It's my pleasure, it truly is. For those that don't know, I've been fortunate enough to count Jim as a friend and mentor for over 10 years now. And I've learned an incredible amount from him. So Jim, I know your story very well. And I suspect many of our listeners do. However, for those that don't, maybe it would make sense for us to just kind of set the table and set the context and have you share with our listeners, your entrepreneurial story, and you can take that in any direction that you'd like.
Well, Steve, the question was interesting, because initially, after while I was in college, I joined a startup. And I worked there for six years, both during college and after college, and concluded when I applied for my MBA that I never wanted to go back to the startup entrepreneurial, crazy world. And after graduating from HBS, went to work for the General Electric Company thinking that this is where I want to be, I want to be in big companies. Fortunately, GE gave me some opportunities to run small, medium sized sized businesses, and I felt pretty entrepreneurial. And as time went on, I concluded, I really rather be running a single small business than working for a big company. So the entrepreneurial bug kind of came and went, and it was exciting to see that I'm a mid career self funded searcher. Six years after getting my MBA, I searched with a partner for about six or eight months, and the deal fell apart.It was a great learning lesson for me, and decided I'd do it eventually.
Indeed, four years later, launched a 10 and a half months search and successfully acquired an aluminum manufacturing company in the Boston area. It was a $2 million transaction, there were no investors, I invested $100,000 in cash, the seller put in 65% of the seller note and the rest was financed by a bank. And 21 Light Years later, I sold it to a private equity firm, firm, and enjoyed during those 20 years a long term hold, great results. $4 million revenue business that I bought, ended up having 35 million when I sold it. And it was a great exit for me, and shared some of it with the employees at the end. And after selling the business did nothing for a year, decided to join HBs as a as a professor did that for three years. And now spend a lot of my time giving back to the communities or writing blogs or mentoring or investing in the various search models. So happy to use some of that experience, as we talk a little bit about my my favorite topic, which is pricing.
Well, 20 years running a business and growing it by many multiples as you just articulated, we all have a lot to learn from you. Before we dive into kind of the topic du jour, I want to talk about the failed transaction, and the several years that elapsed before you successfully consummated the deal that you did and bought the company that you ended up running for 20 plus yours. Maybe just likely because this is likely to resonate with a lot of our listeners, a failed deal, especially one that kind of falls apart in the late stages is quite a heartbreaker. And not a lot of people understand just how emotionally difficult that can be. Especially when you start to picture yourself running that business. So can you just walk us through maybe how or why that deal fell through, and how you were able to manage the emotional impact that that surely had on you.
It was devastating. I remember my partner calling me up and saying, in three weeks, we're going to close Jim, and I've made a decision not to do this, I'm going to go off to Texas and take a job as the CEO of a of a multibillion dollar company. And I don't think you're going to be able to do this on your own. But I wanted to tell you, and I'm sorry, I didn't do it sooner. So I was facing not only giving up the goal of being the general manager of the business in Vermont, that was the plastic injection molding business. I knew I was going to park. I knew what I was going to be doing on the first day in the first year in the first five years. It was exciting to me to be an owner. And it just fallen all apart. I learned that probably a great lesson but I wasn't a partnering kind of guy. So really understand, didn't really understand what my partner's objectives were and didn't talk enough and loud about it.
But it was also very centering to me. I knew I wanted to do it. I've learned some great skills about negotiating and doing the due diligence and outreaching to to sellers. So when I restarted it again, four years later, I was very well equipped. So I'm have failed to find searcher who, who eventually succeeded at it. But the learning was was important to me don't have a partner in my case it would that made sense, live locally to where I was going to be looking for a business, have enough cash to be able to afford to buy it and to do the search. So I felt those levels of comfort that were there. We moved my wife and I from the Midwest to the east coast to be where we wanted to be picked a zip code that was important for us to live at. So really got our life in order so that we were really ready to do that. That second search, which was successful.
I mean, part of the heartbreak that is almost inevitable for entrepreneurs and CEOs, that almost no external observer, witnesses or pays attention to or is even aware of. So really amazing that you were able to bounce back from that. Now, what what we're here to talk about today, Jim, is the realities of running businesses in inflationary environments, something that you have a lot of experience in certainly as an investor, but as an operator, as a CEO, yourself. So just again, to set the context for the listeners, what was happening, you know, when you were running your company in a high inflation environment, just kind of set the picture for us? What was happening from a macroeconomic standpoint? How bad was it from an inflation standpoint? How long did it last? Just kind of set the table for us if you can.
