Navigating the rising cost of living & the impact on your business

Ange
Quick, kidding around and reading the topic.

Andy
Okay, this one comes from a South Australian trade business owner, and she says Profit margins in our business used to be great before the pandemic, but now with Russia stuffing up the petrol, material, prices are ridiculous and our profit is almost zero. And my hubby and I are starting to fight over money. What should we do?

Ange
Hmm. She’s so right. The cost of living is skyrocketing and it seems to be the number one conversation on the news at the moment. Petrol prices are at an all-time high. Groceries are climbing and for trade business owners materials have increased by 30% in some cases, thanks to supply chains, constraints.

Andy
And, and much more.

Ange
Yeah, absolutely. And I can imagine that the rising cost of living is affecting most Aussie families right now.

Andy
Money or lack of it is definitely one of the biggest causes of stress and anxiety. So if you’ve been feeling a little under pressure lately, you are really not alone. Can I just remind everyone out there that Lifestyle Tradie partnered with Gotcha4Life, Australia’s leading mental fitness charity.

Ange
Yeah. It’s super important to learn how to deal with the pressures that come with stress and anxiety. So if this is you, then I definitely suggest that you check out Gotcha4Life Foundation and you can find them on their website, which is gotcha4life.com.au. I actually saw a stat yesterday that Australia’s inflation rate increased by 3.5% in the December 2021 quarter.

Andy
Yeah, that’s a hell of a lot. I think it’s sitting at around 5.5% or something. But let’s be honest, the rising cost of living does impact trade business owners, and it may feel like there’s nothing you can do about it, but you absolutely can. First, I think it’s important to understand why the cost of living is rising so rapidly so we can talk about what we can do about it.

Ange
Yeah. Right. I totally agree. So price hikes are global based on the current climate. So something like Covid has slowed manufacturing because it’s more expensive to buy materials and machinery like vans and our vehicles. The war in Ukraine has pushed up the fuel prices, which makes it more expensive to get to site, which in turn pushed up the prices of everyday goods. And you know what? When A and B are combined with our normal annual CPI inflation, our cost of living has risen significantly. And the point here is it’s actually not going to go away. So there’s no point ignoring the fact.

Andy
That’s right. We don’t tend to notice when general inflation occurs. You know, we expect year on year that some items do increase in value. We’ll say a can of Coke years ago was 5 cents in the sixties, but now it’s around about $3.50 but if, tomorrow the price of a can of Coke all of a sudden surge to $7. We’d be like, wow, this is absolutely crazy. So that’s essentially what’s happened over the last two years with Covid and now the war taking hold. We’re seeing these kinds of quick price hikes and it’s hard to swallow sometimes.

Ange
Yeah, totally hard to swallow. So you mentioned that that is something that we could do about it. So how about you share your thoughts about that.

Andy
Yeah, we definitely can. Absolutely. As a business owner, you need to increase your prices to match the new market. You know, I can’t believe that so many tradies just absorb these costs, and it’s not up to us to absorb these costs because realistically we can’t afford it either. Rising material, prices and fuel are definitely real and your customer is absolutely aware of it. You know, we’re in an industry of helping people, but you know what guys and girls out there, we need to make sure we help ourselves first. You are in business to make money, you need to be passing on these rising costs to the customer. So be thoughtful and strategic on how you can go about doing this.

Ange
Yeah, right? Totally agree. Simple things like keeping a really close eye on your invoices from your supplier. I’ve heard that most suppliers are actually informing you as a trade business owner that prices are about to increase and like we said, for some say, up to 35% over the next three months, which is huge.

Andy
It is, but at least we have been warned. You think about it, most products are coming from overseas and due to the shipping restraints, increasing costs and the like, our material pricing has gone through the roof.

Ange
Yeah, it has. And if you’re watching your invoices daily, you are going to catch these price hikes on individual items, you use a lot when it happens. And hence, quote accordingly from that day.

Andy
Yeah. Guess what? It’s just too late to wait until your monthly supplier invoice comes in and check the prices then, because you might discover that that hot water system you’ve been charging at X rate for 30 days increased by five a hundred dollars and you didn’t even know about it until now, and it’s your biggest selling item. You definitely don’t wanna be doing that.

Ange
Yeah, ouch. Let me give you an example about that then. So imagine that you’ve sold 40 of these units in the past 30 days with a price hike of $500 a unit. That’s $20,000. You have now gone negative. You actually owe the supplier. So why are you out of pocket? You just weren’t checking regularly enough.

