By August 19, 2005 1 Comments Read More →

Local firms are squeezed by gas prices

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.

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Mark Graban's passion is creating a better, safer, more cost effective healthcare system for patients and better workplaces for all. Mark is a consultant, author, and speaker in the "Lean healthcare" methodology. He is author of the Shingo Award-winning books Lean Hospitals and Healthcare Kaizen, as well as The Executive Guide to Healthcare Kaizen. His most recent project is an eBook titled Practicing Lean that benefits the Louise H. Batz Patient Safety Foundation, where Mark is a board member. Mark is also the VP of Improvement & Innovation Services for the technology company KaiNexus.

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1 Comment on "Local firms are squeezed by gas prices"

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  1. Mark Graban says:

    In a related story, there has been more rain and storm activity than usual in Phoenix this year.

    We are selling our house (and moving to Texas, a whole other story) and needed three roof tiles fixed or replaced before the sale of our house could be completed.

    Because they have been busy, roofers can, in effect, turn down small jobs. They are charging premium prices — we could get ours done only because our realtor had connections. Anyway, they charged $200 when it would normally cost $100 (according to our realtor).

    Why did they charge $200? Because they could! Not because their costs had gone up (although I’m sure their gas prices for their trucks isn’t helping).

    But, it’s a lesson in charging what the market will bear. I don’t begrudge the roofer for charging more, that’s his right in a free economy.

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