When I was in college, the seemingly etched-in-stone concept of economics was either Supply and Demand or Perfect Competition. As a business owner, the understanding was that pricing would come down to one or both of these concepts to manage how much products or services would cost. For some aspects, I agree. Both concepts will play a part in pricing as well as market viability. However, I believe both concepts are an example of oversimplification of broader market influences in that businesses are robbed of precious margins that could fuel their growth.
Inflation/Wage
Every year the spending power of the dollar goes down and the cost of labor goes up. Think about that for a second. The money the company earns can buy less and the money a company needs to spend on employees increases. Since 1929 there have only been 6 years of deflation and every non-deflationary year has had at least a 1% increase in inflation. If you have owned a business since 2018, inflation has increased by 19.1% (yearly average of 3.82%). That means a company has to reduce costs through scale or cost-cutting measures by 3.82% every year in order to make as much profit as it did the year prior. Madness.
To make matters even worse for the bottom line, employees are increasingly asking for larger salaries. UPS recently signed an agreement to increase hourly union worker pay by $2.75 in the first year and $7.50 per hour by year 5. They also bumped up the starting hourly to $21.00. That's an increase from $15.50 (35%). Ford, GM, and Stellantis have similar deals in front of them to settle a strike. If you think this won't affect your employee's mindset, you are mistaken. By the end of 5 years, the average hourly UPS employee will make $170,000 per year including benefits. If your company's average is below $80,000 per year, UPS's contracts could affect the company faster than you think.
TL;DR Inflation/Wage: Both small and large companies need to strategically price in wage increases to their service/product offerings. I've been in countless discussions about annual budgets and salaries. Rarely included in the discussion are product or service price increases. If your company plans on increasing salaries or benefits annually (which you should), increasing prices that align with the salary and benefits is a must. The company is already losing 2-3% annually to inflation, so adding an additional 5-10% in salary expense without increasing prices will torpedo profits.
Perfect Competition
Although I believe Perfect Competition plays a role in pricing and selection, it's outdated and incorrectly applied to millions of businesses. First of all, Perfect Competition as a concept was first introduced in the late 19th century and formalized in 1950 by Kenneth Arrow and Gérard Debreu. Capitalism and society were different back then and I believe the theory as it applies to pricing needs to be reexamined. As the internet has opened up channels for commerce and democratized how we communicate, it has also created nuance and tastes for every person in every part of the world. In the 1950s and before, there was far less variety, and thus pricing equilibrium was easier to establish. A candle was a candle was a candle and so pricing was more mass market driven. That's not our economy now. If it was, Apple wouldn't be the most valuable company in the world (a phone is a phone is a phone).
Perfect Competition shouldn't keep a company from raising its prices on products or services. There is a niche for every business and every sector. A company would be better off focusing on how to differentiate its products and services, focus on brand alignment with the customer, and simplify understood perceived benefits for the end user. A candle is not a candle that is not a candle. OUR candle is an experience that is unique to a cherished memory that represents who I am (and I'm willing to pay 5% more every year for that experience).
TL;DR Perfect Competition: Don't let perfect competition keep you from increasing the prices of your goods and services. Focus on your brand and how it aligns with the customer. Focus on quality and service. Focus on guarantees and values. There is a premium market for everyone.
Margin Minimums
Almost every client I have worked with, a company I've owned, or a friend that has (had) a business has industry margins as an annual benchmark. The margin benchmark is an average margin from the industry to set as a goal to be...average. The margin minimums do not take into account scale and raw materials pricing. It is just an average.
It's time to change that paradigm. Instead of using the average industry margin as a benchmark, use it as a minimum. If the industry's margin average is 10%, make that your company's minimum and try to achieve 12%. All things being equal, how can the company increase productivity, decrease waste, or increase price to bring the annual margin up by 2%? If you do achieve an additional 2%, what will the company do with the extra cash? Payroll? R&D? Facilities?
TL;DR Margin Minimums: Don't be average. The world has enough average companies. Set your profit bar higher so you can reward employees through benefits/growth and customers through innovation and service.
TL;DR summary: If you do not increase prices on products and services every year, the company is making less net money. Less money to expand. Less money for A-Player employees. Less money for R&D. Annual reviews and benefits package season is upon us. Don't make less in 2024 by ignoring harsh fiscal realities.