How Much Is Too Much?
Do you have a crystal ball to predict the future? I don’t….but I wish I did. Can you guess how much your house will be worth in 3-5 years? How about your salary….How much money will you be making in 3-5 years? No one knows, but we can make an educated guess.
To make that educated guess, we look at history. How much of a salary increase you received at your annual review the last 1-3 years and estimate that percentage, year over year, moving forward. Look at home values the last few years. Do you see a trend? Forecast accordingly.
As a business owner, you do the same thing when quoting for future services. You can’t really know how much you will charge for something 3-5 years from now, but you can make an educated guess. Or you can agree to a maximum year over year increase and then commit to lock in rates at 6-12 months prior.
But how much is too much? When a company proposes an increase with no history to back it up. When it is obvious that the business owner is taking advantage and being greedy.
For example, in the meetings / convention industry, hotel room rates are currently rising 4% – 6% year over year. For a group looking to book a hotel in 2018, it would be fair to take the current room rates for the corresponding dates in 2015 and contract for the CURRENT rate with a cap of 6% year over year increase to 2018. The increase may be less if the economy does not continue to grow. It is possible that the rate will increase only 2% year over year. But the 6% is a fair increase that can be backed up with current performance history.
The same holds true for food and beverage costs. The profit margin on food and beverage is much less than it is on rooms. Other factors such as cost of water and electricity and labor affect food costs too for a business. But again, the year over year increase needs to have historical backup to justify the increase. A 30% increase, year over year is not only unrealistic but insulting to the client. When a business tries to get this kind of increase they are at risk of not only losing that particular client, but they are also harming their reputation.
So how much is too much? If you can’t justify the increase with historical data, it is too much.