With inflation currently at 8.6 percent, the fastest rate in 40 years, businesses may not be able to simply pass along cost increases to customers. So, what options beyond price increases do companies have to address the impact of inflation?
As inflation continues to change how consumers navigate the marketplace, businesses are looking for profitability strategies to curb inflation without the consumer sticker shock.
The decision to raise prices comes with potential risks and limitations, such as customers taking their business somewhere else. There are a few ways for businesses to address the impact of inflation other than price.
Offer Low-Cost Alternatives
Find ways to offer customers low-cost alternatives to the current product or service they are purchasing. Taking this proactive approach provides customers options to save money and can therefore be a win-win for both buyer and seller.
The buyer may no longer need or expect the level of service or product at the same price as a year ago, but a low-cost alternative could be a viable solution that keeps the customer happy without impacting the business’s bottom line.
The seller would still need to thoroughly vet the low-cost alternative to ensure that they are no worse off from a margin dollar perspective. Depending on the product or service, it could even be an opportunity to expand margin.
When low-cost alternatives are provided as options, a buyer can perceive the existing product or service as having a higher value, for which they could be willing to pay a higher price.
Many streaming services have begun offering low-cost alternatives such as cheaper memberships that include paid advertisements or limited content.
Review The Cost-to-Serve
Reviewing the cost-to-serve a client can help determine if there is profit erosion that can be addressed. The three primary areas to review are:
Order frequency – Customers who order frequently are costly from a packaging and shipping perspective. We recommend working with customers to reduce order frequency to find savings. This may include simply delaying shipping timeframes to allow bundling or updating shipping costs to reflect incentives for larger orders. Additionally, look at your own company’s purchase orders and see if there are ways to limit shipping costs while balancing inventory levels.
Scrap Rate/Utilization – For manufacturing companies, we recommend reviewing areas of operating waste like scrap rate and re-working operations to utilize more of the inputs/capacity being used to make products.
Evaluate Freight and Fuel Costs
Determine which customers pay for freight and fuel and which do not. Are all the customers who are supposed to pay for freight doing so? Are sales team members waving freight and other fees to capture sales? Review these hidden profit leaks and update policies to ensure the sales team is limited in waiving freight for customers. Just recently announced, Walmart is going to charge some suppliers for the fuel Walmart uses to haul products from supplier warehouse to the retailer’s own depots and stores.
Understand your Customer’s Share of Wallet
Believe it or not, this tough economic environment can be an opportunity to strengthen relationships with current customers. Take the time to understand the customer wants. Yes, we know everyone wants prices to go down, but in the meantime, you can help your customers understand where you can provide more value to capture more of their spend for good and services. Effectively a price for volume strategy, working with customers to understand how pricing is determined and listening to their ideas can build quite a bit of consumer loyalty.
Maintain Prices, Increase Market Share
If your business can, refrain from quickly increasing price. Instead, wait to see how competitors in the marketplace are addressing inflation. By watching how customers in the market react to other vendor price increases, you can gauge if increasing prices immediately is the right move. Offering lower prices than competitors can be an opportunity to capture more market share and attract new customers.
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.