INFLATION – the overall increase in the prices of products or services over a period of time – particularly hurts small and medium-sized enterprises (SMEs). Indeed, in addition to a decrease in the purchasing power of their capital, suppliers tend to increase the prices of raw materials and services.
How can companies cope? You can always expand into new markets and try to add customers, but these are long-term solutions to a problem that, in the meantime, is eating away at profits. In the short term, two measures can be taken.
The first is to get a line of credit. It is a type of business loan that allows you to borrow from a pool of funds whenever a business need arises. It’s free to set up and you only pay interest on the portion used, making it a good emergency fund for cash flow shortfalls or new business opportunities. A good option is First Circle’s Revolving Line of Credit, which lends up to P10 million for as little as 1.39% per month.
Second, the short-term operational strategy must be changed. To quickly make up for lost revenue or reduce unnecessary expenses, there are strategies businesses can use, either together or separately. The five most common, with their pros and cons, are:
Price increase. B2Cs can stage a large one-time price increase when a key component of their product or service is heavily affected by inflation. For example, bakery owners charge more when the price of wheat rises. However, to make higher prices less noticeable, it is better to increase gradually.
For service and B2B businesses, increasing prices regularly is actually a good practice, as customers usually expect increases from time to time. B2Bs tend to raise prices after a year with customers; some even use it to sell customers an extended lockout period with previous prices.
When customers perceive that your products offer superior benefits or quality over your competitors, raising prices is acceptable and may even reinforce that perception. However, if your product or service is not unique or if customers are particularly sensitive to price increases, be prepared for customers to change. Avoid this by offering something unique like dedicated customer service or additional perks like a one-time free service.
Reduction in the quality of the product or service. Some companies keep prices stable by downgrading quality – replacing raw materials, decreasing sizes, or reducing functionality. For example, a clothing store may switch from a 100% cashmere blend to a 50-50 cotton-cashmere blend. A cosmetics store may use ingredients that are water resistant but not sunscreen.
This strategy can indeed address certain customer segments: those who are satisfied with simple and functional products and those who only need certain functionalities. Done well, it also encourages customers to buy in larger quantities. If your brand image and your customers’ priority is product quality, downgrading will create a bad brand image.
Reduced profit margins. The objective of companies is to have revenues higher than the cost of production of goods or services. However, you may need to do the opposite – reduce projected income – to increase sales. You can lower prices until they’re too good to be true or offer deep discounts to entice customers to shop for your business.
Lower prices can increase the number of customers and purchase volumes. Ultimately, however, your income will be equal to or less than your production costs. Customers may also equate lower prices with lower quality. Your long-term funds for operations will certainly deplete faster. This strategy is only good in the very short term.
Changing the pricing model. Instead of an outright price increase, you can offer subscription-based pricing. This allows clients to pay for your services on a weekly, monthly, or ad-hoc basis.
Bundling – collecting complementary products into one bundle – is another way to increase revenue. Another pricing model is to sell an item with options for add-ons, reducing their price each time an upgrade is added.
Subscriptions can provide more regular income and retain customers by spreading the costs for them. Customers also have the illusion of choice since they can stop or renew subscriptions before the monthly fee. Finally, it is profitable in the long term because orders and receipts are automated.
Bundling, on the other hand, keeps customers from focusing on individual prices and makes your bundled price look like a bargain. It can also introduce an underperforming product or service, which customers might initially ignore but ultimately repurchase.
However, you need to absorb a big loss upfront to set up your new pricing model and automation process.
Modification of product lines. Inflation changes customer preferences since they also adjust spending to maximize purchasing power. SMBs can take advantage of this by introducing new products or eliminating slow-moving products to match customer preferences.
This strategy increases revenue by reaching new customer segments or focusing production on items that attract repeat buyers. However, the research and development of new products may require a huge initial investment if the products are complicated. It is therefore important to collect customer feedback and regularly monitor inventory to ensure that new product lines are worth the investment.
Whatever business strategy you choose, always consider expected resources, customers, and revenue. You will likely need funds for marketing, developing new product lines, or increasing production. If you are short on working capital, a revolving line of credit will ensure that you cover these expenses. More importantly, your new strategies will need to balance your organization’s capacity and benefits with the value you bring to customers.
Kathryn Jose is a multimedia writer who writes about banking, finance, technology, and entrepreneurship. She studied at the University of the Philippines Diliman.