Successfully managing a business through inflation

Inflation sucks, let’s be real. It means paying attention to your costs to do business as well as increasing costs for your customers. As a business leader if you have not already done so, you’re thinking about raising the price of your products and services. Whether you run an inventory based business where the costs of your goods could be increasing with inflation and other supply chain issues or you run a professional service business and the cost of labor and demand for company perks are stressing you out. Here are a few tips from successful businesses that have been able to actively manage through inflationary pressures.

Know when to raise your rates and or prices

Seems simple. Costs rise and you should raise your prices. Not always the case. Sometimes businesses have longer term pricing contracts in place, sometimes you’re waiting to see what your competitors decide to do. In all cases the worst thing a business can do is nothing. Here are 3 easy steps to evaluating the best course of action for your business.

1. Take a moment to assess your cost changes for doing business.

Are your product or service costs drastically changing? if they are, think about if they are changing month to month or adjusting in one price increase. This will help you identify if you should consider future costs adjustments as you adjust prices or you can be confident in a single cost adjustment for your customers. Customers hate highly unpredictable changes to the costs of products and services.

2. Assess your customer impact

When prices change for a customer about 30% of them tend to use the opportunity to shop around. It is important to understand what will happen with your customers should you modify pricing. TEST IT. Ask some of your more vocal and loyal customers what impact a price change would have for them. The more informal the better when you have this conversation, give them a call or talk to them the next time they come to the shop. Most customers who value your product or service with respect that you thought of them to consult and they are the ones that most often have the best support advice for keeping your product or service.

3. Do the math

Calculate how much more your product or service is costing you. Add in what you anticipate happening to those costs over the next 6-18 mo. Also factor in the fact that changing prices could sway customers to shop around, factor in a 20-30% attrition rate. Now decide your tolerance level for changing prices. If you do not want to change pricing for your customers frequently you might consider a larger price shift, if you’re able to modify pricing more frequently for your customers, you have the ability to make more incremental changes.

Customer communications

Now let’s think through the most stressful part of inflation for business owners, telling the customer about a price change. While this will be different for every business type there are some common principles to consider.

1. Timing

Waiting too late to modify your prices and let your customers know can be damaging to your reputation and credibility. The best practice is to signal a price change prior to actually modifying prices. The reason for this is that it allows customers to understand where you’re coming from, what is impacting your business and enlisting the empathy of your customer base. It is recommended that signaling happens 2 payment cycles ahead of the actual change. For example a coffee shop might signal a price change 2 weeks ahead of the change for the weekly customer or in a law firm where invoices are paid monthly, the communications would happen 2 months in advance of any change.

2. Transparency

Customers appreciate transparency, letting the customer know why you need to modify the costs of your products or services is critical to enlisting them in the change. Details like “the cost of coffee beans have increased by x% and we hope they go down soon, but in the meantime, we need to increase our cost of java. Starting next week we are increasing costs by 50 cents per cup.”

3. Commit & Communicate

Commit to reevaluating your pricing frequently during this volatile time. In addition to committing to lowering prices if inflation circumstances change, tell them you will keep them informed. Customers become skeptical of prices changes and presume they will be permanent. While this could be the case, demonstrating your commitment to adjusting prices down again in the future will build loyalty, even if that change never happens.

Ways to safeguard your business from inflation

There are ways to protect your business from inflation and costs of goods and services rising. It is important to think ahead as a business owner. Putting these building blocks in place can save you volatility in your costs of goods and services as well as easing the need to increase prices for your customers.

1. Contracts

The terms of your vendor and employment contracts are important to think through in a volatile inflationary environment. A longer term contract can lock in lower rates for products and services that will enable you to keep costs level through up and down costs. The downside of a long term contract is that you are locked in for a longer period of time. There is a balance that can be created by creating a longer term contract for a product or service with a exit strategy. Contracts with early termination/modification clauses are important to think through as you establish them especially during inflationary times.

2. Advanced ordering

Ordering in advance can lock in costs. This does not necessarily mean that you need to pay at the time of a pre-order, while ever vendor varies more often they appreciate pre-orders to help them manage their own inventory and service demand and at times can receive discounted pricing. Think about pre ordering even if it is for 75% of what you think you might need to lock in pricing

3. Negotiate separate pricing

Pricing high-cost fluctuating products and services separately from stable priced inventory/services can prevent a “peanut butter” increase. A peanut butter increase is when a vendor or inventory supplier increases costs by x% across the board (like spreading peanut butter evenly across your toast). Businesses want to challenge this immediately when they see anything like this from a vendor or supplier. A peanut butter increase happens when the supplier is lazy. They do not want to do the cost analysis so they just say “everything is going up 20%!”. Now is the time to challenge individual costs AND consider advanced ordering or longer term contracts.

Need some help planning for your financial future and modifying your pricing strategy? Set up time with a financial expert at Arena today!

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