Productivity not Price

In Public sector, UK productivity on January 10, 2011 by Tim Aikens

Towards the end of last year I wrote about price as productivity – how government and others (supermarkets especially) try to push down the rates they pay their suppliers in order to cut costs (but without improving productivity).  Here is the other side of the coin.  Businesses who push up prices in order to retain margin and hence profit.  We have a classic situation in the UK. VAT went up to 20% on January 4th and many business have taken the opportunity to ’round up’ prices.  They can recover some of the lost margin eroded by competition and weak markets over the last year.  The same thing happened in the Eurozone when the Euro was introduced.  Of course customers are not stupid, they know exactly  what is going on. In the short term there is little they can do, but over time people will find ways of abandoning the new high priced items and either find an alternative or else do without.

The Royal Mail is an interesting example. Stamp prices have risen by over 52% in the last 10 years (70% if you include the planned increase in April), whilst the RPI has gone up by some 33%.  So potentially double the rate of inflation!  Volumes are declining, so prices go up to cover the fixed costs.  However, the post office is largely a people business. Staff costs in 2005 were almost 70% of the total cost base.  Consequently a large productivity gain could do wonders for Royal Mail.  Despite a lot of new and very effective technology the Post Office has militant unions and still struggles to move its productivity.  You might argue that price increases are done reluctantly, but with almost a monopoly on post most people have little choice but to pay the higher prices.  Sadly, this year I did receive many more e Christmas Cards than ever before.

So where am I going with this?  A simple message – in any competitive world if margins are declining, productivity improvement should be the first resort not price rises!  Sometimes they are inevitable – when a commodity price increases there is little or nothing you can do.  But generally a productivity gain will last, whereas a price rise usually has a limited impact and will often reduce volume!


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