Happy beginning of summer! After our April newsletter when I discussed various strategies to help companies justify a price increase, I had a lot of very positive feedback, and quite a few subscribers asked me to write more on the topics of inflation and pricing. In fact, we had an amazing 51% open rate on that newsletter, our highest ever!
The inflation we’re all experiencing is somewhat relentless. Consumer prices in the United States shot up again in May by +8.6%, the largest increase in 40 years, and gas prices are now well over $5 a gallon going into the busy summer driving season.
If you produce goods or sell products, you are certainly facing rising raw material and transportation costs (and supply chain issues) which are cutting into your profit margins. And if you sell services, given a tight labor market, as you’re having to pay your employees more to keep them happy, you’re also seeing profit margins erode.
Many now fear that we are soon going to be entering a period much worse than inflation…something called “Stagflation”. This is when not only do products and services keep going up in price, but at the same time, the economy slows down into a recession and companies start laying off workers. A weak stock market would likely accompany this situation as well. Hopefully, the Fed will be able to raise interest rates just enough to stabilize inflation, but generate a “soft landing”…and avoid a recession. Only time will tell…
But in the meantime, how can you manage your business going forward in such a difficult inflationary environment?
7 Strategies to Help Manage Inflation!
- Internalize The Fact That There Are Many Risks Now In The Global Economy – And you can’t really control most of them. Aside from inflation itself, there are also rising interest rates (making it harder to borrow money or buy a house), labor shortages, energy prices that are very volatile, supply chain issues, the war in Ukraine, and of course both geopolitical instability and many difficult domestic issues (such as rising crime rates and an open Southern border). So you must think about which of them you might be able to offset with other more positive approaches.
- Watch Costs Very Carefully and Develop “What If” Scenarios – It goes without saying that you should monitor costs and control them as much as you can. But you should also run a few “what if” scenarios such as what if raw material costs go up by 40%? Do you have enough cash on hand to weather that? This is also a good time to be sure you’re company’s bank “credit line” is easily accessible, so you can access quick cash if needed for working capital.
- Better Articulate Your Value Proposition And Brand Positioning So You’ll Be Worth A Higher Price To Your Customers – We do positioning strategies for many clients every year. Ask yourself…When selling or marketing your product/service, what do you say about it? What are your core benefits? What do you makes you truly unique and special? Are there “non tangible” benefits you can tout? And what do your key competitors say about their products? What is your value proposition that makes you worth buying vs. your key competitors? Are you healthier? More socially responsible? And how do you articulate that “story” clearly and succinctly so it’s easy for the customer to see what extra financial value it brings him/her. If the customer truly understands the “value” of what you provide, then even if you raise your prices, your price increase will be more tolerable to them.
- Leverage Digital In Creative Ways To Grow Revenue – If you end up selling more products, your fixed costs will get spread over a wider range of products sold, thereby lowering the costs for all of those products. Start with low hanging fruit such as organizing buyers in your customer database and e-mailing them about your newest products or providing incentives if they buy soon. Then think about new approaches such as leveraging relevant influencers on Instagram, LinkedIn or Twitter to support your brand. I’m now working with a company who has been extremely creative working with influencers (via humor and the like). Finally, if you’re in the food business, explore buying ads on Instacart to support consumers who want products delivered to their home. Covid has helped home delivery explode exponentially, and this is a great new channel for anyone to drive more business.
- Raise Your Price, But Upgrade Your Product/Service at the Same Time – That way, customers feel that they’re getting more for that extra money. You should look for ways of adding features, benefits or “bells and whistles” that cost you very little to add on to the product or service you’re offering, but create a “perception” of much higher value. And if you can tie the price increase to a “customer centric value narrative”, then you can not only avoid the customer’s wrath, but you may actually come out ahead of the curve. If you provide a vivid and compelling story for why the price is being increased that focuses on better customer value, and puts the customer at the center of the price increase story, you may come away unscathed. The important point here is to actually provide some additional value (albeit at a higher price for the customer) in order to eliminate the perception that they are paying more for basically getting the same product or service they’ve been getting till now (at a lower price.)
- Think About Leveraging “Shrinkflation” – Have you recently noticed that your jar of mayonnaise used to have 16 ounces, but now it has only 14 ounces?This is called “Shrinkflation”.Instead of raising the price of a product, companies just give you less of it, so it is sort of an indirect form of inflation. For your business, you might consider telling your customers that you are now giving a bit less product per box or per jar (people are less “quantity” sensitive than they are price sensitive). Or consider “unbundling” an existing product or service by taking away a few features from the existing version, and charging extra for those features for people who want them (Think airlines who used to allow free checked luggage, but now charge extra for it)
- Upsell and Cross Sell – I often tell clients that these are two of the most powerful profit drivers, yet many companies don’t do either of them especially well. “Upselling” is when someone wants to buy the $250 item, and you convince them to buy the more expensive $400 item. If the $400 item has a better margin (which it usually does), you’ve not only increased profits, but you just increased revenues by +60% as well. “Cross selling” is when they buy one item, and you convince them to buy a few others as well. Think car dealers. Once you decide to buy a new car (if you can find one anywhere J), the dealer will try to cross sell you other items such as a leather seats package and a long term warranty.
The Bottom Line
Inflation will likely be here for a while, so in this environment, every business owner and management team needs to think seriously about how to manage this difficult issue…or you risk diluting your margins and profits. Try to think about how you can incorporate some of the aforementioned strategies to develop your go forward game plan.
So until next time, good luck and good selling in the rest of 2022…
Have a happy summer and please stay safe and healthy!