Five Expert-Backed Strategies for Business Owners to Fight Inflation
Inflation seems to be all over the news today. Rising gas prices and interest rates, increasing costs of food, and a housing market that appears to be ready to burst are all discussed when you see the word inflation. After being hammered by the Covid-19 pandemic, business owners are particularly vulnerable to the effects of inflation. In today’s article, I’m going to discuss strategies your business can implement to fight the harmful effects of inflation.
Inflation can be tough for business owners, but the right strategies, support and resources can help them mitigate the challenge.
Inflation forces business owners to make tough decisions about increasing prices and securing supplies. This decision making process can be problematic for long-term planning, because you might focus more on managing inflation risks rather than on your loftier business plans and goals. Although inflation does create challenges for business owners, there are ways to avoid its worst effects.
The trend, viewed as a sign of even higher consumer prices around the corner, has already taken a toll on business owners.
When consumers have less purchasing power, it can decrease a company’s ability to expand — or simply stay afloat. Inflation is soaring. In the US, the consumer price index — which measures the average change in consumer prices over time — rose 8.5% from March 2021 to March 2022, the fastest annual increase since December 1981, according to the Bureau of Labor Statistics. Still, businesses can take action to bolster their financial health. I’ve assembled five strategies for business leaders looking to not only weather this inflation surge, but set themselves up for success in the new normal of costs.
The looming effects of inflation, combined with the loss of income due to the COVID-19 pandemic and supply-chain issues, can threaten business profitability.
In an inflationary situation, a dollar buys less than it used to (everything is more expensive). So, there’s a decline in the real rate of return that financial institutions earn on their loans. Fortunately, there are several things you can do to protect your business from the harmful effects of inflation. If you take these measures, you could ride out the inflationary period and even increase your profits.
Here are five expert-backed strategies for protecting your business from inflation.
Prices are rising, supply chains are still rocky and customers are closely guarding every dollar as their lives get more expensive. So what can business owners do to weather the highest rate of inflation in 40 years? If you’re an entrepreneur on the ropes, let the following tips be the basis of your survival plan.
Streamline and automate processes
Improving processes may mean exploring automation for your company. As the cost of labor continues to climb, you should re-examine processes. Could time-intensive work be automated? Is there software that can be deployed to automate business processes like scheduling, order taking, billing or collecting payments? Is robotic processing an opportunity when manufacturing a good or completing a repetitive task?
With both skills shortages and higher salary and benefit costs affecting businesses now, it’s a good time to look at ways to reduce labor expenses.
While cleaning up the company’s product portfolio can decrease demand, executives will also need to scrutinize the labor costs associated with the remaining products given upward pressure on salaries. Maybe now is the time for that automation project that’s been discussed and shelved in past years. Reducing work through automation means that less labor will be needed to run operations. And, it will free up workers to focus on strategic value-add activities, benefitting the business and increasing retention. Whatever the case, increased productivity is always the best and most sustainable tool to counter inflation.
The high-inflation environment has given business owners a pressing need to reevaluate the specifics of the way their businesses function.
Business owners across the country are pouring capital into technology and automation to increase each employee’s value, reduce costs, improve service and streamline their operations to offset the effects of inflation, according to the Harvard Business Review (HBR). Investments in tech and automation have proven to be useful during times of crisis, in general, not just when inflation is high. For example, HBR’s own research found that businesses that invested in AI and automation just before the pandemic weathered 2020 and 2021 better than those that did not.
Bill Glaser, CEO of Outstanding Foods, said automation is a business owner’s friend and inflation’s enemy.
While the present inflationary tensions mean firms should decipher a completely unique monetary picture, firms should likewise acknowledge exactly how much innovation has changed. A new study by IBM observed that just about one of every three firms all over the planet are currently utilizing (AI) in some limit, and reception is speeding up. Some 43% of these have sped up their reception of AI as an immediate result of the COVID-19 pandemic, as per a similar study. Although you may not be able to replace all your employees with machines, you can implement smaller automation processes that will have a direct impact on your labor costs and efficiency. Every business has manual, repetitive processes that are performed by employees. Using AI and automated digital workflows these tasks can be performed error free, faster, and repetitively.
In the coming years, workflow automation is going to be the solution that can make or break a company.
