The beast is back. Inflation is roaring, and showing no signs of letting up. Small business owners concerned about inflation has increased from 74% in Q4 of 2021 to 85% in a recent update of the Metlife/Chamber of Commerce small business index.
Vulnerability of Small Businesses
The problem for smaller businesses is that they are less able to adjust to inflationary pressures. Small businesses are the weak player when it comes to market power. Time is your enemy right now, as inflation is raging at levels we have not seen in decades.
If you have big suppliers or customers, they can tie your hands. Your costs go up, but you are unable to pass along these costs with higher prices quickly enough to keep up with the inflationary squeeze.
An additional worry is that we have a weak economy with inflation — this is called stagflation. In this scenario, customers begin to sit on their hands. When you raise prices they either buy less from you or even decide not to buy at all. Consumers go out to eat less often and when they do, they buy less expensive meals. They travel less and choose cheaper options. They postpone buying new goods. They also postpone maintenance on our big investments, such as houses, cars, and appliances.
Employee costs were already on the rise due to recent labor shortages, but now will likely accelerate as a result to their own challenges with inflation in their everyday lives.
What to do?
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 if the delay price increases.
This can be tough to implement for some businesses, particularly if you publicly 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 be vigilant. 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 you to implement this strategy during inflationary times. For example, a restaurant may use 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.
In addition, prudent management of finances can help a business survive inflation:
- Find ways to cut expenses without impacting the core value offered to customers.
- Keep overhead low.
- Build cash reserves to buffer short term price increases that precede your ability to get higher prices from your customers. I know this sounds contrary to the investment advice we are now hearing about holding cash during inflation. Don’t think of this cash as investment — it is your lever to hold back the rising tide of inflation. Think of it as an internal line of credit to hold off the impacts of inflation.
- 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 relatively low. As soon as inflation heats up, interest rates will continue to rise. And given the stubbornness that the Fed is now showing with interest rates, we may soon see huge spikes in rates over just a few quarters as inflation takes hold.
I was reading an article that people are more likely to realize if something goes from $9.99 to $10.99 but not if the amount of product goes down. This can be another way to combat inflation with a smaller risk of losing customers.
So many people don’t make the connections between politics, inflation, and what it means even for those who work for large organizations, and, therefore, feel falsely secure. I’m sure that I’m not the only one who knows someone like this.
“Stagflation” is an important concept that many don’t know or simply ignore. When inflation causes consumers to slow or stop spending, there is a trickle-down effect for employees too. It’s interesting to consider how “consumers going out to eat less often” and “traveling less” could be further exacerbated by simultaneous bad press in a state that relies on tourism.
Dr. Cornwall’s pricing advice is good for entrepreneurs and small businesses and individuals too.
Service businesses that operate on contract have been on my mind as inflation increases. With many contracts being 6 months plus there is a lot of space for economy change and little room to negotiate. This is good advice to not lock in to long term contacts that have low margins.
In my life, I have found what you stated about small, frequent price increases being most effective method to combat inflation to be true. Working in Retail, I have seen first hand how both small price increases and large price jumps “play” to the customer. Customers are certainly more friendly towards small, constant increases.
One way that I have seen some restaurants successfully raise their prices at small and often increases is through virtual menus. If it is created well, it can be nice to scan a QR code with your phone and see the menu on a website, rather than the restaurant having to print new menus with new prices every month. I used to not understand why so many places were sticking with the virtual menu even long after the biggest worry about germs from COVID had passed. But I get it now, that it has more to do with needing to keep up with inflation in an inexpensive way rather than needing to keep people from touching the same menu.
Over the past year, all businesses are vulnerable due to all the inflation, politic, and not enough resources for the supply and demand parts of the job to obtain a successful business. The cost of everything is going up tremendously; which not sure if we’ve had which has made it difficult to sustain a living in these days. I think we can all learn from todays world, always focus on growing profit instead of sales because that will determine the success of the business in the end of things.
I have seen this to be true at my own workplace where since we have raised prices people have commented on it more. But in order to keep the business profitable, you have to lean into increasing prices. Additionally, if you are keeping the same standard of service or product then people will be willing to pay for it.
I think that the advice given under the “what to do” section is very valuable and important. I think there are often times when we wait too long in business to catch up with a trend (even a trend like inflation) rather than proactively or readily being able to adapt and adjust the prices of our product to meet the demand of the market.
I think that the advice given under the “what to do” section is very valuable and important. I think there are often times when we wait too long in business to catch up with a trend (even a trend like inflation) rather than proactively or readily being able to adapt and adjust the prices of our product to meet the demand of the market.
It is hard to keep up with inflation and how to raise prices without losing customers. I think it is very important to make small increase prices in inflationary times. Over the past years I have seen the prices at restaurants go up $5 dollars over night. To me it was shocking that they abruptly did that. I know it was necessary for their business to stay afloat but I think a slower increase over time would have decreased the shock factor.
It is very disheartening to realize that inflation, or the ‘beast’, may not slow down at all. It is unfortunate that many small businesses may not be able to thrive during these times, although these are fantastic tips. Having multiple small price increases rather than a large jump won’t scare customers away.
During the past 2 years of the pandemic, my parents have had to be very strategic with their pricing increases due to inflation. We actually do the paper menu inserts as mentioned in the article. It becomes very difficult for small businesses who cannot raise their prices because they are not able to supply as quality of materials as they once did.