I hadn’t raised the rent at one of my out-of-state rental properties, a small multiplex, in two and a half years. It wasn’t because the numbers didn’t justify it. Every time one of my costs went up, I ran the math, and it never seemed like enough on its own to justify raising rent and risking potentially losing a good tenant or two. Over the course of those two and a half years, my property insurance crept up a little. So did water and sewer. My bookkeeper’s rate also ticked up, as did my CPA’s rate for income tax preparation. Each increase, taken alone, felt more like a rounding error.
Here’s the problem with that reasoning. Margin is simply price minus cost. It’s the buffer that funds everything else in a business: discretionary spending, reinvestment, a cushion for a bad month, whatever you pay yourself beyond the basics. When margin compresses a little at a time, discretionary capacity is what shrinks, often before you’ve connected the dip to pricing at all.
That’s the actual mechanism behind what is called margin creep. No single cost increase ever crosses the threshold that would make you act. Only the aggregate does. Unfortunately, nothing in the ordinary course of running a small business forces you to look at the costs in aggregate. You compare this year’s water bill to last year’s, not to what water cost three years ago. So you never make the comparison that would actually reveal the drift.
The 50 Odd Costs You Never Add Up
Add it up, and the list is longer than most owners realize. For example, let’s break insurance into what it actually is, not one bill but several: general liability, business personal property, errors and omissions, directors and officers, cyber liability, commercial property, business interruption, auto liability, product liability, unemployment, workers’ compensation, and health. Add utilities: electric, gas, water, sewer, waste removal, internet, phone, security monitoring, pest control. Add professional costs: bookkeeping, payroll processing, income tax preparation. Add the software your company uses: website hosting, your CRM, and accounting software subscriptions. Add marketing and advertising. Add your own rent and common-area maintenance overages if you lease your space. Fifty separate recurring line items are a realistic count once you actually start to add them up.
A five percent increase in any single one of those, spread across a year of billable hours, works out to just a few cents per hour, not worthy of a decision to raise your rates. What makes matters worse is that each one renews on its own separate date, scattered across the entire calendar year. An increase in your firm’s general liability insurance hits in March, auto insurance in June, tax prep in April. You get the picture. The only place that aggregate view ever gets built is the one you build on purpose.
The same mechanism runs on a faster clock when you consider labor. You don’t re-price your billable rate every time you give an employee a raise. The raise happens; margin compresses a little. The two events land in different places on your P&L, so nobody connects them.
Why Knowing This Doesn’t Fix It
Here’s the part that actually explains why understanding all of this still doesn’t fix it. It isn’t a willpower problem. Daniel Kahneman and Amos Tversky’s prospect theory, which Kahneman lays out in Thinking, Fast and Slow, found that losses loom larger than equivalent gains in what he calls Loss Aversion. Raising a rate creates a felt loss: the customer might leave. Not raising it creates a cost too: margin erosion, but a diffuse one that never announces itself the same way a lost customer would. Loss aversion doesn’t weigh those two costs fairly. It just makes the vivid one feel heavier, so the honest default answer becomes “not today.”
Then something else takes over your attention, what I’ve started calling SNOW, Strategic Notion of the Week, a term I recall from John Nolan’s book Confidential. And the pricing review gets bumped again. Next month a different line item ticks up a little, and the same pull happens all over again.
This is really a question the philosopher Epictetus answered a long time ago. Some things are within your control, and some things aren’t. The mistake is treating the two the same way. You don’t control whether your insurance premium goes up or your CPA raises their rate. What you fully control is whether you have a cadence for checking your price against your costs. Margin creep isn’t caused by inflation directly. It’s caused by never exercising the one thing you actually control.
Build the Habit, Then Time the Ask
So, build the cadence. Pick one day a year, a founding anniversary, your birthday, whatever you’re already going to remember. On that date, compare your current pricing with your costs from the last time you checked. Tying it to a date you’d remember anyway is what keeps it from losing to Strategic Notion of the Week, month after month.
Some landlords might raise rent in September, after tenants with kids are already settled into a school year. A mid-school-year move to save a little money isn’t worth the disruption to a kid’s school year, since it often means changing schools. A more generous version of the same timetable would be to raise it in June instead, giving the tenant the whole summer to look for a new place if the rent increase doesn’t work for them.
On the business side, the same fork exists. You can time a rate increase to land right before a client’s budget cycle locks, so they absorb it into their planning instead of getting a surprise. Or you can time it for their busiest season, when they have little to no bandwidth to shop for a replacement. A rate increase landing on a retail client in November, right before Christmas, is close to impossible for them to act on.
Same timetable, opposite intent. That’s Machiavelli’s territory as much as it is a pricing tactic. Leverage works either way, but only one end of that spectrum compounds trust instead of spending it.
Margin creep isn’t a math problem. You already know how to do the math. It’s an attention problem, and the fix is smaller than it sounds.
When did you last check whether last year’s price still covers this year’s costs?
