Rising fuel and energy costs are strangling profit margins for small businesses.
That led me to ask a question: How are small-business owners dealing with rising fuel costs?
I heard from 66 owners in 31 states and 60 cities who took the time to tell me that some are raising prices across the board, some are adding surcharges and delivery fees, and some are sitting tight and eating the costs. I am grateful for the thoughtful e-mails I received from people like you who make tough business decisions as your profits decrease or disappear altogether.
"Fuel costs are eating me alive" was a plaintive note struck by many who e-mailed me. Or more simply: "It's killing me."
One correspondent in the energy consulting business in New Jersey reminded me that rising costs for natural gas, heating oil and electricity are also putting the squeeze on business owners. He writes, "We see customers in Delaware that are facing electric rate hikes of 300 percent in the past three months; our Maryland customers are seeing 80 percent rate hikes this month. This is huge, and it affects all small businesses, not just those in the services industry that have to travel."
Of the 66 owners who wrote, 39 said they had raised prices in some way and 27 said they were holding off. In this informal survey, that breaks down to about 60 percent who have already passed on rising fuel costs to their customers, and 40 percent who have not – yet. Among the folks who have held off, two are planning to raise prices soon or by the first of the year, four plan to add fuel surcharges or mileage fees, and two are planning to shut down their businesses.
As you can imagine, many of these small businesses — among them a searchlight business, a Fed-Ex home delivery service, and landscaping businesses, to name a few — depend on vehicles to get the job done.
One N.J. owner of a fleet of soft ice cream trucks writes, "This business is very sensitive to increased costs. I mean you can only charge so much for an ice cream cone. But my profit margins are way down. Two years ago, my fuel charges per day were $20. Now $60. That may not seem like a lot, but some drivers only pull in $200 a day. I almost want to park these trucks, but then I would put someone out of work."
An owner of a telecommunications business said that he has seen fuel costs for the company's 16 vans (which get about 12 miles per gallon) go from $3,500 per month to $8,000 per month.
But there were just as many who responded who don’t own a fleet of trucks, such as a convenience store, a marketing firm, a plant nursery, a steel fabricator, and a coupon book publisher. It didn't seem to matter whether the small businesses had their own fleets or depended on suppliers who use fleets. Higher prices are being passed down the line, and the small-business owner is often the last bastion before customers start paying more for products and services.
I did notice that it was much easier for those with wealthy clients to increase their prices:
· "I charge what I charge, others will be higher and others will be lower. My clients are wealthy and loyal,” writes the owner of a lawn service in Michigan, who has added $5-$10 to his bills without mentioning the increase.
· “We raise the prices on some of our wealthier clients; they don’t seem to mind," writes the owner of a leather restoration business in Georgia.
Tactics for Raising Prices
Of the 39 owners who have raised prices, here's the breakdown of how they’ve done it:
1. Increased prices – 25 owners have bitten the bullet and raised their prices overall, both hourly rates and project rates.
2. Fuel surcharges – 10 added these surcharges, which range from $2.49 per invoice (“most customers pay it”) to $25 for trips longer than 50 miles.
3. Delivery fee, service call fee, mileage charge – Seven have added these fees to their invoices. These were either flat fees ($20, $25) or an addition of 5 percent to the bill ($5-$25).
4. Combination – Five owners have combined overall price increases with mileage surcharges or fuel surcharges.
Surcharges seem like an easy way to collect money from customers to cover the costs of rising fuel prices, but one owner of a locksmith business in Texas — with a fleet of five service trucks — wrote: “I toyed with the idea of a surcharge, but, to me, those seem so misleading. In all the years of doing this, I have never seen a surcharge that ever went away. The cost of doing business never EVER goes down.”
He decided to raise his service call fee at the beginning of the year in an effort to offset the rising fuel costs. But he already has to think about a mid-year increase, since his previous increase doesn’t accurately reflect the prices he is paying today. “When my customers see another increase, they may start to scream a lot louder,” he said.
Many said they waited quite a while before raising prices.
· “Over the last two years, we have absorbed all of the add-on costs, such as fuel surcharges, environmental, hazardous waste, delivery, trucking, local fees, etc. (they keep adding new names) being added to almost all of our invoices now,” writes the owner of an auto repair and painting facility in Georgia. Now that he’s been notified that the company’s health insurance premiums are going up 37 percent in September, he’s considering a temporary fix of adding a surcharge and then probably increasing his published prices.
· The partner in a plant nursery in Georgia writes that they had to raise their prices for the “simple reason that all of our suppliers have added freight and fuel surcharges.” He says that these charges increased 40 percent over last year. “We waited as long as possible before making the price increase but felt it was necessary.”
One tactic for some small business owners is to charge more to new customers and those who don’t do as much business with the company. The owners tend not to charge more to loyal, long-term customers or those who are critical to their business, because they don't want to lose these customers.
For some of the small business owners, it was not too difficult to raise prices or add mileage charges. Those who own businesses that depend on fuel seem to have an easier time making higher prices stick, because their customers can readily see the connection – for example, the airport fuel station, the driving school owner, the trucker, and the flag car-escort business.
Overall, though, raising prices is traumatic for business owners. As I wrote in my earlier Small Talk column: "Raising prices is like asking for a raise from your boss, except that, in this case, your boss isn’t just one person. It’s each and every one of your customers. Some of them will give you that raise willingly; some will reluctantly give you the raise but hope that you can take a pay cut again soon; others will simply say no and give their business to a competitor or do without your service or product."
I recommend that if you do decide to raise your prices, be straightforward about it. Take the time to write a letter to your customers and explain. For your prime customers, you may want to do it by phone or in a face-to-face meeting. Your customers are not blind to the fuel environment, but they do want to know why you are raising your prices or adding surcharges and fees.
As one landscape business owner in South Carolina learned, an informed customer most often is a loyal one: “I talked with all my customers at the beginning of the year and let them know that my prices would stay the same until gas hit $2.75 a gallon, and then I would add one dollar charge per lawn, which does cover the gas costs. I also explained that for every 25 cents gas went up, I would go up one dollar. If gas went back down, I would drop the dollar. All of my customers understood, and I did not lose one.”
For more specific information about how these small business owners have gone about raising their prices, please see Part Two: Fuel Costs Burning Your Business?
For more information about the small business owners who have not yet raised their prices, please see Part Three: Fuel Costs Burning Your Business?
Susan C. Walker writes a personal finance and economics column for FOXNews.com as well as this small business column. She works for Elliott Wave International, a market forecasting and technical analysis company, and has been an associate editor with Inc. magazine, a newspaper business editor, an investor relations executive for a real estate investment trust and a speechwriter for the president of the Federal Reserve Bank of Atlanta. She graduated from Stanford University.