Andy
Wow. You really got those numbers out really quick. You’re smarter than I thought.

Ange
This is, this is the hit pocket of a trade business owner, and the challenge we have with invoicing is it’s so common that trade business owners only look at their supplier invoicing at the end of a month, but we’re getting price hikes sometimes every day.

Andy
I was actually talking to a tradie yesterday and he was commenting on how his October, November, December, January and February was the biggest, five or six months that he’s ever had. And he lost money. And I said, why? And he said, well, we went through everything. And he said, I’d quoted those well before all the price hikes.

Ange
Right.

Andy
And I hadn’t adjusted for it.

Ange
Ouch.

Andy
And he said, and I just got buried. And he said, I thought I was working so bloody hard that I was making a fortune.

Ange
Because he had to honor the price to the quote, to the, or he felt like he had to honor the quote to the customer.

Andy
Yeah. And in a way, when you quote, you do have to honor, but there’s so many people that I’ve talked to. I said, no, no, no. Go to the customers and talk to them about it and get it reorganized before you do it. But he totally, he just wanted to do the right things by his customers. He’s really busy and makes no money. Why would you do that?

Ange
Terms and conditions, guys. This is.

Andy
You don’t know what you don’t know.

Ange
Correct and you don’t know how to deal with that, about how to go back to a customer and talk about these price hikes cuz they’re real.

Andy
So when it comes to customers and pricing, you need to really, everyone out there give thought about your hourly rate and you need to, you know, adjust to take all of these pricing increases into consideration. I know a lot of you that quote or you flat rates and you’ve gotta be doing that, and it’s just a fixed fee, so everyone’s okay, but it feels a bit like when it’s an hourly rate and it goes up, everyone freaks out because they’re all bargained basement shopping at the alley rate, and customers are picking you or not, over your hourly rate. So it freaks most tradies out, which is not cool.

Ange
So let’s think about from a customer’s perspective in this situation, if you had a customer that has actually used you before and actually know your hourly rate, what you just said, they are actually quoting a value and they hear you mention a price, they know what it was before. What do you do then?

Andy
Yeah, you need to be ready to manage these conversations, you know, to be able to explain the reasons behind it. I mean, every customer out there knows about the petrol and they know about materials pricing, and you just gotta be really transparent, be honest, and be personable.

Ange
Yeah. Like you said before, Andy, this is where the advantage of upfront pricing or flat rate for maintenance style businesses is an advantage. The customer doesn’t hear you quote an hourly rate. They don’t hear one number that they can compare. Price increases aren’t noticeable, so perhaps you do seriously need to consider changing your pricing model if you can, from hourly rate to flat rate. And what we’re talking about here is quoting. It will most definitely remove those price choppers.

Andy
Yeah. And that’s right. You don’t want to be working with these bottom of the barrel customers and, and realistically, you know, giving a price upfront with good margin and good profitability is the only way to fly. You know, and you don’t go to McDonald’s and ask for a hamburger and ask to break it down into an hourly rate. Materials costing all that absolute rubbish. You know, so sometimes guys, you just, you know, it’s the old way of talking about an hourly rate, but how can you compare your business and your services when you’re so professional and incredible what you do, you’re an incredible tradesman against some Billy bum crack with no insurances, and who just comes in. It’s so well below the hourly rate. But so many tradies, it’s all in their head that I think I couldn’t possibly charge that. I couldn’t possibly do that. Oh no. How am I gonna do that? And you know what, it’s in your head, buddy. Charge to make some real money. .

Ange
Tell us what you really think.

Andy
And if you haven’t already, now is the time to introduce this sales technique of upselling and cross-selling. You know, this skill set of recommending profitable products or services around the property for your customers is to increase overall spend in just one transaction that still needs to occur. So you may be thinking. But I just increased my price. I don’t wanna push them hard to buy anything else. Well, guess what? You don’t have to push them hard to buy anything else. You just need to offer what you can do, and the customer will make the decision if they want to go ahead with it or not.

Ange
Yes. So developing a solid upsell strategy, which will help you generate a greater spend per transaction, plus helps you gain a better profit per job. It will boost your business bottom line, which will only help solve these money headaches we’re talking about.

Andy
That is right and I just wanna say only ever upsell products or services that are needed by your customer.

