Pricing is weird

I have a good friend who had a low 8 figure contract to sell his small business. It fell through.

His largest customers were not willing to renew their contracts with him, not because they were dissatisfied, but because they weren’t sure what pricing and inflation would be like over the next twelve months. This leads me to believe they believe prices will be lower than they are today.

They are wrong, prices are going way, way up.

One thing is for sure, pricing is unstable and chaotic. It is wrecking deals.

I have another friend who is quoting machine work. His quotes are only good for 7 days. He’s getting close to being unable to quote work.

1. He quotes the work based on current pricing on workload.
2. The client has 7 days to accept the pricing.
3. He then schedules the work. The work may be as much as one month out.
4. He completes the work five days after starting and bills it.
5. His terms are now Net 30. The client has 30 days to pay without interest.

His cash comes to him 6 weeks after quoting. Inflation, according to is about 15%, making it a little over 1% per month. His cash hits his cash register one and a half months AFTER setting the pricing. His profit margin is only 8%. He has to pad the price to make sure he is anticipating the purchasing power of the cash six weeks out.

He has to create more inflationary pressure in order to protect himself. Many such cases.

Imaging building a complex product with long manufacturing times. Machine tools, houses, airplanes. In order to build something like this prices have to be padded a lot to protect agains inflation. This is a vicious cycle.

Pricing instability is going to get worse.

I have anecdotal evidence that people who are putting together deals in the small business market think prices are going to come down in the next year.

I have anecdotal evidence from folks like my machinist friend that pricing is going up steeply in the short term.

Money supply expansion normally takes 18-24 months to hit the consumer in the form of inflation. We are in for quite a bit more of it.

Prices aren’t very elastic in the downward direction. I think the venture folks who offered to buy my friend are wrong. Prices might not continue to climb one year from now, but they damned sure aren’t coming back down. They never do.

Leave a Comment

Your email address will not be published.

Scroll to Top