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Options for Navigating Your Business Through Inflation

Options for Navigating Your Business Through Inflation

For a while, it appeared that the rate of inflation nationwide was on the decline. The most recent federal data, however, present more of a mixed picture, with inflation easing in some sectors and continuing to rise in others. That poses challenges for business owners who must decide on what course to take as they try to navigate the ever-changing waters of the post-pandemic economy.

Cutting expenses vs. raising prices

One of the toughest decisions business owners have to make is how much of an increase in their costs they are willing to absorb in order to avoid having to raise prices and thereby possibly losing some customers. Fortunately for interior designers, some of the higher costs resulting from supply chain and shipping delays during the first two years of the pandemic have begun to come down. However, some operational costs, such as energy and rent, are only now starting to show some softening.

Whenever possible, for service industries, the better choice usually is to avoid raising rates. One of the first places to look to offset rising costs is cutting expenses. Start by eliminating all nonessential expenses. Review your marketing plan and eliminate any weak links that are not producing substantial responses or inquiries. Consider outsourcing some activities and/or adopting time-saving technologies in place of hiring additional staff. If that is not enough, do you have some flexibility to reduce fixed costs, such as allowing remote working schedules, renegotiating a lease, or even relocating to a smaller office space?

In addition to cutting expenses, explore ways you can generate more revenue from the projects you already have without raising rates or prices. Work with your team to maximize billable hours. Offer clients ancillary products or services, such as curated accessories or consultations to show them how to get the most from their new space. Emphasize the uniqueness of your brand to prospective clients. Improve the quality of customer service and stress personalized attention to increase referrals and land new projects.

Adjusting salaries and other compensation

When inflation rose rapidly last year and higher interest rates followed, employees experienced a notable loss of buying power. Essentials such as fuel, food and housing costs all quickly outpaced the recent gain in wages resulting from the tight labor market brought on by the pandemic. Understandably, workers looked to their employers to raise wages further to help offset the cost of inflation. Employers were caught between trying to hold back prices while covering increased business costs. But they faced yet another challenge; raise wages or risk losing their employees. Overall, wage adjustments for inflation averaged between 6 and 8 percent for many employees in 2022. Estimates at the beginning of this year forecast slightly lower increases in 2023 of between 4.6 and 5.3 percent.

If you are maxing out on what you can afford to pay employees, there are other ways not directly tied to compensation that you can help employees navigate their way through inflation. Offering employees remote work is one of the most direct ways to lower their household expenses by reducing transportation, meals and other work-related costs. If that’s not practical, offer to contribute toward transportation costs. Providing assistance with child care, student debt or professional development expenses is another option. Allowing more scheduling flexibility can make a world of difference to two-earner households struggling to balance competing work/life demands.

Rolling out rate hikes

With so many competing pressures, sometimes the only option to maintain a viable profit margin is to raise rates and/or prices for services and/or goods. Should that be the case for your firm, avoid raising rates or prices too high too quickly. Loyal customers, who also are dealing with their own inflation management issues, are liable to be more understanding if increases are modest and justified. Communicate with them well in advance. Be honest and specific about your need to raise rates or prices and let them know you are aware of the impact that may have on them. Remind them of the long-lasting benefits they will enjoy when their project is completed.

Another reason to be mindful about raising prices or rates is the longer-term impact. We know from previous periods of inflation that once the rate of inflation begins to drop and level off prices are unlikely to decline as far or as fast. Some clients may become accustomed to the higher costs, but others may expect them to be only temporary. Decide ahead of time what your stance will be and communicate that as well.

At present, no one knows how much longer it will take to get the current wave of inflation under control. A best-case scenario would be for the rate of inflation to drop to around 4 percent by the end of this year and continue to decline, possibly lowering to pre-pandemic levels in late 2024. Meanwhile, business owners need to keep an eye on which way the wind is blowing and adjust their strategies appropriately.

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