The continued slowing of economic growth in China, coupled with the slow recovery in the United States is creating a flat market relative to many commodities. You would never guess this is the case relative to the quantity and frequency of price increase notifications being submitted by many both manufacturers.
Relative to the plastics industry for example, pricing continues to climb despite the fact that drivers (i.e. crude oil) remains well under $100 per barrel. So what gives?
There are three fundamental drivers which continue to elevate prices:
Driver #1: Profitability.
Organizations are seeking means to boost profits quickly as a result of the economic slide of 2010. In addition, growing concerns of another economic slowdown (contrary to my beliefs) are creating an urgency to increase profits and cash-flow. Lastly, as baby boomers head into retirement there is an increasing interest in investing in those organizations which show the greatest potential for return on investment. Boosting profits is an easy way to demonstrate success and viability.
Driver #2: Market control.
Predicting and delivering on profitability is a direct result of market control. Consider the once dominant Blackberry, sold at prices well above $600, which can now be obtained for less than $400. Increased competitive pressures have placed downward pressure on prices. The solution, buy your competitor. In the paperboard industry there have been numerous mill closures, all in an effort to reduce supply and hence justify increasing prices.
Driver #3: Better me than you.
For those following the plastics industry, it is not uncommon for less than 50% of announced price increases to actually take hold. Many manufacturers tend to rescind price increases if there is enough push back from customers. The basic philosophy is, “if I don’t ask for more money, I won’t receive it.”
So, the next time you receive a price increase, push-back. Ask for supportive facts to justify the increase, request discussions with manufacturers to clearly understand drivers and most importantly, review other competitive options. Don’t be held hostage by your suppliers.
The financial sustainability of your business is dependant on it.
© Shawn Casemore 2011. All rights reserved.
