How small businesses can manage through inflationary pressures 

During 2022, small business owners dealt with something extraordinary not experienced in years.  Inflationary pressures impacted small businesses, resulting in increased cost of goods and services, reduced consumer purchasing power, wage pressures to keep top talent, and overall pressured profit margins.  The challenge for business owners is recognizing the impact of inflation and reacting accordingly to maintain profit margins.  Here are ECG’s tips for managing through inflationary pressures:

1. Analyze Your Per Unit Profit: In this environment, small businesses need to assess their business model actively – including the impact to unit economics.  Pricing tests are a tool to determine how product or service conversions are impacted to pricing changes.  Understanding inflection price points where price increases Matching prices to accommodate inflationary expenses, and understanding the impact to unit sales, is critical to maintaining profit margins. However, this should be tested and done slowly. Be strategic – look for areas where pricing pressure is less likely to impact unit sales.

2. Evaluate and Automate Processes: With the wage pressures that exist in the economy, find ways to explore automation.  Re-evaluate ways to extract greater operational efficiencies or other mundane tasks that can be automated with software or other processes/solutions.
3. Control Costs: Set up a focused project team to reevaluate cost structure and opportunities to improve margins.  Develop a constant feedback loop throughout the organization on pricing impacts on the supply side.  The constant data loop will position you to better assess margin impacts and when to address price increases. 
4. Productivity Improvement: Expansion Capital is based in Sioux Falls, South Dakota. Currently, the unemployment rate remains below 3% and recruiting top talent has remained a challenge post-COVID. Your employees will often have the most impactful suggestions to increase productivity.  The small business and the employees are in this together.  Engagement and recommendations from your team will often result in solving the most difficult challenges.
5. Reduce Other Expenses: Examine each expense item by line item.  Find ways to either eliminate redundancy or waste, or renegotiate contracts with suppliers or vendors to lower costs.  This could include negotiating longer contract terms at reduced fixed prices.

6. Communicate with Customers: Use terms like adjustments or updates to our pricing schedules. Communicate the “why” but most importantly focus on the value you deliver with your products or services.  Additionally, if you do receive push back be creatieve with ways to minimize the impact that still benefit you – ie, discounts for longer term or volume commitments. This can be a “win-win” for both you and your customer.  In summary, small businesses can manage through inflationary pressures through consistent engagement and analysis of their price and cost structure.   It is important to be proactive and adapt to changing economic conditions to maintain profitability and sustainability.

Author: Tim Mages, Expansion Capital Group Chief Strategy Officer