Do you remember riding a seesaw when you were a child?
It was always fun until the other kid jumped off. I can still remember slamming to the ground when my friend Joey jumped off without warning. As painful as that was, it taught me a great life lesson.
What goes up always comes down. Today’s economy reminds me of that same experience.
We’ve all enjoyed the benefits of a great economy over the past few years. Our revenues went up, our earnings went up, and our companies expanded and grew consistently for several years. We even survived the pandemic relatively unscathed.
Unfortunately, during those good times, many in our industry did not anticipate how quickly things could change. In a few short months, the rapid and dramatic change in pricing for virtually everything we use in the industry has left many of us feeling like the kid whose friend jumped off the seesaw. While many of us were celebrating that we survived the pandemic, we suddenly find ourselves facing serious downward pressure on earnings and cash flow.
We’ve watched as significant increases in fuel, containers, trucks, equipment, labor, benefits, landfill, and most other costs have come almost on a daily basis. As a result, many within our industry have seen earnings come crashing down.
The pace and scale of price increases have caught many off guard. The question now is how do we ride this seesaw and avoid the pain of crashing to the ground?
One simple answer is to pass through every price increase. That sounds great. However, the practical application is more challenging.
Do we simply apply across the board price increases? If so, how much? Is it a flat amount or a percentage? What if the price increase today doesn’t cover the costs tomorrow?
Even worse, how do we deal with illogical competitors who undercut everyone’s prices thinking they will eliminate the competition? We all know that never ends well for the low baller. However, in the short term, their unwise decisions make our ability to increase prices a bit more challenging.
I’ve noticed a common thought process for many independent haulers over the years. They often try to set their prices based upon what their competitors are doing. They mistakenly think that revenue equals profit. It does not.
In times like these, it’s critical that we price our services based on our own financial structure and what the market will bear rather than on what any individual competitors are doing. This is where understanding your operating costs is very important.
I’ve seen many waste haulers struggle financially because they based their pricing on what they “heard” their competitors were doing rather than on what actually made them money. I’ve also seen companies make up pricing without any analysis at all. They have no idea if they are making money or not.
Early in my career I met a consultant who said that most businesses have no idea who their most profitable customers are. They rarely take the time to analyze their customers to see which ones are profitable.
He said that when he ran profitability analysis for his clients, most were shocked to learn that the customers they thought were most profitable were often losers. In most cases, 80% of their profits were generated by 20% of their clients. That rule is still true today.
I encourage all of you to take the time, today, to analyze your clients and determine who are profitable and who are not. I would also suggest identifying your top 20 to 25 clients by revenue. You will be surprised to see what percent of your gross revenue this small group represents.
Once you’ve completed the analysis, the next step is to either adjust pricing enough to make the losers profitable or get rid of them. Failure to identify unprofitable customers can have a devastating impact on your business now and into the future.
In summary, the way to stay on the seesaw is to increase your pricing at every opportunity and identify and address every unprofitable client. The result is sure to be a more pleasant ride through a very up and down economy.