How can a business realistically measure and manage the impact of inflation in today’s market?
This is a question filling up board rooms in countless industries as inflation continues to soar across the country. Businesses are continuously looking for ways to reduce the impact on their bottom line and calm an increasingly frustrated consumer base.
We understand that businesses are facing the complex challenge of balancing pass-through cost increases while maintaining margins and not losing customers. However, if cost increases outpace price increases over the long term, a company will eventually go out of business.
While there is no universal solution to combat inflation’s effect on the cost of doing business, the following actions can help your business better measure and manage the impact of inflation.
Implement a Tactical Approach
To offset inflation costs, a tactical approach is needed. A one price increase for all approach typically does not maximize the likelihood of offsetting impacts of inflation. Companies need to understand where they can increase price, but just as importantly, they also need to know where they should not raise price.
To better understand the impact of inflation, it’s helpful to generate a detailed analysis of raw material and product cost increase, mapping the total impact to profitability to specific customers and products. Knowing where and when profit will be impacted can help decision makers determine actions to offset inflation.
Leverage Data and Reporting
We recommend actively forecasting your business’s revenue and profitability on a regular basis—at least monthly (and even weekly depending on the amount of new qualitative and quantitative data available).
Have reviews each week to understand: Which customers are accepting or rejecting price increases?
Are specific items harder than others to increase price?
Sales velocity of products: What products are selling or not moving? How should I change my purchase orders accordingly?
Feedback of what is going on in the market, including customer, competitor and vendor intel that could be a threat or opportunity to the business. By implementing formal reporting schedules, your business can increase individual accountability and make better informed decisions. You will also be able to determine which customers and product lines are not meeting profitability standards and decide if they are expendable.
Measure Cost Pass-Through Percent
It’s important to actively measure changes in cost and price to determine the percent of costs dollars passed through in the form of a price increase (Cost Pass-Through Percent). With this metric, a business can quickly determine which customer, product and internal leaders can increase price to offset inflation and continually readjust their strategy to improve profitability.
Consumers are rightfully frustrated with the impact of inflation on their finances. We know that discussing prices with customers can be tough with tensions already high, but you must be willing to have the difficult conversation.
Having a candid and transparent conversation can help consumers understand why prices are increasing and dispel some of the common myths surrounding the current economic environment. Communicate the need for the price increase in a clear, easily understood message, emphasizing the need for the increase to maintain the value and service levels provided to the customer.
If you have any questions about how to better manage the impact of inflation on your business, please feel free to contact me directly at [email protected].
Schneider Downs Business Consulting delivers sophisticated consulting services to meet the complex needs of today’s business environment. Our team features experiences professionals across a diverse array of specialties that allows us to help our clients make more informed business decisions across every facet of their operations.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.