Ange
So let me just change tact a sec with regards to rising costs, cuz I do feel there’s a chance that it could be impacting your team and therefore having a negative outcome on your business. So on the news last night I saw that CPI increases at the moment is about 5.3% and staff wages is about 3% or so, which is obviously lower. And it perhaps means that the wages you are currently paying your team is now falling short.

Andy
Yeah, it’s interesting you say that because I, I believe that a lot of tradies out there are getting more money than they’ve ever got. But you know, I think in general, rent has gone up. Everything’s gone up. So everyone’s feeling the pressure and they’re seeing it, and at the moment it is everywhere across the news. But that’s what makes it even more important, that as business owners, We have to move with the times and as a business, put our prices up so we can keep our staff and we can pay them the money that they need to live as well. Right?

Ange
Yeah, it’s a fair point, Andy.

Andy
And it affects every trade business owner out there. You know, we’ve talked about this in the past about the great Aussie resignation and there’s a lot of trade business owners at the moment that are losing staff left, right, and center to the guys that are willing to pay their better coins. So you’ve really gotta analyze your staff, your cost as a business, what you need to make money, and how can you make enough money to keep your staff and to keep everyone loyal to you, because if you’re not doing that, not only is your business probably losing money, but your staff are looking around and hearing their mate that’s turning so much more. And before long, you will not even have staff. You know, you think with Covid, people would be happy to just have kept a job, but they want more and more. And during Covid, heaps of us tried to look after our staff to be the best that we could, and a lot of us were potentially losing money. Depending on where you are located, but we’ve done everything to hang on to our staff. And now you look as a boss and go, where is the loyalty? And I just had, um, one of our members talk about that. You know, they were sort of really at a break even in Melbourne when it came through the covid break even to a loss. And they’re sort of bounced back a bit, but now the staff are just like, more, more, more, more, more, more, more. And he is like, oh my God. I thought that would’ve been just a static that I’ve paid them for every single day through those two years. But now that’s all forgotten and they’re just looking for the dollars. I think that’s the changing of the guard, where a lot of people these days are just after that number. They’re after themselves. The number one is them, and they don’t care about the business and whatever. They just wanna go, well, what is right for me now and what do I need? And the loyalties, It’s probably not there like it used to be.

Ange
And look, staff leaving is a really big issue in our industry. There’s really only one way to ensure that your staff develop a bond with you and loyalty, and that’s through building an awesome culture. We are in the times of staff, literally chopping and changing jobs regularly just to benefit themselves. So as business owners, we’re responsible for giving them reasons to stay. You know what? Do yourself a favor and check out one of our episodes called the C word Culture. It’s in season four. And you know what? This will give you a jumpstart on this subject before it’s too late. So let’s change tact and go back to this subject about rising costs and your pricing structure with potential and repeat customers, because I feel that we all need a strategy on how you communicate and implement these increases.

Andy
Yeah, some say that you have to openly communicate any price increase, and yeah, I can see merit in that, but for the most part, customers don’t really notice. So it really does depend on how you as a business owner wanna operate.

Ange
Yeah, you might not need to tell new customers about your rate increases, but repeat customers, you do probably need to give them a heads up, especially if you’ve been working with them for a really long time. It is important to communicate with these repeat customers what this price hike will look like in the short term, so that the moment that this price hike does take effect, that the transition is accepted really seamlessly. There is a correlation between these repeat customers staying loyal to you and are happy to spend more because they get such valuable attention and professionalism from you. So swallowing these costs for you as a business in the short term may actually help you in the long term with these particular customers. There’s a caveat on this that I wanna highlight though, that you really must, must, must understand your numbers when it comes to these jobs because you can only absorb these costs if it’s actually still allowing you to make profit in every single one of the jobs.

Andy
Or there’s a different strategy, which is the small increase. And if you’re losing money on your jobs with your current rate, but are worried about the potential backlash to build on the generosity strategy, you may implement a smaller price increase. Say that your prices have gone up by 20%. You may wanna go to the customers and say, listen, our prices have gone up 20%. I know that’s a big hike, but this is what’s affecting us as a business for goodwill. We’re gonna put our prices up at 10% for the next month, three months, six months. And then they’re gonna gradually go to the next 20%. You know, you can explain why you’re being so fair with your price, and you wanna make sure that they’re loyal to you, like you are loyal to them. Because the thing is, if you lose this customer, there’s a lot of businesses out there, out there that if they lose a customer, then they’re actually in a world of pain. So you’ve gotta be smart about how you go about this. I know some of us sitting here listening now is just like. Well, the price has gone up. You should just put your prices up right now. Ready, set, go. And I’m a slight believer in that, but it really does come down to your business and your clients and how you go about it.

