Business Lessons Lost in New Era?

My first business mentor, Bill Trussler, passed on a lesson he learned from his mentor – raise prices immediately when costs increase. The reason: customers will tolerate slight upward price adjustments. The novice merchant may try to hold on to increases, waiting for the competition to raise their prices in hopes of picking up customers looking for a bargain. Or, at the very least, trying to avoid customers wandering over to a competitor offering a lower price.

But, the lesson goes, if you wait until the increased costs erode all profit and force a price increase just to stay in business, the customer experiences shock - an increase so dramatic that she is likely to be become outraged, to feel betrayed. Once a customer feels betrayed they will no longer be your customer.

This time-tested wisdom passed down from merchant to merchant does not seem to hold in Seattle according to the results of a study undertaken by the University of Washington. In 2014, the city of Seattle passed a minimum wage law that was to begin to take effect in 2015. Wisely, in the wake of such a mandate, the city council commissioned a periodic check of the city’s vitals to be conducted by the University. The first study, done at the inception of the new law found that 62% of merchants expected prices and rents to rise because of the law. The second study, just completed, and done one year later found that prices and rents have not changed.

The first study revealed that 10% of merchants questioned wrongly believed that the jump to $15 per hour was to be immediate. In fact, the law set two standards, one by which companies employing more than 500 people were to follow, and another, slower paced standard for companies with less than 500 employees. Minimum wages are to be incrementally increased for the first set to $15 per hour in three years. Smaller employers are required to incrementally increase wages until 2021 when they will be $15 per hour. This means a minimum wage earner’s income would rise somewhere between 8% and 12% per year. California’s new minimum wage law has similar incremental increases over time.

It seems like Seattle merchants have forgotten Trussler’s rule of passing on increases as they accrue.