The annual inflation rate right now is over 8%. As a business, you are likely to feel the effects of inflation before the consumer because your supplier prices will likely increase before you can increase prices for your end customer. This creates a difficult period for most businesses where their costs have increased, but the prices they charge customers have not. The result is a decreased profit margin. The key is to remember that all of your competitors in your industry are struggling with the same inflationary environment and it’s up to you and your business to adapt and create solutions so you can survive.
1. Improve Efficiency
It’s critical that you think of ways to become more efficient in an inflationary environment. Your business is going to be forced to pay higher costs. Everything from labor to shipping to supplier costs will go up and there isn’t much you can do about it in the short term. But you can react by looking for less expensive suppliers, vertically integrating – for example manufacturing your own products instead of sourcing them or shipping your own products with your own truck instead of hiring a 3rd party company, and making your operations more efficient. One great way to become more efficient is to closely examine your staff and how they perform their jobs. Is there anything that can be improved? Are there any unimportant tasks that can be removed? Finding ways to be more efficient is the most important aspect of reacting to inflation because it allows you to maintain as much profit margin as possible without having to raise prices. If your competitors aren’t reacting as well as you, they will either have to raise prices more than you or go out of business. So inflation is an opportunity if you can become more efficient than your competitors in the business-hostile environment inflation creates.
2. Create new High-Margin Products
Your popular, best-selling products probably need to remain at a competitive price to maintain their popularity. Since the pressure to keep prices low for these established products is strong and your costs are rising due to inflation, the profit margin will likely decrease for these products. However, you should look to create new product varieties that can command a higher price and deliver a higher profit margin. For example, my company CRAVEBOX sells snack boxes and gift baskets. Our best-selling products are general snack variety boxes and prices must stay low for customer demand to stay strong. But CRAVEBOX also sells holiday snack boxes and gift baskets for Halloween, Christmas, Valentine’s Day, and Easter. I’m able to raise the price for these holiday products and demand stays strong since there aren’t as many competitors offering this type of product. So I’m able to regain profit margin by making more on these products. It’s in my interest to create more holiday product varieties and I’m also working on creating gourmet snack varieties to find areas where I can earn a larger profit margin.
3. Raise Prices
At some point, you will need to raise your prices. It’s important to keep an eye on competitors and make sure you’re not raising your prices too quickly. You should remain in line with competitor prices. You likely won’t be able to raises prices as much as your costs are increasing without losing customer demand. So you’ll need to make that decision – do you want to allow your profit margin to decrease by holding your prices lower or raise prices to maintain profit margin and lose sales and market share. I think it’s best to split it somewhere down the middle. You obviously should maintain some level of profit margin – you definitely don’t want to be losing money, but you don’t want to raise prices too much faster than competitors to the point where you’re losing market share that you may never recover. This is also where points 1 and 2 can help. If you can make your business more efficient and create new high margin products, your established popular products might be able to remain at a relatively low price, keep the demand, and still maintain profit margin in the overall business income. This is how you will beat your competition in the long run during an inflationary period.
About the AuthorJohn Accardi is the founder and CEO of cravebox.com and starcoursecap.com. CRAVEBOX assembles care packages and gift baskets to be sold online. STARCOURSE CAPITAL is a venture capital firm that invests in young e-commerce companies. John dropped out of a PhD program at Georgetown University in 2014 to start CRAVEBOX and he says it’s the best decision he ever made. He now runs the businesses out of North Wales, PA and also lives in Manhattan part-time. When John’s not working, he enjoys sailing, playing guitar, and spending time with family.