So I'll go back to running an SME inflationary times. I was working for GE at the time, I was in Virginia, selling products to the coal mines. Inflation was at a 10 to 15% range at the end of the 1970s. And I was a fresh young MBA, trying to run a business and not really understanding kind of what inflation meant, and had a division executive fly in, the executive jet to a little small town in Bristol, Virginia, and do a business review. And one of the things he asked at the time was, what's your what's your plan for pricing increases, and I said, I'm very worried about this, we could lose some customers, I'm going to try a 5% price increase and see how it works. And he says, it should be double that. And I want to know what the results are in three months. I said, I'm really uncomfortable with that, we could really lose some business. And salespeople are telling me this is the wrong thing to do. And I think we can try to keep ahead of it with our cost structure and efficiencies.
He said, I want you to do it, report back to me in three months, and tell me how it went, took off in the plane. And that was it. Three months later, after I implemented a 10% price increase. I called him and said 9.95% of it worked. How did you know that they would be successful when I wasn't sure. And he said to me, Jim, you know, when you're 1000 miles away from a business, not there in it like you are, it's a lot easier to raise your prices. So the truth, the lesson was kind of look, you got to be ahead of this and you got to work at it. And it might take some external push besides your employees or your CFO or customers or your vendors to make you do it. So it was kind of a great lesson on somebody else's nickel. And he was right. And that was my experience with with high inflationary times in my own business. Those lessons were ingrained in me. So when prices began to go up or inflation began to happen again, in the after the.com bubble around that time, there was some additional inflationary pressures. I was ahead of it and knew what to do.
You know, I've noticed as I've transitioned from CEO to investor, the truth of what you just said, which is to say that when you are an inch above the ground, so to speak as a CEO, often you are just too close and too emotionally attached to the day to day to see certain things clearly. Now as an investor who has some distance, so to speak between myself in the business. What seemed like very obvious decisions to me are much less obvious to the entrepreneurs in question. And the same was true when I was running my business. When we Jim were talking about price increases, and I had similar worries to you. But again, as someone who not only has experience but also distance, you are able to just see things much more clearly than I was able to, patially by virtue of the simple fact that you were just further away from the day to day than I was.
Yep. Makes a big difference. When you're right there. It's much more personal. And, you know, if you're the the one there, no one's kind of watching over your shoulder making sure that that happens. That division manager is not there. So we're coming in.
Do you recall what your costs were doing? So you said 10 to 15%, inflation, which is pretty darn high. We're recording this in June 2022. I think the most recent read was somewhere in the eight to 9% neighborhood. Do you recall what your costs were doing at the time? And did that have any impact on the price increases that you've decided to pass through to your customers?
So Steve, there's always a lag, you know, when these times happened, you read the paper every day, and you see little leading indicators that prices are going up, our costs indeed began to go up. We weren't sure how long it would last. So you hoped that they would level off and go back down, you hoped that the increase from your metals vendor was was going to turn them around, and they will go back down to a month later. And that lag exists. You know, your accounting system is not telling you all of the truth about what's happening that uses generally standard costs, the standard costs are set at the beginning of the year. So you have to dig in and find the price variations from your purchases, they don't get recorded immediately, they get recorded, kind of as the invoices get paid, built into the system.
And initially, I had a rule of you know, things were going bad over a three month period, in terms of profitability, I'd take some action. But I learned pretty quickly that when costs were going up, I needed to take action sooner. And the old fallback of well maybe I'll go get more volume to cover the margin that's been lost, because of the margin percentages being eroded. Volume just takes much longer to deal with price of it, cost efficiencies, or another opportunity to improve margins. That's a hope, also, not necessarily the best strategy, they take a long time. So the only thing you're left with is going back to your customers and attempting to pass those costs along. And if the lag is set in too long, it's dangerous.
What as you look back on your time, both at GE and in your aluminum extrusion business. What are some of the biggest mistakes you made? Or maybe the regrets that you have specific to managing the in the company or shepherding the company through a high inflation environment? What would you do differently if you could do it all over again?
So the first thing that happens when you see these inflationary spikes, is your employees start coming to you and saying I bid on the street and get more money? What are you going to do for me? What's my I'm paying more money for gas, I'm paying more money for groceries? How can you address this with me? When I was at GE was a little different. There was a structure that I could fall on with aluminum business. I didn't have those procedures in place. I didn't have a an annual review program where we could talk to employees on a annual basis about wage adjustments. I didn't have the compensation studies that prove that things were in place. So the mistakes I made was reacting to Joe who showed up and was the most verbal kind of requester. Because I was worried that Joe would leave. And you know, this wasn't GA anymore. Why were these people still working for me as a small, medium sized company?
And why did they even to come to work? Was I going to be a hold on to them if there is their wages weren't weren't accurate? So I regret that I hadn't put the procedures in place for wage adjustments that I could turn to employees and say, look, let's wait. Next February, we're going to have a wage review, we'll have done the market basket review. And there'll be an adjustment for everyone based at that time. So just hang in there. But I reacted more immediately and got into trouble with employees who felt that they didn't ask and consequently weren't making things happen. Second mistake was finally getting around to raising prices, but not raising them high enough. And having to make a very difficult decision to go do it again. And then waiting too long for the second time. So not only waiting too long the first time but also not raising them high enough. And having to be embarrassed going back to my customers and and saying I have to do this again.
