As we commented in the previous post, in which we reviewed the first half of 2022, the shadow of what the pandemic has meant for the supply chain, as well as other factors such as the invasion of Ukraine, the uncertainty about Taiwan and a possible impact on the production of microchips, or the Monkeypox continue to paint a picture of uncertainty at least in the short and medium term.
This global scenario obviously has consequences and if you have been following the news in recent months you have probably noticed that one of the recurring themes is inflation, and for good reason.
Looking at the year-on-year inflation figures published by the OECD last July for the month of May 2022 they comment: "Year-on-year inflation in the OECD as measured by the Consumer Price Index (CPI) rose to 9.6% in May 2022, compared with 9.2% in April 2022, largely driven by food and energy prices. This represents the sharpest price increase since August 1988." In other words, we are looking at a period where, with few exceptions, we are looking at something that the flexible workspace industry, for the most part, has never experienced (it is worth remembering that Regus was founded in 1989).
This increase is fuelled by several factors, one of the most important of which, especially in the European Union, is the increase in the price of energy, which has risen by 35.4% in the OECD countries as a whole, but in the cases of Belgium, Estonia, Greece, Latvia, Lithuania, the Netherlands, Turkey and the United Kingdom it represents an increase of 50% over the same period. We all know the impact that the energy bill has on this industry and its costs.
It is always complex to give advice that makes sense, and can be useful, to any workspace manager around the world reading this article without falling into the trap of offering advice that is too generic. If at any point the topics we cover are too basic, bear in mind that we must try to make sure that anyone reading this article can put it into practice in the best possible way. So, having clarified this point, let's move on!
The first step we must take is to assess the problem we are facing. Maybe your country is not experiencing a situation like the global one, or maybe your workspace for various reasons is not as affected by inflation. The ideal way to do this would be to review your costs and compare them with those of the same month of the previous year and see what has happened by comparing at least the months so far in 2022 with the same months of the previous year. You will then be able to make a forecast based on these calculations for the coming months of this year. Additionally, you should look for an official source on inflation in your country and city to verify that you are not missing anything.
Keep in mind that employee salaries do not increase at the same rate as inflation (there are some exceptions we will see later), so workspaces where salary costs represent a significant percentage of total space costs will experience less of an increase than those spaces that have very few staff. Similarly, those spaces that are better insulated thermally, or have solar panels, will experience a lower impact on their costs due to their better energy management.
Once the diagnosis is completed and we know how big the problem is that we have to solve, we can choose different strategies to minimize or solve them, which will vary depending not only on the size of the problem, but also on other particular factors of the workspace in question.
When you know by what percentage your costs have increased, you know by what percentage you should increase your rates to maintain your margin. But before doing this we must ask ourselves if it is possible to somehow optimize your costs starting with those factors that contribute most to the total or have increased the most significantly in this period. Try to do it in a way that does not impact on the quality of service: when you reduce the quality of service you can not only cause your current customers to drop out if your value proposition loses attractiveness compared to other alternatives, but the space will be less attractive to new customers, making future conversions more difficult.
If you have no choice but to apply measures that reduce the quality of service, try to ensure they have as little impact as possible. If this is the case, you must avoid impacting those members who are most integral to your space.
Some ideas that can help would be, for example, to contact an energy broker (companies that study your energy consumption and change your contract every year to a provider that offers you the best possible price for the energy consumption you make). You can also consider changing the cleaning service provider for one that maintains the same level of service. Also, you could study how your users access your workspace and dispense with superfluous elements, or services, of which they make little use (or are only used) by those customers who are the least profitable for your workspace. You could also consider adjusting your opening hours to the public.
Once the costs have been optimized, go back to review where your margin is compared to where it should be. At this point, if you realise yu are still some way off your target, you will need to consider an adjustment in your rates. This is when things get interesting, because there are many factors to consider...
On the one hand, you have to take into account what the culture is in terms of price increases in the space: are they regularly raised on an annual basis? Are they raised when private office contracts are renewed? In other words, are clients used to regular price increases? If the answer is no, and this goes hand in hand with the need to increase prices significantly due to the impact of inflation on your space, you have created the perfect storm. In this case the rate adjustment process will be more traumatic and it will be essential to address the problem in the most transparent and honest way with your members, be more creative in optimizing your costs, and perhaps make the increases progressively so that it does not impact your members so much or generate cancellations.
If this is your case, although it is useful for any space, there is an exercise you should do and that is to analyse your current client base and, in an objective way, study the use they make of the space - analysing how essential you are to them and to what extent you estimate that they would accept a rate increase. This exercise works best when done not only by management but also by the staff who are in day-to-day contact with the members.
In all of this there is one key factor that we have left until the end, and that is your occupancy rate: the lower it is the more careful you need to be about rate changes and reductions that affect the quality of service. The higher your occupancy, the more leeway you have, but please remember, if this is the case, your customers have other options and the service you offer them must be at the level of the price you charge them.
There are other factors such as the pricing policy, and discounts, as well as what the competition is doing around you (when we talk about competition I am not only referring to other flexible spaces but to traditional landlords) or if your financial situation allows you a certain flexibility or forces you to maintain specific levels of profitability.
Taking all this into account, you must answer the question: should I raise my prices? The answer will depend on the weight of each of the factors mentioned above, but I would also give you some personal advice.
- Calculate with your head and not with your heart: there is no room for sentimentality.
- Analyse your costs and optimize them as much as possible without impacting the quality of the service.
- Take care of your key customers.
- If the increase seems excessive to you, the least risky thing to do, if your economy allows it, is to carry out the increase in two stages.
And the last and most important:
- Opt for a sincere and honest approach with your members: inflation affects everyone and it is obvious that sooner or later it will have an impact on the bills for the various goods or services they pay for.
But remember in the end, when you look at the price increase, it all comes down to the percentage of the price increase being greater than the percentage of members you will lose because of it. Trying to maximize this differential is the key to everything.
Unfortunately, there are countries that have been living with inflation for decades, and Argentina is one of them. When you talk to space managers they give you advice that is very useful, especially if the current situation is prolonged. The advice they give us is very much in line with what we have discussed in this article. However, it should be remembered that there are factors that make your situation very different from the rest of the world:
- Inflation has been a weakness of the Argentine economy for decades and people, we are told, are "used" to dealing with this situation.
- They have developed indexes to offer prices in these units to avoid continuously varying prices (or offer them in US Dollars).
- Employee salaries, for companies that want to keep talent, adjust their employees' salaries several times a year (something that, they insist, the rest of the world will soon have to consider if this inflationary situation continues).
Some of their thoughts and strategies are as follows:
- They are very insistent on the need to be clear with customers from the outset about how rate adjustments will be handled.
- Establish more frequent review periods: instead of annual rate reviews, do it every 6 (or even 3) months.
- Remind customers 30 days in advance that a rate adjustment will be made.
- Try to keep rate increases to no more than 20%.
- Estimate how much your costs will increase in that period and adjust your rates by applying the average price.
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