Let’s Talk About Rate Increases
It’s time for consumers and businesses to tighten their belts and trim their sails –
rate increases are an inevitable reality in 2022.
New research expects the construction sector in South Africa to grow by 6.2% in real terms after four successive years of decline
South African producer prices have increased drastically over the last year (9.6%), with the prices for machinery, equipment, and raw material in the form of metal increasing 12.6%. Furthermore, the cost of petroleum, chemical, rubber and plastic products went up a whopping 22.8%.
Inflation rates in South Africa have remained steady over the past couple of years, with inflation now standing at 4.6%
According to a BUSINESSTECH article published online on 24 January, Momentum expects headline inflation to average 4.6% in 2022, and 4.3% in 2023. The same article also states that the South African Reserve Bank should raise interest rates to 4% at its Monetary Policy Committee meeting in January as part of an ongoing hiking cycle.
Finally, the South African minimum wage should an increase in 2022
A poll comparing the minimum wage of 64 countries with a government-set minimum wage, placed South Africa in the midfield, with a ranking of 36th.
The current national minimum wage is R21.69 per hour. The labour department has called for comment on a new minimum wage target for South Africa in 2022, at around R23 per hour.
Depending on the number of hours worked each day, a worker earning a minimum hourly wage could receive between R3,400 and R3,900 per month.
All these factors will most likely cause businesses to have to seriously rethink their own finances, customer pricing and service rates.
The important thing when talking about rate adjustments is to try to cushion the blow for your customers.
The general and widely accepted rule on price increases is to simply match and slightly overshoot the inflation rate. This means that businesses can expect an annual increase of 5%.
This year, however, brings multiple compounding factors that will place a burden on any small business owner.
The best advice in this situation is; simple honesty.
Be upfront with customers about the financial challenges facing businesses and the increases needed.
Dumping the new rates on unsuspecting customers at the start of the year is not the best practice. Rather provide a revised rate card now, with the implementation of these increased rates in say, 90 days’ time.
Furthermore, confirm that any project started under the 2021 rate structure, will be completed thereunder.
Rate increases will never leave customers smiling, and they can lead to tricky discussions. But they are, unfortunately, a part of life, and a necessity for your business to stay afloat.
We consulted various locally written and trusted sources in the writing of this newsletter. For more in-depth discussions of the subjects mentioned above, follow these links:
OPINION ON CONSTRUCTION INDUSTRY EXPANSION
PRODUCER PRICE INCREASE BREAKDOWN