Ange
Well, based on what you just said, maybe there is a strategy three, which is like, yeah, maybe increase your prices immediately.

Andy
Well, I’m an . Everyone knows what I’m like, like do it, do it now. But um, yeah, strategy three. Exactly. If you are wearing the cost, it’s gotta be pretty into your pricing right now, so you make the profit that you need. We’re the business owners. We’re in control. We should take control and do that. Now for some of you, you’ll go out and tell your customers your pricing is going up. For others, we don’t need to do that because we’ve got a quoting format and our prices in our quote just go up. I know a lot of tradies out there are super, super busy at the moment, and quite a few of them are pumping their prices really high because if they get the job, they’ll make a keeper cash, and if they don’t get the job, then there’s another one just coming through around the corner.

Ange
Absolutely. So in any of these scenarios, the first thing you need to know is how much profit you’re gonna be generating before those increases, and that’s how you decide if there’s any wiggle room at all. Yeah. To maybe give some, you know, flexibility to your current, really loyal, long-term standing customer. Which means yes, recalculating your hourly rate. You’ve gotta know this because this is about the profitability of your business, which should absolutely be your number one priority at all times.

Andy
So to all you tradies out there listening now, what is the gross profit you are making in each job? Now gross profit is one thing, but then what’s the net profit you’re making from that job? I just had a chat with a guy yesterday and he’s like, I make 50% profit on every job. I’m like, that’s great. How come you’re not making any money? And he’s like, and I, and I said, mate, that’s not net profit. That’s gross profit. You’ve got a heap of expenses after that. The moral of the story is even to this day, Ange, with all the technology in the world, 90% of every trade business owners I talk to do not have a good handle on their numbers. They do not. It’s crazy. It’s scary. It’s really scary. Some of these guys are doing a million, 4 million, 10 million, and they don’t know where their money’s going. I know we’re tradies. We’re good with our hands. But if you are listening now and you don’t know your numbers, know your numbers.

Ange
A hundred percent Andy, I couldn’t support you anymore. As business owners, we must take control of our finances. Since the pandemic and Russia’s invasion of Ukraine, the disruption has had a huge ripple. We as trade business owners are facing unprecedented supply chain disruptions, market fluctuations, and cost increases, and the reality is that it doesn’t look like they’re returning to normal anytime soon. Therefore, creating an effective segmented pricing strategy is a necessary step for every trade business owner who needs to safeguard their business.

Andy
And we understand some trade business owners out there have this hesitation to increase their prices, and they’re thinking everything will just be okay. But when everything around us is increasing, we need to increase our prices as well. So seriously, guys, go out there, increase your prices to make sure you can make the money that you need to provide for your team and provide for your family.

Ange
And there are some very clear do’s and don’ts that can ensure you are putting customers first every step of the way, and knowing how to increase prices in your company does hinge on a really deep understanding of your product and service, and its ever-changing value in this dynamic market. If you want proven steps to implement this in your business, then jump on a free strategy session with us and we’ll do a deep dive into your business and make sure the steps that you are taking are the right ones for you and your customer.

Andy
A hundred percent. And all of our Lifestyle Tradie members have had to reconsider their pricing structures, and we’ve successfully walked them through our process. But don’t take my word for it. Let’s hear how they’re doing now.

Member’s testimony
Don’t wait. These guys are very honest and open. They share so much information, personal as well as, um, Uh business, it’s a holistic approach to life, not just, uh, how to run your plumbing business.

Yeah, definitely joined Lifestyle Tradie, the amount of support and knowledge which, which is within the program is valuable.

Um, the other thing is, uh, The community that Lifestyle Tradie has developed is amazing. There’s been so many times where I’ve learned on the community’s advice, where we’ve had certain issues that we’ve been able to bring up in our, you know, Facebook group. You get plenty of answers that you can actually take. You don’t know what you don’t know.

Lifestyle Tradie has a huge sense of community, just a great group of people just hanging out, helping everyone out, and they help you out. Just hanging out after the events is always fun as well. Some great speakers come along and definitely always, always learning stuff from every event we go to.

Do it. Like don’t hesitate every year that you put it off, there’s just an extra year that you’re losing. You don’t get this time back. That’s one thing that we can never buy as time, so you need help, get it.

Ange
That’s all we’ve got time for today, so I really look forward to seeing you next week.

Andy
Till next time, hell yeah.