high demand for their services to start pushing more aggressive price increases into contract negotiations.”
Eaqub says the pandemic has been “a real boon” to businesses and skilled professionals serving the “knowledge economy” as the uncertainty of Covid-19 has increased demand.
Demand has exceeded expectations because typically during times of economic uncertainty people cut back on discretionary spending, he says.
Patterson says the recent Reserve Bank expectations survey also indicates that inflation has outpaced supply chain challenges.
The survey asked recipients where they expected inflation to be in two years and the answer was around 3.3%.
He says that means companies still expect to raise prices above the Reserve Bank’s target inflation range of 1% to 3% a year in two years.
“This sentiment is important because it creates inertia in what is happening right now and means companies will factor these kinds of thoughts into their contract negotiations with customers.
“The persistence of long-term inflation in New Zealand is not yet a done deal and the last thing we want is for companies to act the way they are.”
The global and supply chain factors that drove prices up will eventually subside — or companies will innovate to ease the burden, Patterson says.
“So what we don’t want here and now is for companies to act as if a highly inflationary environment is going to persist in the longer term. If they do, it will be that much more difficult to rein in the inflation. “
Companies have a role to play, especially larger companies and those with stronger balance sheets or larger margins that aren’t squeezed, he says.
They can be a “responsible company” and tell their customers that they’re taking some of those pushes on the chin and have chosen not to root rapid price increases in longer-term contracts, Patterson says.
He says it’s not such a far-fetched idea.
“These types of moves can have a snowball effect. An initial trickle of businesses jumping on the bandwagon can lead to a torrent.
“Companies that lead the way can win favor with customers and can actually win long-term business through what they do.”
If companies don’t start lowering their future inflation expectations, the Reserve Bank won’t hesitate to act aggressively on interest rates, Patterson said.