As the world economy recovers, company owners and executives are seeing accelerating price increases for many of the goods and services they purchase from suppliers. At the same time, these managers are contemplating how much of the increases they can pass on to their own customers.
Recently released statistics from the U. S. Department of Labor provide guidance. The combined inflation rate for goods and services sold in America rose by 1.6% in January 2011, as compared to January of 2010. Yet the inflation rate for goods (tangibles) was considerably higher than it was for services (intangibles). Inflation for goods was 2.2% versus 1.2% for services; some service sectors, such as dental and tax preparation, have actually seen prices flat-line or deflate. By contrast, between 2000 and 2008, the inflation rate for services was 3.4%.
This divergence in the inflation rates for goods and services is explained by supply and demand. The worldwide demand for commodities is driving up the prices for goods, whereas the stubbornly elevated unemployment rate is moderating the prices of services. Super-growth emerging economies like China and India are competing vigorously with the United States and Europe for increasingly scarce commodities to put into their products, run their factories and farms, and feed their people. On the other hand, service businesses are labor intensive and wages are being held in check by the surplus of people to fill most jobs and not just in the lower paying occupations. For instance, a number of blue-ribbon law firms have de-hired law school seniors that they had previously offered positions as associates.
Equine-related businesses can expect persistent price pressure for such items as feed, energy, boarding, construction, gasoline, fertilizer, and paint. These are either commodities are have a high commodity content. By contrast, there should be much less price pressure on services that do not depend on the vagaries of commodity markets, such as business and professional expertise, employees, and rent. Health insurance is likely to be an exception.
Equine businesses primarily providing a service will find it more difficult to justify price increases to their customers in the near future than will enterprises that can transparently document commodity cost increases. For example, a CPA would have a harder time than a horse transportation company persuading clients of the need for a price boost. A customer knows from filling up his or her own automobile that a trucking/air firm is beset with soaring gasoline prices. Some equine businesses, of course, deliver both goods and services. A veterinarian provides a service but also uses a commodity-based product in the form of medicine.
Equine-business executives in 2011 and beyond will face an ever-challenging environment for maintaining profit margins. However, companies that sell a tangible product will generally be able to present their customers with a stronger case for price increases than enterprises that proffer a service.
Copyright © 2011 Horse Racing Business
Originally published in the Blood-Horse. Used with permission.