Workflow automation is a method of expediting and streamlining document-based business processes to improve efficiency, reduce costs, and provide transparency. With the help of workflow automation, organizations can easily identify bottlenecks in processes and respond to them rapidly. When it’s easier to pinpoint issues, address them, and implement a solution, organizations experience increased efficiency and, ultimately, reduce costs. Embedding intelligence not only has the power to minimize the impact of near-term disruption, but also to build more resilience to current and oncoming disruptions and improve long-term outcomes. Enterprises need to invest in mid- to long-term agility enabled by digital transformation.
Raise prices judiciously
Inflation directly adds to the operational costs of a business, so it should be easy to justify raising prices, right? Maybe. Price hikes can forestall some of those cost cuts, but you run the risk of losing customers who don’t see enough value in your product or service to justify paying more. Ultimately, companies need to consider their larger market and what competitors are doing, not just inflation.
Pricing strategy should look at the four “Cs”: customers, costs, competitors and cash.
Customers: How important is price in customers’ purchasing decisions? Do your customers love the quality of your products and services, or are they mostly buying on price? High price sensitivity means companies should stay near market norms. Costs: How is inflation affecting your costs? Are supplies or labor significantly more expensive? Competitors: If the competition has increased prices, it’s worth considering a price increase to match. The exception would be if your company has the ability to keep prices steady to gain market share. Cash: The ability to hold prices steady will depend on what’s happening with your cash flow.
Pricing power refers to the quantity demanded of a product relative to the change in the product price.
It is linked with the price elasticity of demand or the degree to which demand changes in response to a product. For example, luxury brands carry a high pricing power because few alternatives exist. Strengthening your pricing power can be tricky, but offering essential services or goods is a great way to find stronger pricing power in an inflationary economy. Closely related to pricing power are your product offerings. Some products might be more susceptible to inflation than others. Eliminating these poor-performing products can be another way to manage inflation in your business. Doing that can help keep your business healthy and prevent you from wasting time and energy on inventory that doesn’t serve you any benefit.
It can seem like raising prices is the easy way out to combat inflation, but your business can gain more from this strategy than you might think.
You may survey the marketplace and see if you are underpriced for your services or goods. And if you do decide to raise prices, there are creative ways to communicate with your clients that can benefit your business in the long run. Jacqueline Snyder, co-owner of The Product Boss, a small-business coaching platform, recommends bringing your customers in on the story. For example, saying something like: “We’re a small business, prices across the board have gone up. We’ve tried to keep this going for so long like this, but at this point in order to survive — and we still appreciate your business — we have to raise our prices.”
Higher prices to the public mean you won’t incur a loss.
However, there’s something you need to watch out for when you’re raising prices. Keep a close watch on your competition. If your products are priced higher than theirs, you could lose business. You could even apply a loss leader strategy and decrease the price of one of your star products. This will lead people to your doorstep and, while they’re buying the start product, they’ll also buy other stuff that might be a bit more expensive.
Cut expenses when and where possible
Since rising costs are one of inflation’s main consequences, reducing and cutting unnecessary costs can save you money. Adjusting financial forecasts can help determine where you can cut some of these costs. Reducing costs in other areas can help you balance your budget if you’re unable to raise prices too. By keeping your prices low, you can avoid a lot of negative consumer reactions to inflation. A good way to identify unnecessary costs is by figuring out what adds value to your goods and services. For example, eliminating things like excess packaging can be a great way to reduce costs without harming value-adding activities like great customer service, marketing, and research & development.
Every dollar saved will add to your bottom line and strengthen your cash flow.
You should always strive to improve your processes and reduce wastage to spend less and win more. That’s exactly what a strategy, called lean management, is all about. Cash flow is king, and it’s certainly one of the best inflation hedges. When business is slow, there’s a tendency to ignore certain things, like arbitrary spending, purchasing, and collections. On the spending side of things, take a pragmatic view of new purchases and the return on investment (ROI) they deliver. As for your clients, sure, you want to cut them some slack–everybody’s feeling the crunch. But you can’t put your business at a disadvantage because of it.
If the situation calls for cost-cutting measures, try to do what you can to reduce your overhead expenses.
Proper decision-making, especially when it comes to expenditure, is vital in any business. If your current cost-cutting measures are not effective enough in your case, you may need to look for new methods. Learn how to find vendors, engage in supplier relationship management, cut back on expenses where possible, but never lose sight of the fact that a strong business idea is the foundation for all your success. Think outside the box. One way to add value is by offering a unique experience that your competitors can’t match. For example, if you’re selling products, you could offer free shipping or a longer warranty. If you’re selling services, you could offer a satisfaction guarantee or additional features. Whatever it is, make sure it’s something that will appeal to your target market and give them a reason to choose you over the competition.
