After a hectic couple weeks of travel, while working with clients to close out their 2011 accounting records, and begin financial strategies for 2012, I was struck with one big takeaway theme. From all of these meetings I’ve attended, there has been a common decision (or resignation) by almost every client to raise prices and improve gross margins.
There may be several reasons, but I have a hunch that it will boil down to two. When the fourth quarter results are all in, I’ll know for sure and will keep you posted. The first reason is that my clients have been on a steady path to improve product offerings in an effort to increase gross margin; otherwise known as innovation. The four basis steps they follow are:
1. Innovate – to identify better ice cream, faster delivery times, more effective backup systems
2. Smoother the client and prospective client base with service
3. Inch up prices
This is a simple process, but will usually involve some gut-wrenching decisions and risk taking. On client had to kill a type of health care program designed for teenagers. It was a logical extension of his successful program for adults. After investing countless hours preparing and marketing, it never panned out and he walked away from the significant investment, to spend his time more productively on newer ideas.
The second reason our clients are willing to raise prices and improve gross margin is more subjective. I believe that after weathering three years of a recession, most of the competition that was habitually discounting prices to stay alive, is now gone. A recession has a way of shaking out weak players. What’s left are generally solid businesses that have more latitude to raise prices.
What’s been your take on the last fiscal quarter? Are you more or less optimistic that you were a year ago?