The third mistake I made was I wasn't strong enough with my vendors to say just no, I won't accept this price increase now and begin to look around and trade them off. Because what I discovered was, some of them were prepared for that negotiation element and would offer something up about half of the increase now and half of it six months from now. And I'd say, well, that's interesting, how about a quarter of it now, and a quarter of a year from now? And I wasn't kind of attuned to pushing back on some of those those increases that came our way. And learned a lot from that, because I was going to be in the same boat with my customers who might be saying the same thing to hear what our vendors were saying to us at the time.
You know, the first thing that you said really resonated with me, which is being too reactive to employee requests. I found that, you know, I did the same thing naturally, I don't have nearly as many years of experiences as you do with respect to operating, but that your comment resonated with me. And I made the same mistake many times. And I think what I failed to appreciate at the time was, if employee A or employee B came into my office and asked for a raise, and I was fearful of them leaving, I would give them the raise. And I would kind of comfort myself by saying, well, you know, this is confidential, no one will find out. But of course, in 100% of the cases, everybody found out, there's just a way that information like this tends to work itself through the grapevine. And what one employee gets, every other employee comes to expect, at least in my experience.
Yes. And it's not a fair and equitable system for your employees, they shouldn't have to beg you for a raise, you should be able to take care of them ahead of time. And those systems are available, but they're easy not to implement in the early stages of, of ownership of your own company, there's a lot of things going on, and kind of getting the handbook squared away and getting those levels of signed and wage structure assigned. So people know how much they're going to be paid, how to get ahead, how to get a raise, what happens when they top out? What happens if they get a promotion, and it's to a lesser, kind of responsible job? Those things are important to them to have in place.
Now, you said that, eventually, you've benefited from leaning on procedures and policies as it relates to wages and specifically increases to wages. Once you had that, you know, eventually, once you had that infrastructure in place, did you find like, did it work? Was it effective?
It was amazingly effective. I had seen it at GE work, I didn't think I was big enough to put it together. But I went to the local state funded kind of resource services for small medium sized companies and said, I need some help with this. And they said, oh, there's that guy over there does this all the time for company, so we'll help you with the levels that needed to be in place, the quartiles about how you move up through the the entire levels of wage base, the wage ceiling, all those worked effectively for me. Job descriptions had to be written, they had to be kind of judged. And then we would go out for every two years on annual, a review of our wage structure in a competitive arena. And I used to have a discussion with the employees, at least once a year, about being a fireman. My supervisors would just go crazy, because I would say, look, our company is not going to be able to pay you the same wage that they get going down the street and becoming joining the fire station, you can get paid more money there. And if we want a lot to be paid more money, you should go be a fire person, do that, it's okay with me. But here's what our structure is our benefits are better than average, our wages might be a little lower. And this is a great place to work. And so I learned the narrative to kind of let employees understand what our objectives were as a as a company.
So we've talked about pricing a few times. So that's where I want to go next. At the risk of asking too general of a question. I mean, at a high level, how should entrepreneurs think about pricing their products or service in an inflationary environment? And is your view on this colored at all by situations in which the input costs actually aren't rising by all that much, so it's more of a opportunistic price increase than it is a necessary price increase?
Yeah, there's a challenge around our kind of thinking about Amazon and Walmart's kind of everyday pricing kinds of mode where, you know, many companies are really focused on best pricing. And my general philosophy in medium small sized businesses that you want the customers that will recognize the value that you offer, and their willingness to pay is high, and willingness to see that you're offering value to them, and their ability to pay it is because of their competitive arena is high. I'd much rather have five medium size customers than one big customer who's only focused on cost. So you can get easily trapped in running your business that you can grow it with revenue, but I'd rather grow my businesses, the business that I was in to be profitable first and then to be growing fast. So it was more important for me to look at that.
And during non inflationary times, it's kind of easy to kind of sit back and say, oh, gosh, I don't have to go through the annual price review. But I disagree with that. I know, everybody has a birthday. And once here, they have a birthday. So once a year doing something, coming to your customers and saying we're doing an annual review, we've looked at our costs, we've looked at our our business and feel that this year, our pricing will have to go up, is a good discipline to have in your company, regardless of what's going on with the costs. Because your pricing is really about their willingness to pay, and recognize your value. And strictly a cost measure.
That's a great way to put it. It's not necessarily cost plus its value created and value captured by your pricing. But how does pricing power, kind of figure into this, if at all. So for example, when you were counseling me about raising my prices, I don't want to say it was easier to say that, but maybe in some ways it was I mean, we sold a software product that represented a small percentage of our customers expenses, but was very material and important to their day to day operations, which is all to suggest that they were pretty willing to pay those price increases. What about the complete opposite end of the spectrum? So I'm thinking of like a commodity business, where it's very much a price driven decision. And they basically make their profit on volume, not on, you know, unit economics or high margins per unit. If you're in that type of business, does that color your view on price increases in inflationary environments at all? Or is your advice more or less across the board?
