In 2022, countries around the world saw near-record-breaking rates of inflation. The Consumer Price Index in the U.K. reached 11.1%, the highest since records began in 1997. The U.S. saw inflation hit 8% - the highest rate since the early 1980s.
The rate of inflation affects all businesses and all consumers. As purchasing power decreases, the cost of everyday goods and services rises.
As well as less consumer spending, this can lead to elevated prices for materials and services, higher wages and increased operating costs for businesses.
Although rates of inflation are slowing in many regions, owners will do well to think about the impact that any rate of inflation has on their business.
Knowing how to weather all storms will ensure the business has a higher chance of existing and growing for years to come.
This article will discuss strategies to inflation-proof small businesses.
Monitor Economic Indicators
Staying informed about trends by monitoring key indicators is important. This data can help with making decisions about pricing, wages and inventory management.
The main indicators to watch are Consumer Price Index (CPI), Producer Price Index (PPI) and wage growth rates.
Review Pricing Strategies
As operation costs rise, raising prices for customers might be necessary in periods of high inflation. The question is by how much? It is a delicate decision, as raising prices may exclude spenders that the business has already captured. Competitors may also gain the upper hand. Additionally, some corporations take advantage of inflation to drive profits and not to offset business costs. Behaving in this way could damage a small business’s reputation.
Strong Supplier Relationships
This strategy is one that should be employed from a small business’s inception. By having strong, positive working relations with suppliers in ‘easier’ times, those same suppliers will be more inclined to help in uncertain economic times. They may offer bulk discounts, more flexible payment terms and competitive pricing which will help with managing costs more effectively. Also, to reduce the impact of potential supply chain issues, it is a good idea to have a diverse pool of suppliers.
Efficiency, Productivity and Streamlining
Looking at all systems and processes to identify areas for improved efficiency, productivity and streamlining is a powerful tool for combating the negative effects of high inflation. Automating where possible and upskilling employees can reduce costs and increase output.
Long Term Contracts
Consider negotiating long-term, fixed-price contracts with suppliers and customers so that external inflation does not have as much of an effect on outgoings and revenue.
Hedging strategies such as forward contracts or currency options can minimize the risk of volatile exchange rate movements. This strategy is for small businesses that import materials from foreign suppliers or conduct international transactions.
A business is nothing without its customers. During times of high inflation, customers may have less disposable income. This provides a great opportunity to engage deeper with customers by enhancing the customer experience and creating personalized solutions to their problems. Customers remember businesses that provide an extra layer of care, even if the price they have to pay has increased.
If a small business holds inventory, then reducing the amount of stock held to the optimal quantities for good operations can help to minimize holding costs and the risk of stock becoming obsolete. Sales data and customer demand patterns should be analyzed to effectively do this.
Innovation And Marketing
To be seen is to be known, and to be known is imperative for continued sales. It’s best to keep an emphasis on brand visibility during inflationary periods to attract new customers and stay in view of old customers.
Perhaps new products or services can be developed that are in line with your customers’ current habits and pockets. Maybe a more expensive product or service of higher value would be appropriate to sell during high inflation. There are still opportunities for growth when things seem to be ‘harder’.
Inflation is a challenging reality and it’s key for small business owners to not panic. By embracing an attitude of open-mindedness and strategic planning, all businesses have the chance to adapt to ever-changing economic trends.
Similarly, operational decisions need to be made with care and it is advised to seek advice from relevant experts where needed.
This article was written by Ron Cole from Forbes and was legally licensed through the DiveMarketplace by Industry Dive. Please direct all licensing questions to firstname.lastname@example.org.