How to manage your business through a high cost environment

High inflation has the potential to reduce your profit and affect the viability of your business. Many businesses look to increase prices when considering how to respond to high inflation, however, this isn’t the only option. The below lists a range of options business can implement to manage through a high-cost environment. We recommend that businesses implement several strategies.

Increase your prices 

• Calculate how much extra it’s costing you to supply each product or service on a regular basis and increase your prices accordingly. In a high inflation environment, don’t wait for your usual periodic price review.
• Research what your competitors are charging and, if possible, the reasons for their pricing. If there’s a price difference, it’s important to be able to explain why. However, don’t blindly follow your competitors – they may have their pricing strategy wrong, or it may not suit your business.
• Undertake research or testing to find out what your customers and potential customers are prepared to pay for your product or services in a high inflation environment.
• You may find customers are more willing to accept regular modest price increases in a high inflation environment, rather than a once-off large increase. If uncertain, try both approaches on different products or services to see how customers react.
• Explain to your customers why you are increasing prices. Give customers advance notice of price increases.
• Capture information about how customers and competitors are responding to your price increases. This includes sales data, online customer reviews and direct customer feedback. Consider whether to adjust your pricing strategy based on this feedback.

Lower your costs

• Lowering your costs will help you to maintain your profit margin without having to pass on your cost increases in full to customers. 
• Focus on cutting costs that are discretionary, however don’t cut costs indiscriminately. Look at costs in targeted areas. For example, look to reduce your insurance premiums by going to an alternative insurer.
• Identify costs that are necessary to your business success and maintain adequate spending in those areas.
• Work with employees to find cost savings. Tie employee incentives to cost reductions.
• Build a cost reduction target into the key performance indicators of employees.
• Be flexible with your staffing arrangements. This includes reviewing customer flows and having the right number of employees to match predicted customer flows. For example, reduce employee numbers at the start of the day when customer numbers are low, or open later in the day.
• Focus on keeping good employees. Replacing employees can be expensive, not only in direct recruitment and training costs, but also the impact it can have on other employees and customers.
• Seek quotes from different suppliers to see if you can get a better price. This has the added advantage of finding potential replacement suppliers if you experience problems with a key supplier. If you go with cheaper suppliers, ensure they can meet your needs and the quality is comparable.
• Research whether outsourcing business functions or processes will provide a similar or better outcome at a lower cost.

Adjust your product or services

• You can limit price increases by adjusting your product or service. For example, reduce the size of your product but keep the price the same.
• Do the calculations to ensure that the adjustment to your product or service doesn’t leave you worse off profit wise and reputation wise.
• Consider providing value-added options to your products or services when increasing prices.
• Tell your customers about the changes and explain the reasons why.

Improve your cash position

• Strong cash buffers buy you time while you consider how best to respond to higher prices. Keep collecting money owed to you quickly, maintain your payment terms and favour cash sales.
• Reduce inventory, particularly slow-moving items. Discount them to move them more quickly and get cash into the business. If that doesn’t work, bundle them up with other items. While reducing inventory ties up less cash and reduces the cost of holding stock, it requires more regular purchase of stock – this increases the risk of shortages, in turn impacting sales.

Invest in technology that improves business efficiency

You should consider technology options that make your business more efficient and improve the customer experience. Examples include:

• process automation software that automates manual tasks such as invoice handling and processing
• artificial intelligence to improve delivery routes
• 3D printing to overcome minor supply disruptions
• mobile apps that make it easier for customers to place orders and make fulfilling those orders quicker
• create dashboards that measure efficiency and productivity. For example, you could track how many items were produced and how many were defective, or the number of sales leads compared with the number of sales.

Pay down or restructure your debt

• In a high inflation environment, interest rates will go up. Where you can, pay down your variable rate loans and/or restructure your debt by locking in a fixed rate loan if it’s favourable. If uncertain about your financing options, seek independent advice.

Stock up on inventory and look for new or alternative suppliers

• If you have the financial resources and space, it might be beneficial to stock up to beat price increases. However, make sure you buy inventory that you can sell or does not become obsolete, as this approach ties up precious cash resources.
• Seek alternative suppliers. Different suppliers can reduce costs, however, be aware of potential changes in quality and other differences such as supply times.

Focus your marketing activities on your unique selling proposition

• Figure out what sets your business apart from the competitors and focus your marketing on that. as this approach ties up precious cash resources.
• Focus marketing on higher margin items, however, be aware if your low-margin products or services bring customers ‘through the door’.
• Target your marketing at customers who are less price sensitive.
• Target customers that might want to bring forward spending to beat price increases.

Amend your sales contracts to allow you to adjust prices

• While fixed price long-term contracts provide revenue certainty, they undermine your business when prices are rising faster than expected. You can reduce this risk by asking your customers to reduce the contract length and/or include variable pricing mechanisms in your contracts.

Use scenario analysis

• Scenario analysis allows you to better understand what impact various “what if” scenarios such as a 20 per cent rise in input costs may have on your business. Run a few “what if” scenarios. Armed with this information, you can better plan for such possibilities.

Other

• Seek advice. Speak with your accountant to get a clearer picture of your business and their ideas on how best to manage through high inflation.
• Give priority to projects that can boost sales and improve efficiency. For priority projects, keep investing in them. For others, consider cancelling or delaying them.

Remember: you are in business to make money

If you keep absorbing price increases without passing them on to customers or through efficiencies, you are making less money and potentially putting your business at risk. 
Sometimes, you may have to ride out a challenging economic period. However, we recommend you explore every possibility to maintain profitability. Hoping high inflation will go away quickly isn’t a plan that will help your business, employees and customers. While you may be in business for reasons other than profit, making money is still fundamental to any business.