Years ago, I worked at Bank of Boston, assigned to an international lending team that managed the bank’s branches and representative offices in Brazil, Bolivia and Paraguay. At the time Bolivia was experiencing uncontrollable inflation, with annual rates exceeding 20,000 percent. On paydays, laborers’ wives met their husbands at work with wheel barrows to carry the large bundles of nearly worthless currency paid to them, intent on turning that paper into tangible goods like bread or meat. They knew that by tomorrow those precious commodities would cost even more. Present day United States is nothing like 1985 Bolivia; nonetheless, small business managers would do well to learn how to manage in inflationary times.
The classic inflation-combatting responses of yesteryear, raising prices and cutting expenses, are not the automatic choices they once were. Price transparency has never been greater. The internet provides customers with almost immediate quotes for similar or substitute products/services. Raising prices can be risky. As concerns cutting expenses, managers still have flexibility . . . with one notable exception. The challenging, Covid-altered labor market has made cutting wages and benefits, often among a company’s largest expenditures, more difficult.
So, what is a manager to do?
The January 3, 2022 The Harvard Business Review (HBR) offered these useful tips:
Cleanup and Recalibrate Your Product/Services Portfolio
Consider bundling or unbundling your products and services. Offering streamlined products, or services with fewer features, may prove just as attractive to customers, especially if they perceive little or no price change.
Reposition Your Brand
To quote HBR: “At any given time, most offerings are either overpriced or underpriced — in some cases significantly — relative to the value they deliver. A wave of inflation offers managers an opportunity to correct these misalignments in their product positioning.” Example: I have one Boston area client that offers what it considers to be a premium analytical service; it recently realized that it had been pricing it services almost 50% below those of its New York competitor.
Change Your Pricing Model
Remember also that customers can be both quantity sensitive as well as quality sensitive. Selling fewer units per package or offering shorter subscriptions may be more acceptable to customers than a simpler (“classic”) price increase. Consider aligning your prices more closely to how the customer uses the product as well: Customers paying when they consume or create something, not necessarily when they buy products or stockpile them.
Consider, finally, the lesson taught by those Bolivian housewives of nearly forty years ago. Given today’s supply chain bottlenecks and creeping inflation, buying critical inventory components in greater-than-normal quantities may be a wise choice. Chances are those components will be both more costly and more difficult to obtain as the year continues. No need to bring a wheel barrow.
Mr. Dragone has spent the past twenty years as an acting/consulting CFO for a number of start-ups in a wide range of industries. Peter’s prior experience is that of a serial entrepreneur, managing various start-up and turnaround projects. He was a co-founder of Keurig.