Unless you’re living under a rock, you already know that the cost of nearly every good has risen dramatically recently. Case in point, as but one example: lumber.
I called a handyman recently who has previously installed flooring in my basement. He’s a good guy, efficient and fairly priced. I told him I want to replace my wood deck with a new one. He came and took a look, then said: “I wouldn’t do it right now if I were you. A year ago this would have been a $3,000 job. Today, with the cost of lumber and my labor, you’re looking at about $7,000.”
Ouch. Looks like the deck will stay in its less-than-ideal state a bit longer.
Now let’s switch gears and take a look at the labor market. It’s beyond tight, right? And as a result, what are you doing with employee wages? Like everything else, they’re going up. Drive around any town and the signs are on nearly every restaurant — “Now hiring. $500 sign-on bonus. $18-20 per hour.”
With the labor pool nearly nonexistent, increasing pay is a crucial component when it comes to hiring and retention. But when you increase wages, what happens to your prime cost? You got it — it goes up.
In his monthly column, pizzeria owner and Pizza Expo speaker Nick Bogacz talks about this very situation. As a business owner, you want your prime cost (food cost plus labor cost) to be at or under a specific threshold in order to ensure profitability. When either your food or labor costs rise, you’re faced with some decisions: bite the bullet and accept lower profits, make cuts in other areas that could impact product or service quality, or raise your prices.
Often the cheese price rollercoaster hits and operators take the “bite the bullet” method. That’s because the end user — your customers — don’t understand cheese costs (and don’t care) and you aren’t going to adjust your prices that often. But this is different. Everyone sees the “$20 per hour” signs. Everyone is aware of how understaffed restaurants and other small businesses are right now. Everyone is aware the prices of other items are going up. A modest increase in pizza prices won’t shock the world.
Bogacz says the time to raise prices is now. I fully agree. Next month, Nick will get into that in his “Building Blocks” column. But why wait? Start doing your research and developing your game plan today.
Editor In Chief