Inflation is an economic phenomenon that occurs because of certain economic conditions, such as when customer demand raises the prices of goods. As a small business owner, you might be interested in how inflation affects you. However, what matters is how you cope with it. Here are some tips on managing inflation as a small business owner.
Know and Maintain Your Pricing Power
As the market pressure increases on your small business, you may have no choice but to transfer that burden to your customers. If you raise your prices too much or quickly, it may be a precarious move as you risk pushing away your customers and losing your competitive advantage. To maintain your pricing power in an inflation situation, consider the following strategies:
- Differentiate your products and services from competitors
- Bundle, de-bundle, and brand
- Market a lot to less price-sensitive customers
- Offer better solutions than competitors, such as complementary services and warranties
- Vertically integrate your product line.
These strategies can help you raise your prices without losing a competitive advantage.
Shift to eCommerce
Conducting businesses online is a cost-effective way to stay competitive during inflation. As a small business owner, you are typically focused on a niche market and do not offer a wide range of products and services like multinational corporations. Therefore, you do not enjoy the economies of large-scale production. When inflation hits, your business may become unbearably costly. If you can transfer some of your activities online during inflation, it can save on operating costs and open up new revenue streams.
Conduct a Supply Chain Risk Analysis
Inflation will also affect the way products move in the supply chain. When inflation is rising, you must conduct a thorough supply chain risk assessment to establish your small business’ vulnerabilities, if any. Consider the following during this assessment:
- Single-supplier dependency
- Nature of your business commodities. Are they perishable or long-lasting? Expensive or cheap to store?
- Just-In-Time Inventory (JIT) products.
- Long lead-time supplies
You can reduce high-risk supplies by stockpiling critical supplies, expediting your supply strategy, reviewing stock levels of JIT supply chains, establishing alternate or complementary supply chains, and hedging.
Forecasting is a proactive way of managing inflation before it hits. As a small business owner, you can create what-if scenarios to prepare for future economic situations. Forecasting should analyze the following parameters:
- Increase in wages
- Increase in price of raw materials
- Supply chain disruptions
- Available cash reserves
- Feasible preventive measures
Downsizing your workforce is rarely a favorable option, but it might be necessary. During inflation, you might not make enough revenue to cover your expenses and may need to reduce the number of your employees to remain in business. In that case, downsize appropriately. If not, consider reducing your employees’ working hours or pay.
Large corporations can survive inflation with strategic changes in their operating methods. However, such changes are not always feasible for a small-scale business. With these tips, your small business is more likely to survive inflation pressure while also staying competitive.