Payroll is one of your significant expenses. If your staffers are in the wrong positions or aren’t doing their share, you’re losing money.
Before you jump to hire, make sure you are thoroughly reviewing the day-to-day workload of your staff. Make sure the right people are in the right seat, pulling their weight. Sometimes changes are required that can prolong the necessity to hire the next person too early. It’s also important to stay up to date on best practices so you can prepare for possible wage increases. Stay current on any new laws or wage increases in the coming future so you have a plan on how to deal with the increase in your payroll.
You may want to analyze your current use of physical space.
Overflowing storage, too many supplies, piles of paper files and inefficient placement of furniture and equipment are common space wasters. Consolidate or centralize the different functions or departments of your business. Use space for dual purposes. A meeting room that doubles as a break room or a storage room that holds copy machines for example. The opportunities will vary depending upon the nature of your business. The assumption of CFOs that remote work is an efficient way to reduce costs is backed up by several studies which show that organizations that decide to go remote experience large financial benefits. For instance, calculations from Global Workplace Analytics suggest that companies can save around $11,000 per employee per year if they allow their employees to work remotely 50 percent of the time — taking into account productivity levels, lower real estate costs, reduced absenteeism and turnover.
Think of ways to boost sales
Boosting sales is one way to ensure that your bottom line remains lush and that your debts don’t eat into your revenue. Increasing the sales of any business, big or small, is important because as sales increase, so does the company’s profitability. An increase in sales doesn’t just happen, it’s the result of thoughtful sales strategies that are planned and executed. In order to increase sales, you have to increase the number of customers you’re selling to, enhance what you’re selling, improve your messaging, or all of the above.
Simply raising prices amid inflation has the potential to hurt customer relationships.
The path to growth isn’t linear, that’s for sure — but it’s possible with sound strategy, time and dedication. For example, figure out what the highest-selling item is in your business, and go all-in on selling it. Too many people try and sell the small stuff and it takes way too much time and energy to build and grow that way.
If you want to multiply your sales, then you must be capable of solving increasingly complex and more challenging problems for your clients.
This can be achieved by your value ladder, which enables you to give value to many more people, through increasingly larger commitments of time and resources on both sides. A common value ladder that I’ve seen, that could work very well: An irresistible offer, usually a basic course, or online community or tribe. A prime offer, such as an online group coaching or training program. A mastermind or inner circle offer with more direct access to you and other members, perhaps combined with a retreat. One-on-one mentor-ship, where your client may work directly with you one-on-one for an extended period of time. Your value ladder is not only important for creating scale in sales, but also within your service delivery, which is why it is so essential for rapid growth.
This might sound like an obvious thing but bear with me. One way to increase sales is to concentrate your marketing efforts on your existing customers.
Many business owners feel that marketing to existing clients means spending money without seeing much returns, so they decide to market to new clients only. But there’s nothing further from the truth. According to Forbes, attracting a new customer can cost 5x more than retaining an existing one. And increasing customer retention by 5% can grow profits by 25% and even to 95%. Give this strategy a try. You could be surprised by the results!
One wise way to prepare for the coming economic slowdown is to reallocate some sales and marketing dollars to client entrenchment.
Studies have consistently found that it’s much more cost-efficient to retain existing clients than to hunt down and sign up new ones. Securing a new customer can cost tens of thousands of dollars. The success rate of selling to an existing customer is 60-70%, compared to 5-20% for a new customer. Just as airlines boost customer loyalty through mileage programs and V.I.P. lounge access, you can provide perks to key clients that make them feel special. A great way of doing this is through a dedicated portal that gives them access to premium content. Alternatives are providing free subscriptions to relevant publications or giving top clients 20 free consulting hours focused on the problem of their choosing.
Run ‘What If?’ Scenarios
A common mistake many people make is called the Sunk Cost Fallacy. Psychologically, people are more inclined to continue investing in something once they’ve already put time, money, and effort into it. But in many economic theories, only future costs are relevant when making a rational decision. Often, this causes people to fail to cut their losses. Think about it this way; if you purchased 200 t-shirts to sell but then only ended up selling 25 of them and did not break even, you might be inclined to continue selling the t-shirts. Maybe you would consider investing more money in an advertising campaign to try and get the product moving. The fallacy is considering the past costs of the shirts rather than accepting that your cost is sunk.
