Many executives are deeply concerned about the effects of inflation on their business for numerous reasons. They see their costs rising due to cost increases from suppliers and utilities, rising interest rates and leasing costs. Executives know that they will need to, sooner or later, pass those costs on to their customers. They worry about their customers’ ability to keep buying their products and services. Executives already dealing with numerous other external factors such as the lingering effects of the pandemic, rising costs and availability of labor, and rapidly shifting technology and client preferences, see the impact of inflation as one more thing piled on to an already overflowing plate of problems.
Instead of seeing inflation as another serious problem to contend with, can we turn it into an opportunity? Simply raising prices in response to inflation has the potential to hurt customer relationships. Let’s look at 5 ways to control costs and minimize price increases to customers, while preserving revenues and profits.
Quantify your debt and equity. What are your outstanding loans, and what is your short-term credit and supplier credit situation? Where do you stand regarding convertible debt, preferred shares and equity shares? What are the repayment terms and schedules? Which ones have interest rates tied to inflation? Decrease your cost of debt by restructuring your loans, obtain new lines of credit, and ensure sufficient financial cushion. (Harvard Business Review).
Minimize Attrition. Despite inflation, it is still a hot job market for workers. Studies show that losing an employee costs 30% or more (sometimes much more) of their annual compensation due to recruitment, training, and lost productivity costs. Providing career advancement and growth opportunities and purposeful employment (see our May 2022 article here), communicating frequently with them, and providing flexible working conditions all serve to increase retention, thus reducing costs. For example, many workers prefer a remote or hybrid working arrangement – do your best to accommodate them.
Avoid the cost-cutting axe, use the scalpel. It is tempting to cut costs across the board: expenditures, headcount, salaries, R&D, training, and marketing and sales. These actions lead to higher attrition as employees (especially key employees) head for the exit before they too are let go. The employees that remain are fearful and distracted leading to a loss of productivity. Instead, cut costs carefully and selectively. First, ensure you have high resolution spending visibility to understand fully where money is spent and who spends it. This is to ensure that all decisions are made knowing the full impact on the P&L (Harvard Business Review). Identify burdensome customer facing, back office and product and service processes. Which ones yield the appropriate ROI if they are automated? For vendors that you regularly do business with, negotiate discounts. Many of them would rather give you a discount than lose your business such as your landlord and those that provide cleaning and delivery services.
Counter price hikes by adjusting delivery priority. Forbes observes that many companies practice a first come, first served order priority regardless of profit margin. However, most businesses have different profit margins for different products and services that they offer. For price sensitive customers that aren’t tolerant of price increases, lower their delivery priority on offerings with lower profit margins. Tell customers that although these offerings will have slow delivery, other products or services can be provided more quickly – those that are the most profitable are provided first.
Plan options beyond pricing to reduce costs. For products (and if applicable, services) most affected by inflation, reimagine them by adjusting product design - product features, materials, packaging – and deliver method. The goal is to implement the least cost method to produce whatever is being sold, while maintaining the functionality customers require. Companies that can quickly redesign products can be agile in finding substitutes for materials and components that have the highest rising costs, designing out expensive or hard to get parts, or removing features little used by customers (McKinsey).
Although price increases are highly likely in an inflationary environment, implementing nuanced changes across the business helps you retain customers and enable your company to thrive through challenging times. These measures streamline company operations and can result in more profitability in the long term.