When it comes to pricing, Steve, nothing should be across the board. I mean, that's a great lesson to learn, it's much easier to do these things across the board, 10% increase across the board, everybody gets it's going to be painful, we're going to have to do it. I think that every customer is different. And if you're in a commodity oriented business, there are even still customers that are different than other customers, don't just the first test is kind of who's doing the buying, what kind of person who's in those buying roles, will are they the stars of their company's business. And you're the kind of most attention that you're going to get from that customer is because you're the highest cost component. Generally, that's not the case, generally, those buyers are moving on. Now, every time a buyer changes is a great time to come in and say sorry, your price is going up. Now, that's perhaps not a common strategy. And your customers don't want to hear that that's what you do. But think about each customer as a different customer. Think about the product that you're providing them in a different way. And that willingness to pay, I think is very important in kind of measuring that.
So what I'm hearing is that if you had let's say, I'll just make up numbers 100 customers, you probably wouldn't, you know, pass through a 10% price increase to 100 customers. Instead, you'd look at each of them and say okay, well this customer is gonna get 10, this customer is gonna get two, this customers gonna get five, etc. When you looked at your customer base, what types of things did you consider when deciding, hey, this is a 10% price increase customer, but this one's actually only a 5% price increase customer like, what how did you differentiate? You know, what type of customer fell into which bucket?
So we looked, we did the 80/20 rule. I mean, first of all, we looked at the top 20% of our customers and said which ones of these kind of have different profiles and attempted to profile either how hard it was to do the quotes. So non cost related things, the returns, the amount of negotiation that we had, the difficulty we had with our customer, ordering people, their ability to give us good forecasts, their ability to work with us on demand, that they would see coming down the line. Their future business with us, their requests for profit opportunities that we would see, so a customer was forever falling behind in their ordering and requesting on quick delivery. We soon decided that we would charge an expedite Adding fee for that, and that they would be willing to pay, and they're willing to pay on an expedited charge was amazingly flexible. So we would charge them for those kinds of activities. So we looked at a range of opportunities across the customers to make them differentiated from each other.
And then we turned to our class system that was kind of putting out standard costs for some of these items. And we would on the side, because we're only looking at the top 20% of our customers that yielded the more significant part of our revenue and profitability, we would look at what the costing was. And we'd start with the basis that the cost system had and then throw the rest of it out. Okay, now we're going to kind of put factors in or adders in how many steps does this process have? How much returns to the customer actually do? How difficult is it to work with their buyers, and we put factors against those things so that we then add a matrix of those customer profiles. And Steve, I will never advocate doing a 5%, a 2%, or 10% price increase, used, no one should ever tell the customer that their price is going up 10%, it should always be 9.37 or 11.65. You want them to understand that you didn't just pull this number out of the air, you worked hard not to make it 15%. But instead you polished your numbers again, to rework it back to 14.3%.
So interesting. So in terms of let's talk more about magnitude, because it might be apparent to a lot of CEOs listening to this right now that, hey, we've got to increase prices. But the trainee figure out well, by how much? How should entrepreneurs think about the magnitude of the price increase? So for example, should it be a 5% increase? Or 50%? Increase? Should it be two or 10? Or, you know, to use your structure instead of two, it's 1.84, instead of 10? It's 9.87. I mean, just just how did you think through the magnitude of the price increase that you either could or should have passed through? And how should CEOs think about that?
Now, Steve, it's a great question because the tendency, the CEOs that I work with in the investments that I've had, and the new searchers that I see sitting in the CEO role for the first time, is make it small, don't be embarrassed to kind of go in with a big number. I totally disagree, go with a big number, and go with a story. I mean, that the story is almost more important than the number, because you want to be able to tell them, here's the number for now, 13.3%, there's probably going to be another one in another six months, or maybe shorter four months, because we're not sure if this is going to be the conditions, the market conditions may change. Here's why we did it. Here are the costs, the story, the narrative about this process of which costs are being impacted and kind of related to their business, you've seen it in your business selling, you know, products to the coal mines, or whatever your your end product is. Then you want to highlight your other narrative, which are the reasons they should be buying for you that are willingness to pay, your delivery responsiveness, your ability to quote quickly, your ability to turn around product when they need to really fast, your ability to provide good quality and look at your track record for that.
