Dr. Rick Franza, Dean of the Hull College of Business, discusses a different, timely business topic each Monday in this column. This week, he provides tips on how businesses can cope with inflation without hurting their customer base. The interview has been edited for clarity and impact.
ABD: Briefly, what is causing inflation, which is currently at 8.5 percent, the highest in 40 years?
Rick: It’s a money supply issue – too much money has been pumped into the system. I’m not an economist but I think that’s the biggest factor. There’s also still a lag in the supply chain and the labor market is tight, which increases wages. We’re finally paying the piper for the elevated money supply.
ABD: What can businesses do to cope with inflation without hurting their profit margins or gouging their customers?
Rick: You have to first look for ways to reduce costs. For example, can you afford to buy things in bulk? That’ll bring down the unit costs.
Transparency is important. Communicating with your customers is a good thing. Customers try to be loyal. If you want to keep your current client base, communicate to them about why this is happening.
Trying to increase the quality of customer service is important, either doing it yourself or bringing your staff together to tell them they have to make the customers feel valued. You have to offer something to offset that increased cost. Ultimately, we all buy the things we feel we’re getting some kind of value from.
ABD: In the end, though, many businesses will have to raise prices to maintain their profit margins, which often are already thin. How can they raise their prices without affecting sales?
Rick: I don’t think there’s a simple answer. It’s a zero-sum game – if your costs go up, obviously you’ll have to raise prices.
You have to understand where your price fits in with all the other components of your products. You mustn’t spend money on elements that are not important to your customers. Cut your costs in a way that doesn’t affect the customer experience.
You can make up the margins by volume, but if you keep the price down it may increase demand. Once you make your costs less, you can keep the price the same and make more profit or lower the price to increase demand to keep the profit margins.
Again, communication with your customers is important. If you allow someone else to dictate the conversation, it’s probably not going to go the way you want.
ABD: Some of this sounds like sound business practices, whether there’s inflation or not.
Rick: Inflation just accentuates this, but a company should always be examining its processes to make sure they’re as cost-effective as possible. This is not necessarily the right time to do this because you’re kind of in panic mode. If you’re worried about inflation only when inflation shows up, then I’m sorry, it’s already too late.
ABD: So what are some things businesses can do in the good times to be ready for inflation or other economic downturns?
Rick: If you look at your processes when times are good, then you have a lot more flexibility with your margins. Understanding your market is important. Understand how you compete – is it through cost, quality, speed, or customization? Understand where you’re better or worse than your competitors; you’re not doing this in a vacuum.
Ask, why are people buying from me? It’s not just one answer. You have to take into account all the things your customers care about.