Inflation is the word on everyone's lips – so how do you limit its impact on your business? Bethanie Hawkins from Unleashed software spoke with business advisor Graham Dyer of the UK’s French Duncan LLP for his top ‘inflation salvation’ tips for product businesses.
1. Explore pricing models
As inflation impacts both your margins and buyer behaviours, consider some of the ways that you can secure repeat business – or attract customers to higher margin items. For example if you’re forced to lift prices, launching a discounted subscription service when you communicate the increase can be a way to retain customers – and secure cashflow. Variations on messages like ‘we value our loyal customers, so we’d like to offer you six months of product at X price instead of Y’ can work for both B2C and B2B channels. Whether you offer a discount for loyal customers, or simply a smaller increase, depends on your particular business model – but either way make sure you don't expose yourself to a future loss when it comes time to honour your transaction. I.e. you may need to buy now and hold stock, or you run the risk of your own suppliers increasing prices further down the track. A similar approach is to use so called ‘loss leaders’ to attract customers to higher-margin items. For example the sandwich chain Pret a Manger is using a coffee ‘subscription’ whereby customers can get multiple coffees per day for a set price. Often this will see them running at a loss on coffee itself – but this effectively ensures extra lunch-time purchases that make the overall pricing strategy work. "Variations on this theme involved aggregating different products into kits or box sets," says Dyer. "Think of the traditional ‘pick six’ beer boxes sold by craft brewers. Or conversely, unbundling grouped products into individual units that can be sold at a higher price point." Regardless of the approach used, the key to this type of strategy is to know your margins by product, so you can create the best combinations.2. Greenflation is real – so shout about it
One of the many drivers of inflation at the moment, says Dyer, is the cost of shifting to a net zero economy. If this is you, and you’re seeing higher prices coming from greener energy consumption, better packaging or more sustainable processes, then shout about it. Businesses are more often choosing low carbon / carbon neutral suppliers and are willing to pay the extra as this in turn reduces the carbon impact of the customer. Again, communication is critical in explaining to your customers any price rises they encounter. So if you are investing in higher quality goods, or environmentally preferable practises, tell your customers why you're doing it and what effect it has on what they pay.3. Onshoring your supply chain can cut transport costs
The driver for the recent trend towards onshoring has primarily been security of supply and reducing lead times. However, onshoring can lead to savings too – especially for those with long supply chains – as higher fuel prices are such a big part of inflation. This can seem counter-intuitive for those who may have sourced from overseas to reduce costs in the first place, but in the context of much higher freight costs is now worth exploring.Watch the full interview with Graham Dyer below:
4. Reassess your marketing
When money is cheap and buyers active it can make sense to market heavily to ensure you’re found ahead of your competitors. But when inflation bites and buying activity slows, the opposite can be true: cutting your marketing spend can be a quick way to shore up your margins. Dyer recommends taking a tactical approach here. Are some product lines well-established in the market? These may be an obvious first candidate for reduced marketing attention as they're more likely to continue to perform adequately without additional dollars. And a general point here: if your marketing spend is primarily digital you’ll be better positioned to take this kind of selective approach, and quickly stop (and re-start) marketing activity as required.5. Review your suppliers
When inflation bites it’s important to review your suppliers – not just for cost but also overall efficiency. Dyer notes that you need access to good data to make those decisions, with systems like Unleashed proving a big help. For example a supplier that routinely misses delivery deadlines can be an invisible drain on productivity if you don’t have visibility over lead times. And while using three different suppliers may help you get the best deal on individual items, consolidating your buying can allow you to negotiate volume discounts if you purchase more from a smaller number of businesses.6. Can you ‘stick to your guns’ to win market share?
Some businesses – typically those with higher margins and shorter supply chains – can take a relatively risky approach and absorb higher costs instead of lifting their prices. In this scenario, if competitors raise their prices you may be able to increase your market share by accepting lower margins, and scooping up price-sensitive customers you would not otherwise have gained. In a similar vein, even though it feels counterintuitive to invest in a business in an inflationary environment, ‘scaling to survive’ can make sense. For example by investing in machinery now you may be able to fulfil larger orders on your more profitable lines – and if you decide sell it later to free up cash, in an inflationary environment it’s likely to have appreciated in value.7. Who should increase their prices?
Retailers are among the industries that should react as quickly as possible and lift their prices, as their margins are generally so slim. For different reasons manufacturers and wholesale distributers will also likely need to react soon if they haven’t already – the length of the supply chains involved in these sectors can mean that higher costs in transport, for example, can be disproportionately higher.8. When is the best the time to roll out a price increase?
Ultimately, says Dyer, if you are increasing price, the key is to react quickly. Now’s the time to do it – rather than in 12 months time, because there’s an opportunity to increase prices now “without raising the same eyebrows that you would have at other times.” Right now you can clearly attribute a price rise to inflation in general. But if you don’t do anything, your margins will shrink, your profits will drop, and you might be in a place in a year’s time where you need to raise prices out of necessity. “That will be a lot harder to do, because you will look like an oddity at that point if inflation has eased. And with the cost of borrowing going up, you could get yourself into financial difficulty.”9. When it comes to lifting prices, granular is best
The key to making a fair – and well communicated – price increase is good data, says Dyer. Systems like Unleashed help you attribute your costs to products, showing your margins per SKU, and letting you review prices on a product-by-product basis. That allows you to see exactly which lines are being affected most, and get tactical about what increases you do – and don’t – pass on. And if you can be more granular than just ‘inflation is up 8% so my prices are up 8%’ then that detail can help when it comes time to communicating prices rises too, says Dyer. “Transparency is best. You want to tell your clients why prices are increasing. And it can help to push the brand out a little more too – push the fact that you’re not reducing quality – that your products are the best available.”