business costs are rising
Businesses around the world, especially in the United States, are feeling the inflation. The tightening labor market is pushing up wages, while also increasing the prices of many goods. It's always a good time to consider cost-cutting opportunities, but doing so avoids the question of what exactly would be different in a high-inflation environment. In high inflation, his three business strategies become more important: quickly adjusting prices, prioritizing high-margin products, and changing inputs in response to changes in relative prices.
Many companies are still hesitant to raise prices. As pointed out in our article on opportunities for profit growth, pricing opportunities are often missed, especially by small businesses. Inflation occurs because demand increases due to massive stimulus from both fiscal and monetary policy. This increased demand allows many companies to raise their prices higher than expected. Consumers are stocking up on cash in their bank accounts thanks to reduced spending on stimulus checks, vacations, restaurant meals and other socially connected services. Can absorb price hikes.
In business-to-business sales, virtually all businesses are accustomed to price increases on a wide range of materials. Certain items sold in the B2B sector often represent a very small portion of the customer's total production costs, making it easier for prices to rise.
The second strategy against high inflation is to prioritize the most profitable products. Today, many companies are constrained in their ability to meet customer demands. They can't find the workers they need and can't get more deliveries from their suppliers. Businesses needing industrial, warehouse, or laboratory space also have limited real estate availability.
The most common method is never the best. Many companies simply prioritize based on order date, regardless of profit margins. However, most companies have different profit margins for different product lines. If management determines that the market for a particular product will not accept a price increase to bring profit margins back to where they should be, then the delivery priority will be lowered. Please inform the customer who placed the order that delivery will be delayed. If possible, please suggest other items to be shipped faster. Ship the products or provide the services that are most profitable.
Prioritizing high-margin products can have downsides. Some low-margin products allow for the sale of more profitable accessories or follow-on pieces. Change orders on a construction project may justify a low bid on the main contract. While this may be true, test that assumption rather than blindly accepting the assertion that lower-margin products should be sold before higher-margin products.
A third business strategy in high-inflation economies is to closely monitor changes in relative prices. Not all prices increase at the same rate. Price increases can vary widely, especially when economic conditions are rapidly changing (as they certainly are now). News reports on consumer inflation highlight increases in gas prices and used car prices. These items are not causing inflation. In economist terminology, they are just the first prices that rise based on short-term elasticities of demand and supply.
Because different inputs have different inflation rates, companies should consider substituting one material for another. For example, in manufacturing, different metals may be suitable for certain products. Alternatively, adhesives may replace metal fasteners.
Inflation rates in the United States are currently higher than in most other countries, so replacing domestic raw materials with imported goods and services may help reduce the impact of rising costs. This decision is also not so simple, as many companies want to shorten their supply chains rather than lengthen them. Key strategies are still worth considering. It's about finding alternatives away from high-inflation products.
In the service sector, consider the human resources needed to provide the service. For example, skilled technicians may not be as likely to see wage increases as unskilled workers, and vice versa. Over the years, the price of computers has fallen while wage rates have increased, creating a strong incentive to automate manual data entry. But today, that trade-off can be reversed, so calculate what is the lowest-cost way to produce what will be sold.
Business leaders struggling with high costs can understand economists' concerns about inflation. Inflation distracts from fundamental business practices of meeting customers' greatest needs in the most productive way. While these fundamentals remain important, managing the impact of inflation has been added to the already long to-do list of corporate leaders.
