We’re living in an extraordinary time — socially, politically, and monetarily. Inflation is near 40-year highs in North America, reportedly up between 6-8% annually, although I think it is closer to 10-12% for what it’s worth. How the government calculates inflation excludes a couple of key metrics, which is why they report a lower clip, but that’s a tale for another day.
The dropping value of a dollar has put tremendous strain on middle and lower-income people and families. It has also negatively impacted living standards for those on fixed incomes. In fact, a recent poll suggested that roughly 2/3 of Canadians are worried they can’t keep up with inflation… a valid concern. Most won’t.
Entrepreneurs are facing a massive challenge in this highly inflationary environment, too. As entrepreneurs and risk-takers, allocating our capital needs to be well thought out. One needs a yield from excess cash, but the only way to have a remote chance at beating a 10-12% inflation rate is to take on substantial risk — perhaps too much risk for ‘company cash’.
Of course, you can’t just leave excess capital in a bank account and think you’re making a good move. Leaving money in a bank account during inflationary periods is akin to owning a boat. Boat owners will tell you they dump about 10% of the vessel’s original value into annual upkeep/expenditures. In other words, they’re money pits, and so are savings accounts — especially today. Just ‘saving’ alone as a business owner will cost you somewhere between 6-12% annually in today’s environment. In other words, you stash away $100K today, and this time next year it has the purchasing power of about $88K-$94K.
Contrary to many early predictions, inflation is not going anywhere for several months, potentially even a year or two.
Prolonged inflation can cripple a once-thriving business without intentional measures to counter it. Inflation forces tough decisions and actions to be made by entrepreneurs. Either they lower the quality of their product/service or raise prices. Neither are good options, but one is catastrophic…
Your customers have expectations of quality. Miss those expectations, and they’ll look elsewhere. What’s more, you, the entrepreneur, take pride in the quality provided to your customers, and that’s what you deem a differentiator from the competition. So, lowering the quality is most certainly not an option. You must raise prices…
I’ve resisted raising prices for my business, which has been a mistake. We were expanding at a rapid clip in 2020 and 2021, but that growth rate has shrunken in large part due to tighter margins. Because of rising costs, we haven’t been reinvesting as much in development and growth initiatives in the last few months. This is a mistake that needs course correcting.
As every entrepreneur knows, momentum is a powerful thing that’s hard to garner and easy to lose. It would be a shame if inflation, something totally out of my control, killed momentum. I have to raise prices appropriately to reestablish that 2020/2021 reinvestment rate and thus growth trajectory.
Entrepreneurs need to raise prices to combat inflation and protect the business and employees. It sucks, and you need to thread a needle here with how much you increase prices, but your costs to run your business are up just like everything else. Contrary to a select group of politicians trying to villainize companies for raising prices, it’s not so much a choice as it is a requirement. This has nothing to do with greed. And it’s not like entrepreneurs are setting monetary policy, which is the culprit for inflation.
Given inflation will likely stick around for some time yet, you may want to consider raising prices enough so you don’t have to do it again in 3 months. In other words, if inflation sits around 10%, and your costs are up in kind, I’d consider a 15% increase if the market will bear it.
Your saving grace with your customers at this very moment is that they’re expecting it. They’ve already seen it from other vendors, at the grocery store, hell even with their Netflix subscription. You have a window right now to raise prices as expectations are aligned with that. This is unusual, so don’t miss the chance as the long-term viability of your business may depend on it.