Price increases are a needed, and sometimes unpleasant action that companies must take. When you think about the price you charge for waste disposal, consider whether the service is a want or a need. Then you can evaluate when and how much to raise your prices.
By Nathan Williams
A difficult question for haulers to consider often is: How many customers will I lose if I raise my prices? It depends on how your customers respond to the price change. How can you communicate with your customers to feel out how they will respond? Let’s look at price elasticity for our answer.
Price Elasticity measures the rate of change in the price of a product or service. There are two types of Elasticity—the first is Elastic. When the prices go up P↑, then demand/consumption goes down D↓. An example of an Elastic product/service is vacations. If the price of tickets, lodging and food go up, demand will go down: P↑ D↓. This can be easily seen with how the prices of flight tickets can fluctuate drastically. A simple way to think of this is: vacations are most likely a want, not a need.
The second type, Inelastic, happens when the price goes up or down P↑↓, then demand/consumption remains the same/flat An example of an Inelastic product/service is drinking water. If the price of water to your house doubles, you will not decrease the amount of drinking water that you use. You might not water the yard, or you might take shorter showers, but you must have drinking water. When the price of drinking water goes up or down, your consumption of drinking water will remain relatively the same: P↑↓D .
Trash Service as a Need for Communities
When you think about the price you charge for waste disposal, consider whether the service is a want or a need. A roll-off to clean out a shed might have to wait until the consumer has the extra $350 to $500 to spend, and it can be delayed. This is a want. Optional recycling in communities, such as drop-off locations, is most likely a want as well. On the other hand, a person that has a can full of trash weekly, needs to have it hauled away, resulting in a need for the service. Sometimes people may spend less for trash service because they can use a smaller can or go bi-weekly or monthly, but they will still need the service.
It is important to remember that wants give you less pricing power compared to needs. Here are the numbers from research and
observation:
• With Needed trash service, you will lose 2.3/1,000 for every 1 percent price increase. A 3 percent pricing increase will lose you 6.9 customers per 1,000. This means that demand is not very responsive to price changes. This can be considered Inelastic.
• With Wanted waste disposal services (optional recycling, dumpster that can be delayed) you will lose 1.77 units of demand for every 1 percent price increase. A 3 percent price increase will lose you 5.31 units of demand out of 100 optional dumpster orders/recycling customers.
Forecasting Cashflow
The Federal Reserve measures the cost increases for Solid Waste Collection. The Consumer Price Index (CPI) can be found at https://fred.stlouisfed.org/series/PCU562111562111. The average annual rate increase for the past 18 years has been 3 percent. This measurement does not break out the different segments of the waste industry; it is a macro number. Many contracts use this Federal Reserve measurement (CPI) as a price elevator in
contracts, and the 3 percent annual increase is negotiated upfront. The reason the annual CPI elevator is included is so that the two parties do not have to renegotiate every year.
Having a price elevator is important so that a hauler can forecast future cashflow for business decisions. Example, if your customer is paying $10,000 per year for waste removal, the next year they would pay $10,300. Year 2 would be $10,609, year 3 would be $10,927, year 4 would be $11,255, year 5 would be $11,592, etc. The price elevator in a contract is a very powerful thing. Do not take it from me; listen to what Warren Buffet says: “Compounding interest is an investor’s best friend.” Compounding price elevators are just as powerful for your business.
It is important to raise prices every year because, 1) You do not want to have costs increasing and not pass on the extra expenses that you are incurring. Benefits for your employees always go up in cost, so the price of your service needs to as well, and 2) If you delay price increases, when you do have to raise prices, the increase might be shocking to your customers. People are creatures of habit and if they expect a marginal price increase every year, they will accept it (2 to 3 percent). *Note: You always want to give a “because” when having a price increase for people that inquire. It validates what you say. The “because” can be as simple as: Because costs have gone up (see Top Reasons to Tell Customers Why You Have Increased Your Prices sidebar).
Price increases are a need, and sometimes unpleasant action, that companies must take. It is always best to share the reason why you need to increase prices. If you can convey why you are increasing prices to your customers, the customer is more likely to accept your increase with little issue. Here are the top 10 reasons you need to increase your prices:
- The cost of disposal has increased, and because we want to continue to give you good service, we needed to increase the price.