But that story can start with a higher number. And then in four months, you can come back and say I said that we're gonna have another increase, and it's going to be less this time than I predicted. And so your your annual change you've already predicated on the last time you had the 13.3% increase. So build a narrative. Start with a high number. CEOs tell me tell my measure of how to do price increase to do well, we didn't have any push back, then it was not high enough. And no matter how hard I work with with CEOs on this, it takes a couple of rounds of this self confidence that your customers aren't going to leave. You want to have the ability to have a last look. And generally if you've either done it with personal engagement, then you're kind of in front of the customer with a picture of your kid saying we still got to eat, my kids are on the line here. This is my business now, it's really important. There's an emotional appeal to the to the buyer who's sitting across the table saying okay, we expected 15%. But 13 is better, thanks.
Almost anchoring a number in their head, which is really interesting strategy. Let's talk a little bit about costs, because we've talked about that quite a bit thus far. And I remember you coaching me on understanding my own unit costs. And of course, in my case, I was selling software. So it's not as if I was, you know, building something for $1 of material costs and selling it for $2. It was a bit more nebulous than that. I guess at a general level, though. And this has a direct increase, or pardon me a direct relationship to pricing. In your experience, both as a CEO and as an investor, what do a lot of CEOs get wrong about understanding their own unit costs?
They believe the numbers that are presented to them, accounting systems are kind of estimates at one year at a time on a standard cost basis, trying to apply overhead and burden which is called burden and to either a labor rate or a machine, right. And it's not going to be accurate, it's not going to be right. And the expectation that the numbers that you're getting out of your accounting system are the correct numbers is a falsehood and you got to have your own kind of side capability to to make that happen. I read a great book that's somewhat boring, but written by Jonathan Brines, Islands of Profit in a Sea of Red Ink. He says that 40% of revenues are unprofitable. And 30% of the revenues cover all the rest of those losses, you've got to distinguish which ones those are. And if you do the unit costs, kind of review, in the same way that I talked about it earlier, which is kind of layering in the pluses and minuses of how the particular unit cost for this customer works, or that particular product line works, you'll better have a better understanding of where you're not making as much margin where you are making good margin.
How you got into those situations, generally, you find low margin, pricing, or low margin products in the Unit Cost Assessment came from a story. Oh, yeah, there was a competitor five years ago that was trying to beat us up, we never were able to recover it back. So instead of going back and getting a 31%, price increase, it kind of moved up with 5% a year or 10% a year and got worse and worse. And you those stories become pretty illuminating, you can make some changes to the practices of what you're doing with those customers. perfect is the enemy of good doesn't have to be perfect. But it can be a model that you're using on the side to make sure that, that happens.
First of all, I love that book title, whoever named that book should get some sort of award. But so 40% of revenues are unprofitable, on average, that is a surprisingly high number to me, was that the experience that you had, you know, when when going through your various rounds of price increases over the years? Or did you eventually kind of if I can use this word, whittle your customer base down to the point that far less than 40% ultimately turned out to be unprofitable?
Steve, when you take over a company as a searcher, you don't want to rock the boat too much, you need that revenue to deliver the similar levels of profitability that you've had over the years. So it might take a while before in my case, it was like five years. And over those five years, we selectively fired customers, we fired them by raising their prices significantly. And when they didn't go away, we're now making them profitable, much more profitable then we did in the past. And it felt good to make that happen. But we did it as our volume increased in new business. And we've replaced the old business that wasn't as profitable in a different way. And it's much harder in the in the software business to look at some of these cost based kinds of premises when your soft, costs are more difficult to assess.
But what's unique about price increases is that, you know, specifically in an environment, like we find ourselves in, we've got a war, we've got inflation, we've got the stock market, you know, low losing significant amounts of value there. I mean, if we're not already in a recession, then there's a very real possibility that we will be, so similar to March and April 2020, when there was a lot of belt tightening and CEOs are trying to figure out, you know, how do I get more cash on my balance sheet? How do I get more liquidity? If you look at all the levers that a CEO can pull, right? They can slow down their payables, they can speed up their receivables collections, they can buy less inventory, maybe they can try to sell more in terms of volume. What differentiates price increases from all of those levers is that it's instantaneous. So it's way faster. It's the fastest lever that I can think of. And it also falls straight to your bottom line, which none of the other ones that I just mentioned do.
Absolutely right. It. However, let me say this, it's the CEOs responsibility to implement it. And no one in your chain of command is going to be coming to you saying, hey, Steve, we want you to raise prices, it'll feel good to us if you raise prices now, we can go implement that for you. In general, the salespeople are looking for lower prices to get kind of into a competitive situation and provide value to the customer by saying, We can do it by price. Your CFO might be pushing you a little bit, but worried about next month's volume, you're gonna have to make these decisions on your own. And you're right, it's the easiest one to impact the bottom line. And if you do the math about kind of, depending on what your margin level is, how much business you could afford to lose, and still be ahead of the game with a price increase, it gives you some comfort that it's worth the risk of losing some customers along the way. And as I said before, it's your job as CEO to say, we're going to do this and I'm not going to blame or fire anybody, if they get it wrong. If we do lose a customer, it's my fault. And everybody takes a deep breath and says, Yeah, you sure? Yep. You've been telling us about getting more volume. Yes. But in this case, if we lose some volume, but the margins improve, we need that drop to the bottom line. More importantly, than we need more volume.
