Right now, a lot of company owners are feeling a loss of control.

Before the pandemic, they could dictate to the supply chain what they were willing to pay, and the supply chain mostly acquiesced.

Today, though, demand exceeds supply. The supply chain has the power to push back and say no.

When owners don’t have the control they once did over costs, it can put them into panic mode. They feel the need to exert control somewhere — and it’s an understandable need. The easiest and most obvious thing to exert control over is pricing.

By raising your prices, you pass those higher supply chain costs on to the customer and maintain your margins. That’s where inflation comes from: One supplier has to raise prices, then the next supplier makes an increase, and on and on.

However, this isn’t the only way to recover lost margin when rising costs hit the supply chain. It may not even be the best way.

It’s not that you can’t ever raise prices because of inflation in the supply chain. It’s that raising prices isn’t your only option, and it probably shouldn’t be your first.

To Raise or Not to Raise Prices

Immediately jumping to raising prices can create two problems for your business.

First, raising prices creates a battle point with customers you don’t necessarily want to take on. It calls attention to itself. It’s quantifiable and easy for a buyer to navigate. They see exactly where to push.

Second, raising prices detracts from the conversation you really want to be having, which is value.

Value is conceptual. Pricing is granular. Once pricing is on the table, you’re going to have a hard time getting buyers to zoom back out to consider the value of your services.

What Should Happen Before Raising Prices?

While raising prices may be a viable solution, you don’t want to deal with the associated problems if you don’t have to.

Instead, take time to tighten up your operation before you jump to pricing changes. You might be surprised how much margin you can make up without ever having a conversation about price.

1. Buy Better

The first and perhaps easiest step of the non-price-related strategies for making up your margin is to get better at buying.

Buy in bulk. Buy further in advance. Negotiate more. Shop around. Just because there are constraints in the supply chain doesn’t mean there’s no supply available. You simply have to find it.

There are always more options for buying better. Become a professional at procurement.

Buying better will help recover some of your lost margin, but it won’t solve all your problems.

When you find a soft spot in the supply chain and negotiate lower prices, you’re putting demand there. Eventually, then, those prices will go up as well.

So, for a more long-term solution, you next need to put more energy on the real issue in your shrinking margins: over-delivering.

2. Stop Over-Delivering

Over-delivery is THE most crucial issue to address if you want to increase your margins. In fact, this is the hidden reef that wrecks your ship regardless of inflation or supply chain problems. You just didn’t notice how much it sank your margins before constraints entered the picture.

No More Free Add-Ins

The first form of over-delivery to deal with is the “free add-in.” You have to reduce the number of free add-ins you’ve been using to manage customer satisfaction and expectations.

This doesn’t mean telling the customer cost is going up; it means reducing the “free” factor. You can’t keep on saying, “Sure, we’ll add that in for free.”

To accomplish this, we actually have to become better salespeople.

When you sell a scope of work, you have to say, “We can do such-and-such up to this many times. After that, there will be an additional charge.” Customers actually expect this kind of limitation. But if you haven’t done it before, they won’t be used to hearing it from you.

In that case, how do you introduce a limitation into a conversation with your customers? The easiest way is to wait until there’s a negotiating conversation.

A negotiating conversation is when you discuss what the customer has to spend compared to what they want. If their budget and their wants are not in alignment, you’re at a negotiating point.

Instead of negotiating the price and/or reducing your margin, renegotiate what the customer wants. I can give you this at a lower price if we eliminate this variability.

If you remove flexibility, you can control the scope of work and keep the price the same.

The philosophy here is to help the customer have a stake in their own budget. If their budget is $50,000, but their needs surpass that, work with them and let them know exactly what they can get for $50,000. Then they can adjust accordingly.

Customers need to know you’re going to help them make choices about where they should spend their money and where they can hold the line.

Know What You Actually Sold

Over-delivery can also happen when you or your team don’t know what you actually sold. If you’re not clear on what you agreed to, then you don’t know when to stop.

Let’s say you sell a job and pass on a project to your video editor, who spends 40 hours doing a beautiful edit.

But the budget was for 10 hours.

You still have to pay the editor for that time, but you only sold 10 hours of editing. The problem is that you didn’t tell the editor what you sold when you passed on the assignment.

A lot of over-delivery comes from a lack of communication about what the budget included.

Reduce Sloppy Execution

Sloppy execution, in a way, also leads to over-delivery.

To continue with the example above, if your proposal included up to 10 hours of editing AND you communicate that to the editor, you could still have a problem. It depends on who you’ve hired to do the job.

If the editor makes mistakes, doesn’t read instructions, or isn’t familiar with what they’re doing, it could take them double the time to do the job. And that’s sloppy execution.

Now, mistakes happen, and sometimes taking longer is okay. But this is an area you have some control over.

I’ve hired great graphics people who built a beautiful slide deck at a high hourly rate in half the time. And I’ve hired not-so-great graphics people who took twice as long to do lower quality work, but at a lower rate.

The key here is to make sure you’re buying at the right level. Sometimes it’s better to pay more to a supplier who will do a great job in less time.

3. Be Honest With Yourself About Costs

To manage your margin amidst constraints, it’s incredibly important to be honest with yourself about costs. Too often, cost assumptions and estimations are based on inaccurate information.

Maybe owners take the first number they hear, or they know a guy who does the job at a certain price. Those might be the prices you want to hear, but they aren’t reliable sources.

You have to make sure you’re getting good information. You have to find the real replacement cost, the amount you can reliably source a product or service for 90% of the time.

The other missing honesty element in cost estimation happens when an owner looks at one element of cost instead of the aggregate costs that together make up the actual expense.

For instance, maybe you find someone who will work for $20 an hour and you think that’s a good rate. You go ahead and hire them, but then find out they also charge for travel time, parking, fuel, and other factors.

These aren’t hidden costs. You just forget to look for them.

If you’d put $20 an hour into your budget spreadsheet, then the actual cost could end up being off by a big factor from the estimate.

This is where a lot of companies shoot themselves in the foot. They want to believe their estimate. They think they have the cost they want, but it’s not quantifiably accurate.

Bottom Line

Charging the same price and eliminating waste is the same as charging more and over-delivering.

So instead of continuing to offer more for less or jumping to raising prices and battling customer push-back, get honest with yourself about costs, learn to buy better, and stop over-delivering.