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Small business owners find it difficult to pass on their rising costs to customers, according to a recent study.
Nearly 21 percent of surveyed small business owners indicated pricing pressures as a major issue for their businesses over the next 12 months, nearly double those who indicated the same a year ago, according the study conducted recently by New York-based Merrill Lynch.
The study also discovered labor costs posed the greatest threat to small business margins in 2006.
A remarkable 40 percent of respondents cite pricing as their primary tool for addressing competition in 2006, up from 35 percent in the first quarter of last year. This data, combined with the finding that around 36 percent of the sample describes competitive pressures as “fierce,” suggests that inflationary fears in the wider economy may be overblown.
Labor-related costs are shaping up to be a risk to operating margins. More than 29 percent of respondents cite labor as a major threat to operating margins over the next 12 months, a 7-percent increase compared to the first quarter of 2005. Business services is the sector most threatened by labor costs, with 55 percent of these managers naming labor costs as their number one concern. In addition to rising wage bills, survey participants fret over increases in benefit and health insurance costs.
A focus on growth by expanding into existing markets is a consistent theme in this survey. A total of 59 percent say higher market share is their primary goal, up from 50 percent who put it at No. 1 in the first quarter of last year.
Findings at the regional level are generally consistent with the findings at the aggregate level. In the Midwest and Southeast, the two actions most often cited to meet challenges are pricing and economies of scale. In these regions, an additional 15 percent of respondents highlight pricing, and an additional 13 percent seek greater economies of scale.
The focus on organic growth (increasing size through business growth and not through a merger or acquisitions) is strongest in the West, where 87 percent of the panel says it is a key initiative. Regions with the least interest in organic growth are the Midwest (66 percent) and the Southeast (50 percent).