You know, you hit on a really interesting point. Because I want to ask you about communication. So I'll ask you kind of a two part question. And please be as tactical as you can be. So the first question is, you know, tactically speaking, how should CEOs actually communicate price increases to customers? I mean, are we calling them individually? Are we sending an email? Are we writing them a physical letter? Are we giving a bunch of explanation or kind of a high level explanation? So kind of as technical as you can think of, but your most recent answer sparked a different question, which is, how do you communicate it to employees? Because the reason why that question came to mind is because when I proposed my first price increase, you know, maybe within my first year or so, as a CEO, my employees acted as if the sky was falling. That this is going to cripple the business, you know, we're gonna go out of business tomorrow, etc. They were very, very fearful. So I probably didn't do a good enough job of communicating it. So maybe if you could talk to communication, both to customers and to employees.
Yeah, I used to have monthly meetings with all employees, so I could tell them what was going on in the business. And as we saw these inflationary periods coming at us, I would explain that we have to extract more pricing from our customers, and that's going to be important. The frontline of customer interfacing employees, the customer service reps are the salespeople, maybe your sales managers, maybe it's the people in quality, or the service people that are out there are the ones who every day, try to do a good job for their customers. I mean, I don't know how many times I heard kind of a customer service person get off the phone and say, yes, I think I'll try to do better for you. Let me see what I can get to make this happen. Either a better delivery, or a better price, in some cases are better terms of some time. And I would have to say, look, remember, the profitability of our company is dependent on your first line response to a customer. And your obligation is to the company, not to the customer.
So Steve, one of the general mindsets, that has to be changed in the beginning, takes a while, took us a couple of years before our customer facing employees were talking to customers. To give them some narratives to talk about why it was important for us to pass on those cost increases. So they needed, they can't be just told, increase the price for this customer 8.4%. They need to have a narrative. Because our energy costs have gone down to X. Our fuel costs have gone up, the electricity that we use to run the extrusion press has gone up. Our raw materials have changed. So give them the narrative around costs. The second narrative that always has to be kind of at the same time is the narrative about value. So the willingness to pay factor, what are the elements that customers need to be reminded about our value proposition? Whether it's delivery, whether it's a good quality system, whether it's ISO certification, those kinds of details should be included in that narrative.
If you don't have customers that you can kind of either write a letter to or are big enough, the CEO needs to go there, needs to an 80/20 analysis on, who's going to make this call with the salesperson for this particular customer. Maybe in person, maybe over the phone, maybe it again, as I talked before, it should be different for each customer, and each category of customer. So those are the kinds of tricks and make it personal. Doesn't hurt to be the one who carries the water on a price increase to your biggest customer, this is really difficult for me, we waited as long as we could, continue with the narrative doesn't look like we'll have to do it till six months from now. But it could be shorter, it may be an additional 15%. So get them focused on on the future. So they can do some planning. And then surprise them when you change your mind. And it's somewhat less and a little bit longer period of time.
You know, when I did my first price increase, we had somewhere in the neighborhood of maybe 350 customers at the time, something like that. And I remember writing the letter. So what I did is I wrote a letter, and I included it, I sent it to every customer signed by me with my own personal cell phone number, invited them to reach out to me at anytime. And I remember agonizing over this letter, I spent an embarrassing amount of time wordsmithing it, I agonized over, you know, do I put this into I put that in? When I finally hit send, I was expecting to receive an avalanche of problems and issues and questions. And to my surprise of 350 or so customers, probably fewer than five reached out to me. And in fact, most customers didn't even notice it. They just kind of paid the invoice.
And they didn't necessarily realize that was for example, $5 higher than the last invoice they paid. So to your point, probably means I didn't raise it high enough. In fact, it's very evident that it didn't raise it high enough. But I think the number one reason why I mean, you tell me, I suspect the number one reason why CEOs don't raise them fast enough or high enough, his fear of losing customers. So what do you say to those CEOs? I think what I've heard you say is, hey, maybe it's the unprofitable customers who are going to leave, which is not the worst thing in the world. Any lost profit from the few customers that leave might be funded by the higher profit that you'll get from the customers that actually paid. Is there anything else that you would say to CEOs who are fearful of losing customers as a result of a price increase?
Yes, make sure you get the last look. So in general, customers don't want to change vendors know they have a relationship they have they know how things get paid, it's a pain in the neck, they gotta put in a new vendor, it's a risk for them. So you want to make sure that there's a little out somewhere where if you do have a problem with this, don't hesitate to call me, or that your salespeople or your customers facing people are asking some questions around. Are you looking at competition or not. And of course, this is a negotiation. Searchers in general, and CEOs in general, nobody likes negotiating. This is not a lot of fun to do all this. But you want to make sure that your price increase has enough wiggle room in it for a slight improvement for your customer if they push back. Another technique that works well is look at your purchasing or procurement department and have them save all of the letters that are coming in asking for and requesting a price increase on the products that you're buying, or the services that you're using.
