Three alternative strategies to combat inflation

Inflation is rising, the labour market is tight, and businesses across the country are feeling the pinch. How should ambitious owners respond?

Companies often deal with inflation by selecting one of three unattractive options. They can upset their customers by raising prices, upset their bottom line by cutting margins, or upset practically everyone by cutting corners in order to cut costs. Faced with this trilemma, most owners ultimately resort to raising their prices, then look for clever ways to mitigate the fallout.

What they often overlook are alternative responses that focus on profitability, efficiency and strategic pricing. Here are three options that you might consider to combat rising costs in your business.

1. Perform an 80/20 optimisation

Typically, 80% of a company’s profit comes from about 20% of its customers and 20% of its products or services. Look at your financial data to find out which customers or products are your biggest money makers. Consider the impact of no longer selling products or serving customers that provide little to no profit. Focusing your resources on servicing your most profitable products or services will increase your margins.

2. Streamline processes

Improving processes may mean exploring automation for your company. As the cost of labour continues to climb, re-examine your key processes. Could time-intensive work be automated? Is there software that can be introduced to fully automate, or at least significantly decrease human time and reliance? Think scheduling, order taking, billing and collecting payments. Increase productivity through clever use of technology.

If not automation, are there are quicker or simpler ways to do things? For example price estimates – are you spending hours pricing a job worth $1,000? Instead of taking three hours to calculate to the exact dollar, can you take 30 minutes and quote a range (e.g. $1,000-$1,400)? Look into streamlining over-complicated processes.

3. Review your pricing model

Instead of increasing your prices, consider changing the way you charge your customers. Can you offer a lower, more transparent price per month, per kilometre, or per other unit of consumption that is more manageable for customers than a larger, one-off purchase price? Can you bundle or unbundle existing products to expose customers to more attractive price points? Can you introduce new versions with fewer features, or conversely, unlock a greater willingness to pay by increasing quality without a significant increase in costs?

It goes without saying that reviewing and reducing your expenses is a must. If you haven’t already, spend time looking at how you can cut costs. Check if you’re paying for products or services that aren’t being used, and cancel them. Also consider substitution – you may find alternate products, ingredients or suppliers that will save you money.

Another must-do is to consider your future lending requirements. If you expect challenges that may put a strain on your cashflow or business performance, be proactive and sit down with your bank manager. Talk through how your business is performing and how you expect things to go over the coming months.

The banks are more likely to support businesses that have historically been strong performers and where you have a good business case to present. So do your homework and go prepared. Be clear about why and how the business can get back to being a strong performer, and back this up with numbers. It’s always useful to have up-to-date financials including a forecasted profit/loss and cashflow to present.

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