You may want to borrow early at fixed interest rates.
As banks raise interest rates to compensate for inflation, consider converting any adjustable-rate debts to fixed loans. As cash devalues, fixed-rate loans will become cheaper in terms of current dollars over time, but the cost of adjustable-rate loans can rise along with inflation. If a business has expansion plans in its foreseeable future, it could be wise to borrow the money to support those plans early in an inflationary cycle, especially if you expect high inflation to be around for an extended period. The cost of that borrowing will diminish over time, giving the business a potential competitive advantage.
In addition, the impact of inflation on labor markets is a bit unpredictable.
While we cannot foresee the exact professions and skillsets that will be impacted, we can reasonably expect the following labor markets to feel some effect of inflation: High-demand professions like software engineering, low-wage and minimum wage jobs and contract laborers, who typically can reprice their wages faster than W2 workers. If your business is highly dependent upon the above professions, develop a human resources strategy to attract and retain talent. This should be done through market-rate pay raises, but also through non-monetary compensation such as career development and employee benefits. If your employees hate their job and only show up for their big paycheck, your business is much more vulnerable to inflationary pressures than one where employee satisfaction is derived from intangible benefits like a sense of community and purpose.
You may not be able to avoid rising supply costs outright—but you can take steps to minimize them and protect your small business’s supply chain for the long term.
First, inspect your current supply chain situation for risky elements like single or lengthy-lead-time suppliers, goods that are costly to store (like perishables, for example), or products that represent an oversized portion of your cost-of-goods-sold (COGS). Then, strengthen your supply chain by: Diversifying your provider base and sourcing more domestic suppliers, gauging and adjusting your safety stock levels, and building up a store of critical goods or best-sellers with low holding costs. It might also make sense to lock in supplier contract terms now so you can save money with inflation-proof fixed rates.
Running through various what-if scenarios will help you plan around the different ways in which shortages and rising costs could affect you.
Start by identifying current inflation trends within your industry, then create financial forecasts to test their impact on your business. You might, for example, forecast around: Wages rising by a set percentage, raw material or supply prices increase by two-fold, supply chain disruptions driving revenue delays of a certain duration and creating forecasts that account for changes like these will help you prepare for a more positive financial outcome. Just be sure to consider how cash flow will be affected in each scenario so you can determine what action you should be taking now—and how you’ll mitigate the financial upheaval should the worst come to pass.
If you read the above items and thought to yourself, “I really need to start working on that,” don’t wait. Inflation is here now. Once it really starts moving, the skills and talent to address it will be in high demand. Opportunities you could have taken earlier will have closed. Make the changes you need to put yourself ahead of the curve.
Inflation and supply chain disruptions have repeatedly been hitting news headlines. Despite this, consumers have not reached a breaking point yet.
To weather the storm of inflation, you should continue planning and revisiting projects, financials, and your company’s spending habits to evaluate whether or not they are working fully. When the economy is healthy, it’s easy to become complacent and just ride the success. However, regularly monitoring your business can help you avoid many of these issues and navigate any fallout quickly. Stay on top of your planning and prepare your business for the best and worst that may come your way.
Most of all, a business needs the courage to increase its own prices during periods of high inflation.
An action that doesn’t come easily to most small business owners who often believe they can hold on in the face of rising costs by reducing profit margin. Sadly, many only see the folly of not passing on significant cost increases to their customers when it is too late and either run out of cash or go broke. Find a way to pass on your increased costs to customers. Some businesses can’t raise their prices or else they’ll lose clients. If you have products that you simply cannot sustain a price increase, try diversifying your offerings.
Inflation can be bad for businesses. You may face rising costs and declining profits.
While inflation is unfortunate and poses unique challenges to operating a small business, it does not have to be the end all be all for you. There are ways to avoid the worst of inflations’ consequences while looking ahead to grow in the long run. To overcome the adverse effects of inflation. Focus on increasing sales and cutting costs.
Hopefully inflation will be managed but best to be prepared.
As tough as it might be for business owners, know that you can take steps to combat inflation. Plus, you can apply the lessons you learn now to future inflationary periods — while it might be the first time you’ve had to overcome this challenge, it probably won’t be the last. Basically, as an entrepreneur, you should learn to expect inflation.
Digital Dandy. Hacker From Heart. Workaholic. Coding Artist. Self-made.