I want to talk about the elephant in the room – inflation, and our new approach to pricing.

Everyone is well aware of inflation being used as an excuse for increasing margins, the news is full of articles about energy, banking and food sector profits being up by record numbers. I find it hugely irritating and I want to take time to explain why we are not profiteering from these changes.

Firstly, we have held our pricing for two years on Managed Services, and this is the first time ever that we are increasing prices on some of our other service offerings. Many of our competitors are in their third or fourth round of increases in the same period. We’ve tried to weather the storm for our clients, but unfortunately we can’t continue to do that.

In the last two years, cumulative baseline inflation increased by 21.6% – and the reality for us is much higher. 

Our biggest cost is people – there is still a huge shortage of skill in our industry – these people have to be at the top of their game, and they have to be happy to work nights and weekends. This means that we have to pay at the higher end of market rates to retain them – and this has increased at well above the rate of inflation. We are also spending hundreds of thousands on resourcing and recruitment each year- something which we didn’t have to do previously.

Moving on to cloud services – as we all know the cost of power has increased astronomically. Across our datacentre estate, our power costs have increased somewhere between 200-300%. To add some context, our power usage is comparable to that of a medium sized housing estate. Whilst we’re constantly rolling out a more power efficient infrastructure, this only makes a small dent in a huge number. Whilst it’s more difficult to compare us to public cloud providers, as they have thousands of individually priced components – independent analysis shows that Azure and AWS on-demand prices have increased between 15% and 23% in the last year, whilst we’ve passed on nothing.  

Then we have incurred other third-party price increases – the industry regulator, Ofcom, increased the price of fibre and copper access to Openreach’s network by 14% in January. Many of the software vendors we use in the provision of our services have also applied above inflation price increases to their services too. 

These are all costs we’ve been swallowing over the last two years, and usually hit us with very little notice.

Our biggest challenge – apart from not wanting to burden our customers with additional costs – is how to manage these constantly changing factors. If we applied pricing changes in the way that we receive them from wholesale markets, we would be changing our pricing on an almost weekly basis. This is irritating and is a huge administrative burden, and we recognise that it is also hard to budget for. 

This is why we’ve decided on our annual CPI price increase policy, where we simply apply an increase on the anniversary of the contract. Whilst this change will mean it takes longer for us to stabilise our own profitability, it is the right thing to do in the long run – it keeps administration to a minimum, and keeps costs predictable for you. 

We operate in a sector where the average profit margin is less than 10%, and you only have to do the maths to see that we will suffer an existential crisis if we don’t start to pass on a small proportion of the huge cost increases we’ve stomached in the last two years. 

I thank you all for your understanding and support, and both your account manager and I am more than happy to pick up the phone to anyone who’d like to discuss this further.

Dan Kitchen
CEO
razorblue Group