Toby Griffin, founder of Kbb Support, questions if restricting demand and/or raising prices will help ease some of the kbb industry’s issue with supply outweighing demand

The kbb industry is very busy, with shortages hampering its growth, and the pressure is taking its toll.

A bit frazzled after two years of closure and boom times, we all need a break, yet we are unwilling to stop taking orders as we “need to make hay while the sun shines”.  But this can’t continue ad infinitum.

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It’s been a while since I revisited my economics studies, but I recently dusted off some of my old textbooks.

To work out how we may be able to solve supply not meeting demand; it’s time we went back to school.

Supply and demand

The fundamental law of supply and demand goes like this: As the price of a product/service increases, the demand for it goes down, e.g. if a chocolate bar that was £1 now costs £2, less people will buy it.

Equally, as the price for a product/service increases, the supply of it goes up, e.g. if the manufacturer of the chocolate bar can suddenly start to sell them at £2 each, they will make more.

Now we can analyse and discuss all day about how much of an affect price changes will have on demand and supply (market elasticity), but there is no doubt that it has an effect.

In normal times, prices and quantities available are reasonably consistent, and the point where demand meets supply is in equilibrium.

We are not in normal times.

Across our industry there are several aspects that are in short supply: with certain parts of appliances, some core materials, and labour (designers, installers, drivers, etc.) being the most obvious; and it could take years to address them.

So, what to do about it now?  There are only really two options in the short-to-medium term: restrict supply (shutting off the increased demand)  or increase prices (to dampen the demand to a manageable level).

Restricting supply

Let’s look at restricting supply, which can be done in two ways: extending lead-times or rationing.

Extension of lead-times is a common reaction to increased demand, and – with decent notice to the customer – is not much more than an inconvenience.

As long as everyone in the chain – starting with the end-user – is made aware, then this just requires projects and decisions to be made earlier.

Rationing is far more emotive and involves sometimes basically telling customers: “No”.

Who makes the decisions as to the “winners and losers” here risks losing a customer forever, as they feel slighted and discarded; but it might also be a chance to effectively thank loyal, good payers by keeping them in supply.

Price increase

It is also tempting to put up prices.  This extra revenue would enable a business to invest more in its systems, machinery, IT, premises; attract more/better staff with higher remuneration and offer training and support to the existing team – making them better at their jobs and more efficient; or pay more to suppliers making them cherished as a customer.

A price increase offered with plenty of notice, and an explanation to the customer as to the on-going benefits they will get from it, shouldn’t receive too harsh a reception.

On the other hand, a price increase that looks like profiteering, is a PR disaster.

Is there some sort of middle ground here? Could prices be maintained for existing customers, but increased for new customers?

Could customers be enouraged into placing orders far in advance by offering a free something, or a discount?  There are several sensible and careful ways that this can be used.

So there we go.  How to restrict demand, and benefit from it too.  One thing’s for certain, we can’t carry on as we are.

Toby Griffin has recently joined the Simon Acres Group as a training consultant.