By Tonika Bruce, CEO of Lead Nicely, who helps startups, nonprofits and leaders win with unique and innovative marketing and business strategies.
With preparation, businesses can survive and thrive in inflation cycles. While there is talk of 2023 potentially being a year in recession—which poses a few economic challenges for small and medium enterprises, such as sales slumps, tight budgets and financing difficulties—we will not get into the politics and philosophy of economics about what is causing this and how to end it. Instead, let’s look at why inflation doesn’t have to be a nightmare for small businesses.
The Small Business And Inflation
Inflation has made everything expensive, quickly reducing customers’ spending power—and for businesses, that is not good news.
The numbers by experts tell us there is progress, considering the fall from 8.8% in mid-2022 to 7.1% by the end of the year. Projections are made for inflation to fall further to 6.6% by mid-2023. However, the fact remains that many business owners ushered in the year facing the same market conditions—a much higher inflation rate than the pre-pandemic period of 3.5%.
The rising costs for businesses often lead to higher prices of goods and services to spare profit margins. In turn, consumers face increasing energy expenses with other essentials and may demand increased wages to sustain their lifestyles. This wage-price cycle can accelerate inflation. If salaries fail to keep up with inflated prices, customers naturally reduce consumption, thus potentially worsening an already delicate situation for businesses.
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It can be difficult to keep up with an ever-changing market and industry trends, and sometimes it is necessary for small businesses to start over. However, my experience with launching businesses has shown me that small businesses are resilient. Most small business owners are individuals who have an entrepreneurial spirit, are seeking creative solutions to problems and are bold enough to take the risk. While we do see businesses fold up in the face of economic hardship, many pivot and morph into an entirely new venture or start afresh.
While consumer spending dips during inflation, this does not mean people stop buying—they only become cautious about where they spend their money by shifting focus to products they see as essential. In this case, consider proactive strategies for restructuring your pricing to boost your sales. Here are a few methods to consider.
• Sales may slump, but customers will look for higher value for their money.
Inflation means consumers are spending less. This is an opportunity to create new sales avenues. Business owners must adapt their products and services to provide value and appeal to customers.
Necessity is the mother of invention. We saw a similar scenario (subscription required) at the onset of the pandemic as companies adapted their businesses to meet new needs and movement restrictions by making products available online. Some even pivoted to offer substitute products.
Customers struggling with inflationary pressure are likely to appreciate the relief from adjusted prices. But how do you balance customer relief and making a profit? One answer is creative pricing. For example, for subscription-based services, consider exploring longer payment plans to make it easier on the wallet, and price bundling for customers seeking discounts.
• If customers are not purchasing, reach out to them instead.
Before inflation, business outreach activities relied on marketing campaigns, at which point the buyers came knocking. However, during inflation, fewer people are looking for products to purchase, not to mention how businesses typically put the brakes on marketing expenses during uncertain markets.
Now is the time to get in touch with existing customers. These are the clients who will keep the doors open during economic turbulence when new customers may be hard to come by. The goal is to keep existing clients involved in your business’s operations and demonstrate appreciation for support during slower times.
For example, consider utilizing newsletters or emails with regular news updates about the company or product discounts for loyal customers. Another potential engagement channel is an online portal that allows customers access to resources like tutorials and how-to guides; this can be effective for keeping clients engaged even when they are not actively purchasing. You can also host exclusive events such as virtual conferences and discounted webinars for service-based businesses, which have the benefit of helping to build community.
• Funding may be hard to come by, so look for alternatives.
In uncertain markets, investors may pull out to manage risk, but they often don’t disengage entirely. Some investors are still willing to spend, although typically at a higher price. The same goes for funding from banks. While dwindling capital might tempt business owners into debt, now is not the time. Instead, I recommend that you manage costs. Cut back on spending, invest wisely and monitor cash flow.
First, audit your books to identify any existing money leaks and build a reserve to cushion the business during this cycle. Next, audit the processes. What systems are in place? Are they efficient? How about cost-effectiveness?
It is not uncommon for businesses to invest in systems for efficiency during high-growth periods, but with tough economic times, some may not bring enough value for your money. Some project management tools have increased in price, and CRMs can sometimes be too pricey for small business operators. Auditing these puts you in a position to identify cost-effective alternatives that can deliver as much or more. That may mean jumping on up-and-coming solutions during this slow growth period, before their pricing goes up.
The Bottom Line
Inflation and recession do not always have to spell doom and gloom for the entrepreneur. Small businesses can survive and even thrive during inflation if they are attentive to cash flow, products and services, and customer relationships.