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additional comment on Using the CPI for rate increase and rate increases
June 19, 2024
additional comment on Using the CPI for rate increase and rate increases
            Thank you for printing my comment on using the CPI to determine monitoring price increases.  My comment was that customers don’t care what your costs are, the art of pricing is in determining what your customers believe is a fair amount.  I got a lot of emails from company owners who agreed with me, but a couple who think that pricing should be based upon the company’s cost.  This may shock a lot of your readers, since I am an accountant, but a markup over cost is not the magic formula for cost.  Customers don’t care about your costs.  The only time to consider markup is to make sure that you aren’t selling something at a loss.  You obviously don’t want to take a loss on a sale and “make it up with volume.”  That said, some companies do installs at a loss and make up for it with profits on monitoring, but that is another story.
            This reminds me of my first business and a lesson that has guided me for nearly fifty years.  My neighbor, Bernie Appel, was the President of Radio Shack (back in the ‘70s when Radio Shack was a highly successful multi-billion dollar business).  He asked me what I would charge to let his daughter ride to school and back with me.  I got out my pencil and computed that my car payment was $45, gas was 35 cents a gallon, and insurance was $15 per month.  I told him that $8 a month seemed fair.  He said “Mitch, I’m your customer and I’m not going to pay you $8 a month because of what it costs you, I’ going to pay you $20 a month because that is what it is worth to me.”  He then explained that nothing in a Radio Shack was priced purely on margin.  A 20 cent cable may be priced at $2.99 while a stereo that costs $125 sold for only $180.  The price was what they determined the customer was willing to pay.
            Same thing with monitoring, service, parts, and installation.  Monitoring can have 80% margin, while service has a 35% margin, and some installs barely break even.  Charge what the customer believes is fair, not what your accountant tells you to charge.  Be sure that you Monitoring Agreements allow you to raise your prices.
            I realize that pricing is not that simple, but successful business owners have mastered the art of pricing.
Mitch Reitman 
817 698 9999 XT 101
Reitman Consulting Group
            The important issue is that your contract should have a provision permitted increases; not just permitting the increase but committing the subscriber to pay it without additional approval.  While you can use any formula, and CPI is a way to do the calculation, I am a fan of simplicity, “keep it simple, stupid”; that is reflected in the Standard Form Agreements; K&K tries to keep them simple to understand.  [The phrase; “keep it simple, stupid” is thought to have been coined by the late Kelly Johnson, who was the lead engineer at the Lockheed Skunk Works (a place responsible for the S-71 Blackbird spy plane amongst many other notable achievements]
            A pre-agreed price increase with no margin for interpretation is preferred and it’s how the increase issue is drafted in the Standard Form Agreements.

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Ken Kirschenbaum,Esq
Kirschenbaum & Kirschenbaum PC
Attorneys at Law
200 Garden City Plaza
Garden City, NY 11530
516 747 6700 x 301