In the past, I have talked about adopting a pricing strategy that aligns your business value proposition (VP) with your cost of goods sold (COGS). In other words, set pricing by ignoring your competition and focus on customer value. By focusing on the value to the customer (removing their pain point), you immediately take the competition out of the pricing equation. But what happens when you are faced with spiking inflation?
According to a new CNBC-SurveyMonkey Small Business Survey, about three-quarters of small business owners said they are experiencing rising supplies costs. Another survey indicated the number of businesses passing on costs to customers has risen to around 47% in the first quarter, up from 39% during the previous quarter. A separate survey by the National Federation of Independent Business found that about 22% of respondents reported inflation was their single-most significant business problem last month. When you factor in other big concerns like labor shortages and rising wages, small business owners are really getting hit. These pressures are brand new for most small business owners, thanks to years of low inflation. So if you are faced with how to address inflation, here are some thoughts to consider.
Refine your business operations to squeeze as much cost out as possible before making the decision to increase price:
- The high-inflation environment has given small-business owners a pressing need to reevaluate the specifics of the way their businesses function.
- Consider a well-thought-out expansion strategy or adding alternate lines of goods to increase your profit margins. These types of development opportunities can help increase sales, which in turn can help offset fixed inflation costs like rent or equipment.
- Business owners should take stock of their current bestsellers and use them to their advantage. If you lean into your bestsellers and try to sell more of them in more places, you’re not only locking in something you know is successful, but you can also start to negotiate your pricing with suppliers.
- You also should have a few backup plans for manufacturing in the case of continued supply chain delays. Buying in bulk with certain vendors, especially when you’ve negotiated lower prices, can also lead to better profit margins.
- Small businesses should explore utilizing reward based credit cards to make their own purchases.
If you are forced to raise prices due to inflation, think about how to do it with your customer in mind:
- I have always found that your customer will understand (maybe not like it) if you frame it in the truth…you are taking it as a last resort step to keep the business sustainable. Maybe word it something like, “We’re a small business, prices across the board have gone up. We’ve tried to keep our business going, but at this point in order to survive and we still appreciate your business but we have to raise our prices.”
- Perhaps think about taking your customers through the inflation price increase changes by running a “last-chance” promotion, where you tell them that your prices are going up on a certain date due to inflation, but frame it like a sale. This way, you’re encouraging them to buy from you now at your lower prices, while also notifying them of the price increases
Pricing is something that, as a business owner, should always be at the forefront of your mind. Your profit margins can make the difference between a business that can scale and grow exponentially versus one that remains stagnant and dies. But for many business owners, the idea of increasing their pricing is often met with some hesitation due to worry about losing out on new clients if the rate change caused pricing higher than your competition. Maybe you have clients that have been with you for several years and feel like they deserve to stay at the lower price point. Whatever the reason, now is the time to put the excuses aside and review your pricing. Inflation hit hard in the past year, and for many industries, those price increases will continue for the foreseeable future. So, you may have to adjust if you want to remain sustainable.
For more thoughts, search for the key word pricing.
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