The cost of doing business is increasing, and a mandate from the Federal Government will not help. When some costs rise, a business has to find a way to make up the money somewhere else. There are only five choices:
1. Increase revenue through improved sales.
2. Increase revenue through price increases.
3. Increase revenue through improved marketing practices.
4. Cutting costs through improved efficiency.
5. Cutting costs by reducing obligations. This includes a reduction the work-force.
6. Improved services or taking other steps to justify a higher price.
7. Stop offering the costly service.
There is only so much that can be gained through either of these options. It makes for some tough choices.
Finally, when a company can not gain any additional revenue or balance their costs, they are left with choices.
1. Pass the expense on to the customers in the form of higher prices? Doesn't everyone do it? Truth is, no. The amount that you can charge for a good or service is really governed by the laws of supply and demand. Businesses that always respond to higher costs with increased prices often find themselves in chapter 11. You have to play a game of "chicken" with your competition and customers. Gasoline, it seems, almost seems very resistant to sharp price increases. But if I ran a grocery store, while not selling at a loss, I would be very careful about passing prices on to customers. Who knows if you will see them back.
2. Absorb the cost. This will reduce profits or increase the red ink. But if an expense in temporary, this may be a better option. It will help ensure loyalty from customers and employees. In the long term, this is not really an option. Operating at a loss is a recipe for failure.
3. Terminate obligations. This could include lay offs. At first, a company will get rid of the least productive employees. Later, however, good employees will have to be let go. Companies are hesitant to lay off employees. They will do things like scale back on extras first.
4. If the loss becomes too much to absorb, one option for a business is to discontinue offering the product. For example, there is a grocery chain here in Utah that no longer offers beer and other alcoholic beverages because it was too expensive. More product was going out the back door than out the front and many of their most loyal customers were never purchased beer, wine or other beverages anyhow.
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