Because they've spent some amount of time they've got some good answers to steal from, so copy shamelessly from what other people have spent. You know, you said you spent hours over that that initial outreach to your customers. Well, let's hope that somebody else looked at that and said, This is awesome. I'm going to modify it for us and use it in that way for us. But I think you're right, the fear and lack of confidence can be overcome with some experience with some successes at it. And you don't have to do all your price increases at once. You can test this, many of us are customers that don't talk to each other. There's not a published price list. Try it with a small quarter of them and see what happens and make your adjustments to well then I should try it a little bit higher on the next quarter and do it over a four week period and give yourself the confidence and prove out with AB testing. The final thing I'd say is it. Interestingly enough, artificial intelligence can help with this.
There are some products available for companies that do a lot of pricing with a variety of different customers, that allow you to put in those variables about the size of the order, the size of the customer, the relative to demand that the customer has the kind of product that they buy the value added services that are attracted to. And you can automate some of these things by putting in the customer's name, what they want to buy, and it spits out an answer for you. And all those variables that were in the back of your mind, or that you put together in your cost analysis can be built into those projects. So they're worth looking at. And at the end of the podcast, I'll give you the name of one particular company that I think does a pretty good job with this. If you're in a business that has a lot of products that you're trying to price.
I love the idea of testing it. So in a customer base of 500, test it on some small percentage and just see what happens. I think CEOs, including me, regularly underestimate how powerful testing can be. It's a it's a it's a proxy for experience, right? It's a way to give yourself experience really quickly. And the other thing that that you said that really resonated with me is like you don't have to do this all at once, which is to say, you know, if you're regularly, let's say you run a business for 10 years, right? Again, I'm just kind of making this number up, and you raise prices by a very palatable amount each year, let's call that four to 5% Every year, well, eventually, each of those 5% price increases will start compounding on the previous 5% price increases. And before you know it, at the end of 10 years, the margin that you're getting from that same group of you know, 300 customers, or whatever it is, is exponentially higher than it used to be because of the power of compounding.
Right. And you want the most profitable customers, you don't want the least profitable customers. And that should be one of your focuses, you don't want all the businesses out there, you want the most profitable business with customers who are willing to pay you a number of in their pricing that makes you more profitable. And you can do lots of things with those profits, go hire more engineers, you can hire more people, you can, you know, use it internally to develop new products. And this is not something you should be embarrassed about, or feared. It makes life easier. When we had profitable customers, we felt good about it.
As we begin to wrap here, Jim, I want to talk about the opposite side of a price increase, which I presume many CEOs are dealing with this right now, which is they are receiving price increases from their vendors. And you talked about this a little bit at the beginning of our conversation today. What are some lessons that you've learned or experiences that you can share as it relates to being the recipient of price increases?
The first is prepare to negotiate. And our business is about negotiating search is all about negotiating all those sellers that you talked to the whole range of what are you anchoring at what are you listening to, make the first offer. So when some of your vendors come in, first categorize them 80/20, don't be spending the time on the little ones that are going to sell you ballpoint pens and the price is going up. Look at the cost of from the various service providers that you have that makes sense for you to be engaged in and do some pushing back. Give them a target, we'd prefer to see this number and make them kind of react to your number as opposed to their number. Talk to them about will this come back down? What elements of this cost increase will be adjusted when we're out of the inflationary numbers? When the price of gasoline comes down, will you come back to me with a cost reduction?
Oh, is that an embarrassing one? Because I was in the aluminum business, we learned never to talk about the cost of aluminum in any basic dollars and cents. Because we didn't want to have to come back when the aluminum price went down and say your your costs are are pegged to that number. Try to avoid that would be a tactic. But you want to make sure that when you're talking to your vendors, you are listening to their narrative, you're listening to them say, Well, what if we can we extend our terms to you, can we start to take a bigger discount, or there's some other things on the table that can help us understand how to cost this biggest one you could ask for is a discount to pay in seven days. Your accounting system can handle that and you can say if we pay early, can we take a 5% discount for this? And there are some companies that are so cash strapped that all right. We'll give you the price increase and you'll take it but we'll give you a 5% discount to collect cash sooner.
Maybe to different parts of their accounting department or talking to them about this and their measures hearing it in a different way. So the most important thing thing, Steve, I think you can take away from this is be prepared to negotiate and push back a little bit, delay it, ask, Can I have it next June? Instead of? If it's January, can I get six more months? Can I buy product in advance, and you know you're own cash position, doesn't make sense to put some of that raw material or product on your shelves for the six months and protect it with pricing now. Don't go to your own customers and say, Look, we have a six month holiday because I was able to keep prices the same on all our raw materials. No, you want to make profitability on your on your scope be important for you. So there are a number of things I think you can do with your vendors to to make sure that they know they're going to have to kind of get some pushback from you, if you if they're going to be raising your costs as time goes on.
