I’ve been down at the local cafe since it opened this morning trying to figure out a way that I’m going to run this motel over the next six months.
Recently a manager has announced that he is moving on. Wages have been going up lately and the temptation to move away from the family business in pursuit of less stable riches has led him off in another direction.
Teachers are striking and it seems like just about everybody is asking for a bigger slice of the pie.
This creates a real problem for our motel because we are and have been stuck at the $99 mark for a long time.
The $99 motel unit has been a core part of our value proposition. While we’ve managed to make it work profitably, the future looks uncertain, because cost inflation is beginning to seriously erode our profit margins, so that we are losing money each week instead of gaining money.
If we change our $99 pricing, we have to make a huge number of changes, including rewriting much of our marketing. We run the risk of alienating great repeat clients who have kept us in business over the years.
I need to make sure I have the funds to secure my staff and ensure that they have enough money to keep with the business and to cover rising costs. This means raising their wages. But for each dollar I raise their wages, our profit margin and our cashflow takes a hit.
We’re going to have to put our prices up. There’s just no two ways about it.
Inflation has forced my hand. I would have much rather remained on our stable and ever-popular pricing model, offering great value to Kiwi families, business people and international travellers. But I can’t do so in a market where each of our costs is creeping up at a faster rate than before.
Inflation forces change. For a business on a locked value proposition and hence a locked price point, it forces crisis. But we have to act now in anticipation in order to be sure that we have a business six months down the road.
The problem is we are a business with exceptionally low price elasticity of demand. Putting your prices up is no big thing for an oil company or a monopoly. But if you’re a small business, you run the very serious risk that a price change will erode your market share. A 10% increase in prices could lead to a 20% drop in bookings.
Running a business is a tight balancing act. Do you put the customer first, the staff, or the business? Each of the components is inter-dependent. The pressure can apply from many directions. Just about the worst thing that can happen to a business is that you lose a critical staff member.
I feel especially sorry for the small cafe operator, who has to fight it out in a very competitive market, with staff wages going up, and being too timid to put up the price of a coffee to $6 to cover your costs before your competitor across the road does.
Part of the problem with the business confidence crisis that is occurring at the moment is that there has been no qualitative assessment of why business has suddenly turned negative. The economic indicators seem positive, and this has led some people to write off the crisis altogether without investigating further, forgetting that the confidence problem looks to the future, not the historical indicators that the economic data is drawn from.
This nexus of inflation and price elasticity of demand, I think, is behind the crisis in business confidence at the moment. It’s not driven by big business ‘fat cats’. It’s being driven by small business operators who are seeing their profit margins eroded at the same time as they risk losing their key staff.
But there is a silver lining in all this. Losing a staff member means that we have to re-evaluate the way we operate, and to put in place a structure that ensures the business can function effectively even without that person present.
