SignOnSanDiego.com > News > Metro — San Diego:

This story is from California, but I’ve also seen it in the local news. I’ve complained in the past about big companies complaining that they can’t pass along the higher cost of oil (as a raw material to, say, nylon production), but you’re hearing it from smaller companies regarding gasoline.

“The increased costs are coming largely out of Welk’s pocket, pushing the company closer to posting losses even though some price increases have been passed along to customers.

‘Fuel is huge right now,’ Welk said. ‘I will have to raise rates again because it won’t cut it where it is right now.’”

We’re all feeling the pain at the pump, but this is yet another example where the price should be set by the market, not by your raw material costs. I’m probably preaching to the choir here, but the Toyota model says:

Profit = Price (as set by the market) – Cost

This dictates that, if you want to maintain the same profit, that you have to find other ways to cut your internal costs, you can’t just pass along higher costs to customers, necessarily, through higher prices.

If your customers readily accepted the higher price, maybe you weren’t charging enough before?

But so many of us, as customers, are conditioned to the old notion of Price = Cost + Profit, that we accept “my costs are higher” as a reason to pay a higher price. We may accept that in the short-term or have no other choice. But, if we don’t value the service, we might walk away in the long-term.

What do you think? Facing this challenge in your business, large or small? Facing it as a customer? Click “comments” to chime in.

About LeanBlog.org: Mark Graban is a consultant, author, and speaker in the “lean healthcare” methodology, focused on improving quality and patient safety, improving access, reducing costs, and fully engaging healthcare professionals. He is also the Chief Improvement Officer for KaiNexus.

Tagged as: Profit = Price - Cost