If it feels like you’re not getting as much bang for your buck as you used to, you’re not alone.
High inflation erodes the purchasing power of your pocketbook.
In November, inflation increased by the largest amount in nearly 40 years, pushed by steep price hikes across many sectors of the economy, from energy to food. Compared to November of 2020, the average prices of consumer goods are now 6.8% higher.
But what exactly does this high inflation mean for the trades, and what can be done about it?
ServiceTitan analyzed the trends and boiled down the key takeaways for a typical shop owner.
First things first: what is inflation?
Put simply, inflation is the growth in prices. High inflation means that groceries, gas, rent, and other items are getting more expensive — quickly. Low inflation means that prices are growing so slowly that you may not even notice them creeping up.
For a shop owner, high inflation brings bad news on both the personal and the business fronts.
On the personal front, inflation means that each paycheck buys fewer groceries, tanks of gas, and other consumer items. That new truck you wanted to buy? It now costs 11.1% more than last year. Maybe a used truck instead? On average, an older model would cost a stunning 31.4% more than it did last year.
On the business front, inflation erodes the ability to expand operations. With high inflation, investment dollars buy less and less equipment, materials, and other essential business items. With fewer inputs to fuel growth, it’s tougher to meet goals planned out at the beginning of the year.
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High inflation means you need to grow just to stay in place
In October, a shop with 5 to 15 technicians may have averaged 18% year-over-year (YOY) revenue growth.
That’s the average top-line growth among the shops powered by ServiceTitan across the HVAC, plumbing, electrical, garage door, and water treatment businesses.
But the reality is that, during periods of high inflation, shops need more dollars just to stay afloat.
If you think about real growth as the ability to buy tangible goods and services, then not all of that 18% increase is ‘real’ because those dollars cannot buy 18% more goods and services this year. Why? Because the average prices of consumer goods increased by 6.2% in October and the prices of many producer inputs increased even faster (see Figure 1).
Figure 1. Inflation in the Economy: Year-Over-Year Growth in Consumer Price Index and Producer Price Index, January 2017 through October 2021
Notes: Producer price index reflects the index for Hardware, Plumbing and Heating Equipment and Supplies Merchant Wholesalers produced by the U.S. Bureau of Labor Statistics (BLS) and serves as a rough proxy for the input prices for the trades. Consumer price index reflects the BLS index for all urban consumers.
For example, average prices charged by wholesalers in the hardware, plumbing and heating equipment and supplies sector shot up 22.3% compared to the October of last year. That means that those power tools, HVAC units, and plumbing gear cost nearly a quarter more now than they did last year.
As a result, each additional dollar an owner invests back into his business this year buys only 78 cents worth of equipment compared to last year.
“Most business owners out there are not thinking about inflation,” says Bill Powers, a budget and planning expert and senior industry advisor at ServiceTitan. “They forget to make the distinction between inflation and real business growth, and it could make a big difference.”
So what is ‘real’ business growth? As a general rule of thumb, it can be approximated as top-line dollar growth minus the inflation rate. What complicates the matter is that different measures of inflation yield different answers.
If you measure inflation using the rise in prices for consumer goodsーthings like groceries, clothing, energy, and rentーthen for our “average” company, real business growth for October would be an 11.8% increase (18% minus 6.2% inflation). However, if you measure inflation using the rise in prices for producer inputs, then the growth was actually negative: a 4.3% decrease (18% minus 22.3% inflation).
In practice, there is no one-size-fits-all inflation index because the measure of inflation is tied to the types of goods and services those dollars would buy. Even so, when both consumer and producer prices are soaring as they are now, the overall picture is clear: the purchasing power of the dollar shrinks.
Reviewing and updating your prices has never been more important, and ServiceTitan is here to help
“These days contractors need to check their equipment and materials prices weekly because they increase so fast,” Powers says. “If you are not on an adequate software platform, it’s a nightmare to raise prices.”
Oftentimes that process tends to be manual and exceptionally time-consuming. However, for ServiceTitan users, updating prices is a lot simpler.
With ServiceTitan, contractors can increase prices of all of their equipment by a chosen percentage every week in less than an hour of work. In addition, ServiceTitan integrates with many equipment manufacturers, which offers an additional benefit. When the likes of Trane and Goodman increase their prices, automated alerts prompt owners to update their prices as well.
And with the high inflation likely to persist in the immediate future, timely price revisions can make a real difference to a shop’s bottom line.
Dr. Marina Miller is an Economist on the ServiceTitan Data Science team. She has a Ph.D. in Economics from University of California, San Diego, and extensive experience modeling the U.S. economy.