That's great, a lot of levers that that CEOs can pull. The other thing that comes to mind, from my own experience, not related to inflation. But I guess related to macroeconomic uncertainty, in my case, the beginning of the COVID 19 pandemic. You know, not all vendors are created equally, which is to say that negotiating leverage, if you will, differs across vendors. So in our case, as a software company, basically, our operating expenses were really simple it was payroll and rent, right? Those are the basically the two major APICs categories, everything else was very small, as it relates to rent. I mean, this sounds very obvious in retrospect. But we quickly learned that one lever that we could pull. In the early days of the pandemic, when everyone was very, very uncertain about what was going to happen is we would just stop paying our landlord.
And the reason why is because if you think about it from a landlord's perspective, and I don't mean to be flippant, but it would be incredibly disruptive, incredibly time consuming, and incredibly expensive for that landlord to kick you out and try to get a new tenant in there. So it is very much in their best interest to keep you, which is all to say that as a tenant, you might have a bit more negotiating leverage, than perhaps you appreciate with your landlord, not that I suggest that you become cavalier with your rent payments. But to the extent that you really need to pull a lever to manage liquidity, for example, a landlord comes to mind, as in certain situations, a vendor over whom CEOs may have more leverage than they might appreciate.
Steve, you're so right, I think beyond rent, you can do this with the top 20% of the cost structure in your business. And do it in a way experimentally, just stop paying for your phone bill, and see how long it takes for the vendor to tease or take action or notice or begin to tell you what the penalty is for doing that. So that if you do become in a liquidity crunch, you can know how long it's gonna take for the electric company to show up, what's the payroll service that you're using, if you don't pay them, just to know that information and to manage your liquidity if you need it. So I think that's a great practice, not just for rent, just stopping and see what happens. Yeah, and don't do it all at once and kind of just mark it down in your each vendor that you deal with, what their, what their pain point is, in terms of how much you can get away with if you need it in a liquidity crunch.
And it's amazing what happens if you just ask, like, in my experience, most people just don't ask their vendors. So you could do I mean, the exercise that you just mentioned, rank your top 20% of your vendors based on the dollar amount that you pay them, or the percentage of sales or whatever the metric is, just ask them. So you know, another vendor that came to mind was actually the accounting firm that we used. Again, this was in COVID. So rather non representative times. But we just said, Hey, you know, we've been paying you X for all the services, going forward we'd really appreciate if we could pay you Y. And you know, we'll remain a customer will continue referring new customers to you. And I'm oversimplifying a little bit here, but they basically said, Okay. If I didn't ask, I never would have gotten that. But I was surprised by the power of, you know, as simple as it sounds just asking, right?
And the leverage that you have is the more we buy from you, or the more consistently we buy from you, we expect that you're going to get some efficiency in providing that service to us. And consequently, we'd like to participate in that savings just by asking that way. I mean, it's so hard to argue back. You better be prepared when your customers are doing this to you when you're kind of negotiating for a higher price.
Yeah, yeah. Jim, is there anything else that you want to say to our listeners Is that maybe you haven't yet said or any questions or comments or thoughts that you want to leave them with?
No, this is hard. It requires some negotiation, I think the the biggest emphasis I can make is that the CEO is the one who has to lead this charge by example. And it doesn't come naturally. It's not something that kind of everybody shows up and says, I know how to do this marketing story. Or I can put the strategic plan together, I can pitch this new product easily. This is complicated and takes some effort. And there's a lot of different levers. And when you find yourself as a CEO, taking the easy route, route with pricing, you're probably making mistake. Nothing about pricing is easy. It takes care, it takes energy, it takes risk, it takes getting over your fear. But it does take practice and it gets better with practice, it is easier to do, the more experience you have understanding your customers and understanding what happened the last time. So I'll leave you with that kind of the same is true for search, search takes practice, the more you do it, the better you're off at it. And as I mentioned earlier, pricing increases is all about negotiating, developing those negotiating skills. And anytime you have an opportunity to educate yourself better about negotiating tactics and practices, you should be doing it as a CEO.
Great place to end. Jim you've made a huge difference for me personally and professionally over the past 10 years. And I consider myself lucky to call you a friend and a mentor. And I know everyone listening considers themselves lucky to have benefited from your wisdom and experience today. So thank you for being generous with your time and thank you for sharing your insights with us.
Steve, it always feels great for me to be able to get back to this community. It made such a significant impact on my career and my life and my business, my family. My ability to kind of share some experiences like this through these podcasts or blogs, or one on one is very fulfilling to me and it means a lot that you asked me to do this. Thank you again.
