Covering Your Rising Costs Takes Trust

President's Message

Covering Your Rising Costs Takes Trust

Communicating cost increases with our customers

Trust is a precious thing. I’ve spent several years nurturing and developing trust with many of our customers to the point that we consider each other friends. However, no matter how good a relationship I have with a customer (or a supplier, for that matter) there is always a level of inherent mistrust when it comes to discussing cost increases.

It’s only natural. We’re all in business after all and we’re all doing it to make money. When I get a letter from a supplier warning me about a cost increase, I’m always suspicious. If they say they’re going to raise the costs of a good or service by eight percent, I’m always wondering if they are just putting that number out there to see if it would stick. Would they be just as happy with three or five percent?

With the recent dramatic increase in lumber costs, I’ve had to go to a lot of my customers and inform them we need to increase the cost of our component packages or go out of business. Many of them want notice of these increases 90 to 120 days in advance, yet one of the first questions I always get is, “why didn’t you foresee this earlier?” I’d like to point out that if I could anticipate what the lumber market was going to do 120 days in advance I wouldn’t be in this line of work, I’d be lying on some beach somewhere.

I typically point out to them that our business can weather small fluctuations in the lumber market but if I had come to them 120 days earlier and told them I anticipated a significant lumber cost increase and raised the cost of my goods then, they wouldn’t have believed me. Therein lies the problem everyone in our industry faces, our customer will never allow us to be proactive in passing through our costs, we must always be reactive and take on the risk of lost margin.

As a consequence, our company has to absorb the loss at the front end of swift lumber cost increases. Then we have to raise the cost of our products to be in line with what we think the market will do for the rest of the year (and how our competitors will react), with the hope that we do not lose too much anticipated margin by the end of our fiscal year. Many times I have to warn my customers that if the lumber market doesn’t do what we anticipate (i.e., a cost correction later in the year), then we will have to raise the costs of our goods even further.

Fortunately, with all the coverage historic lumber costs are getting in the news, it’s not as hard now to convince my customers I have to pass along a meaningful cost increase. Because I take the time to explain to them how we arrive at our cost increases, it’s easier for me to keep those increases in place when the lumber market heads in the other direction. Again, to meet projections, we have to recover the margin we lost when the lumber market was going up. So even though they are naturally skeptical when we approach them with cost increases, our open communication helps nurture further trust in the end.