Protecting the real value of your profits
29 October 2021
New Zealand hasn’t seen inflation above four percent for almost ten years so, for many people new to business, this will be their first experience of owning a business in an inflationary environment.
To survive in this environment, small business owners should be thinking about strategies to avoid the erosion of the real value of their profits.
The impact of inflation
For the September 2021 quarter, CPI Inflation was officially reported to be 4.9 percent. The value of $1 today is worth more than $1 in a year’s time. Inflation erodes the value of today’s dollars and reduces their future purchasing power.
Many businesses are experiencing first-hand what is driving inflation. The closure of our borders due to COVID-19 has put a real strain on many sectors, especially with reduced numbers of migrant workers and those on working holidays. A tight labour market has pushed up wage costs as businesses pay more to secure workers from a diminishing pool.
The impacts to supply chains from overseas markets impacted by COVID-19, such as increased shipping costs and sourcing product, are starting to have a pronounced effect on what we pay for various imported goods.
Given all of this, some businesses have had no choice but to pass these additional costs on to customers.
Adapting your business to an inflationary environment
To adapt to this environment, your business should continually review its costs and adjust its prices accordingly. It is more palatable for customers if small tweaks are made regularly (say annually), than large increases every two to three years. In some cases, it may be necessary to review pricing more regularly if input costs are increasing faster than general inflation levels.
Your business should know and be able to communicate its value proposition to your market. Customers are generally happy to pay a certain price if they perceive the value they derive exceeds the money paid, otherwise they are reluctant to transact. It is important that staff are well versed in explaining the value proposition to customers, to remind them why their product or service is superior to others.
Marketing strategies and initiatives should also be well aligned to your business’ value proposition. Rather than explain the features of a product or service, explain the benefits to the customer because that is what they are buying. How is this product or service going to help the customer? What problem is it going to solve? What tangible and intangible value will be added?
There’s risk and reward in business. Profits are the premium enjoyed by businesses for taking on risk so it’s reasonable to increase your prices to protect them. There might be the occasional customer who grumbles, but provided you’re being fair, the majority will accept it. Have courage, be brave, and know your value proposition.