Inflation: Impact & Opportunity to Your Business

Apr 7, 2022 The Opportunities during Inflation from ProCFO Partners

Every business, customer and consumer is being impacted by inflation. Especially in small and mid-market companies, thin margins are quickly evaporating, and the usual and expected financial structures and models are changing. In this article, let’s explore the impact of inflation and discuss strategies and tactics to realize opportunities. From re-evaluating pricing models to vendor and supply chain relationships to even how your company is structured for success, now is the time to scrutinize parts of a company that sometimes don’t get addressed more firmly. 

Understanding Inflation

Inflation is the rate at which the general level of prices for goods and services rises. 

The main effect of inflation is that it makes the buying power of money decrease over time. If a company wants to buy the same amount of raw materials, machinery, or other products today as it did last year, then it will have to pay more for them.

The impact on small businesses varies depending on their type of business. For example, if they are wholesalers, they will see an increase in the price of their goods without any change in their cost to profit from it. On the other hand, if they are retailers, then inflation will affect them negatively because their costs go up but their revenue doesn’t change because people won’t be able to afford their products as easily.

The Opportunities Inflation Creates For Your Business

There are many things businesses simply can’t control where inflation is concerned. Costs of goods rise, consumer attitudes change, vendors and trusted suppliers go through their own difficult situations. But there are opportunities inflation presents:

  • Pricing model
  • Cost Structure
  • Innovation
  • Communication

Pricing Model

Many small and mid-market businesses are simply under-charging for goods and services. The trepidation that customers will balk at modest price increases or will abandon you for somebody less expensive can keep us locked into low-margin price points. In times like inflation, it’s an opportunity to make some corrections to your pricing model. If you use a fixed pricing model, it might be time to increase your prices. If you are using a variable pricing model, you can adjust your prices according to changes in market conditions. This may mean you raise prices that are overdue for an increase, or you commit to lowering prices again when inflation goes down.

Some businesses must pass on increases to the customer. A transportation company can’t absorb a tremendous surge in gas prices without increasing prices. Your customers will almost certainly understand.

Now is also an excellent time to review low-performing contracts and consider weeding them out or renegotiating. Low-paying customers can take up nearly as much time and effort as more profitable customers for many service providers. If you’ve been reticent to cull your customer list, now is a good time to consider it.

Cost Structure

Evaluate the way your company allocates its costs among its various departments. The cost of each department may be allocated based on the percentage of sales, the amount of production, or some other measure. If you’re unsure of those allocations, it’s a sign to calibrate your financial functions. Your CFO should take the lead in helping to achieve this.

There are two types of cost structures: variable and fixed. A variable cost structure is when the costs change with changes in production or sales volume, such as materials used, electricity usage, and employee wages. Fixed costs do not change when production or sales volume changes, such as rent and insurance premiums.

Some fractional or consultative relationships can be especially valuable during inflation, as they protect you from significant overhead but can deliver the expertise and leadership your business requires.

Our advice is to explore your costs in-depth. Are there any expenses that aren’t critical to the business? Look to reposition yourself where you come out of a challenging situation with a strong financial position, engaged employees, and solid but sensible vendor relationships.

Innovation

We saw during the pandemic how companies found new opportunities through innovation—offering new services or products or transitioning to new delivery or service models.

Smart companies will innovate during inflation too. Make yourself as valuable as possible to your customers, and create new pathways to revenue with new customers. Consider modifying a service you offer to have a “lite” version that can be profitable but perhaps more affordable for customers. Or create a “premium” version with faster delivery or additional services at a higher price point. Bundle existing products together into a new package. The point is, constraints can create opportunity.

Communication

Customers will understand price increases or modifications to what they typically experience – but they’ll really appreciate being made aware first. They may not be happy, but they’ll understand.

Be transparent with customers and let them know the realities:

  • Prices are increasing by some amount
  • The price increase will go into effect on some specific date
  • While it’s not necessary, customers may appreciate knowing more about why your prices are increasing.
  • If you plan to bring prices back down in the future, say so – even if you’re unsure when.

The opportunity to reinforce a culture of authentic, transparent customer communication can go a long way to creating long-term satisfaction and confidence.

Looking Ahead

Inflation won’t last forever – even if it sometimes feels like it. Is it a little scary out there right now? Yes, it is. But it doesn’t have to be when you plan, prepare and position your company for long-term, sustainable success. With the right leadership and approach, inflation can be a catalyst, not a catastrophe.

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