- The cost of equipment has increased, and we need to raise prices to keep providing you quality services.
- The employee benefits costs for our staff have increased. It is important for us to keep good staff so we can keep giving you quality service.
- With the cost of fuel going up, we have increased our prices marginally because we did not want to add a larger fuel surcharge.
- To hire good staff, we have had to increase wages, so we increased prices because we want you to have quality service.
- We have increased wages to retain staff because we need good people to make sure that we provide quality service.
- Overall, business expenses increase year over year, and we need to pass those along to be able to keep quality staff.
- This is an expensive business, and we need to raise prices to keep up with costs. It is necessary to maintain quality services.
- The cost of containers has increased and to service our customers we have had to increase rates.
- The cost to repair and maintain trucks has increased and we must increase prices to maintain quality services.
Formula: The price of, (insert item), and because we want to provide quality, (insert item), we needed to increase the price.
You can use the formula above and move the sections around if you need too. Be honest and make it about the customer and you will have little issue with your needed price increase.
Types of Prices Increases
There are two basic price increases. The first is structural costs and the second is cyclical costs. First, structural costs are those that will go up year-over-year. Examples of structural costs that will be increased include the cost of healthcare for your employees, the replacement cost of a new truck, the computer that you use in your office and pay for your employees, and tipping fees at the landfill. These costs might seem flat for a time, but there are always marginal price increases on them over a years’ time. These costs will always trend up. These are the costs that companies like Waste Management include in that the CPI elevator in the contracts. Graph 1 shows an ever and always march of up and to the right for costs.
Cyclical costs go up and down. The easiest example is oil. These costs are harder to pass on to the end user because they can fluctuate wildly. In the U.S., oil is priced as WTI (West Texas Intermediate). The low price for oil in 2020 was $11.26 and a high of $84.65 in 2021. You can pass on these costs and Waste Management has a handy tool that you can use. Here is the document that determines what the fuel surcharge for the month will be: www.wm.com/documents/pdfs_for_FEC/Disposal%20Fuel%20Surcharge%20Table%20Upload_new%20index.pdf.
If the price of diesel is $3.00, then WM will add a surcharge of 6.15 percent on the bill. Going back to our example of the customer that pays $10,000 a year. The fuel surcharge alone will add $615 to the bill. As the price of diesel goes up, so does the surcharge. When the price goes down, so does the surcharge (see Graph 2).
Many businesspeople do not want to pass on the additional charges for expenses like diesel that can go up and down. I understand that a businessperson might feel uneasy, but what are your options? Do you want to lower your employee’s healthcare plan, run tires longer, or not have a profitable business to offset the costs?
Takeaways
Key take away: If they Need your service, they will pay for it. If it is an optional service, you will find some price sensitivity. If you look at the product mix of a Waste Management, Waste Connections or Republic, you will see that they focus on the Needs in a community for a reason This is pricing power.
Waste companies that focus on businesses that have a constant demand for ongoing service will always have customers to pay for services. When we think about the pandemic, we can see what businesses had to do in order to stay operating. These are the businesses that need to have someone pick up their waste. It is not optional for hospitals, pharmacies or grocery stores to shut down. Those are only a few examples of a long list. These customers will accept the needed rate increases to have service. The most financially sound waste companies have most of their customer mix in reliable, reoccurring lines of business, i.e., commercial waste, contracted residential services and fixed placed roll-offs.
The easiest examples of “wanted’ services would be subscription recycling. The idea of recycling is exciting for many people; some find it is the moral thing to do. At the end of the day, customers do have a choice between throwing it all in the trashcan or sorting it out and paying more. Because the customer has options, it is easier for them to reduce services when they feel the price is too high. Most of all your recycling customers will pay more, but you will have some that opt out purely on cost.
Price is only one part of the equation. If nice employees show up in a clean truck and take away the waste and your customers can easily contact and pay you, then you will have no issues raising your prices—it really is that simple. | WA
Nathan Williams is Owner of Trash Joes, offering business tools for haulers that help them get new customers, retain existing customers and get paid faster. He can be reached at (912) 428-5637, e-mail [email protected] or visit www.trashjoes.com.