I am participating in a multi-blogger forum through Forbes magazine as part of their
This week’s topic from Brett Nelson, Entrepreneurs Editor at Forbes.com:
There’s a lot of confusion about whether we are in a deflationary or an inflationary environment. What sorts of pricing strategies should small business owners consider right now?
I have consistently been on the side of those who are worried that inflation is inevitable. Although the recession has dampened inflationary pressures, I still believe this is only a temporary reprive.
The problem for small business during inflationary times is that they are less able to adjust prices as quickly to
adjust to inflationary pressures. There is never a smooth and orderly increase in
prices for every business in the economy and small businesses often suffer the most.
If you have big suppliers and/or customers they can tie your hands.
Your costs go up, but you are unable to pass along these costs with
higher prices.
What I worry about even more is that we may see inflation take hold long before the recession is over. This makes keeping prices up to stay ahead of increasing costs even more difficult as demand will still be fairly weak for some time.
So
what can a small business do in terms of pricing strategies to try and weather this
impending inflationary storm?
The recession has made entrepreneurs leary of doing anything but cut prices to keep their businesses afloat during the recession. While that may still be the best course over the short-run, pay very close attention to pricing from your suppliers, decreases in unemployment, increasing interest rates, and pricing moves from the big boys in your industry. These are the elements of your inflationary dashboard.
When inflation heats up even a little, be aggressive with frequent
small price increases rather than waiting and trying to catch up at
some point with one big jump. Don’t let yourself get behind, as small businesses can almost never play catch-up with their prices.
This can be tough to implement for some businesses, particulary if you publically list your prices. For example, it can get very costly to print up new menus each month for a restaurant owner who wants to follow this strategy.
But customers are less likely to pay attention to price increases if they are small, so it is essential to find creative ways to communicate your pricing to allow for you to implement this strategy during inflationary times. For a resaurant it may require using menu inserts that can inexpensively be replaced. This was actually very commonly used in restaurants during the 1970s and 1980s when we had high inflation.
I know the question of the week is pricing, but I can’t let this discussion go without a brief reminder that the income statement is also made up of costs. Adjusting to inflation also requires careful attention to expenses, as cutting costs can at least somewhat help ease the pressure to increase prices.
Continue the prudent management of expenses that helped you survive the recession:
– Keep overhead low.
– Build cash reserves to buffer short term price increases that precede your ability to get higher prices from your customers.
– Watch your margins carefully. Worry about growing profits, not sales.
– Don’t lock into long-term contracts that have narrow margins with large customers.
– Pay down variable interest loans ASAP, especially now that
interest rates are temporarily realtively low. As soon as inflation heats up, interest rates will continue to rise.