By Eytan Bensoussan
The United States experienced historic inflation in 2022, and it paved the way for the surge of price increases that followed into 2023. Meanwhile, people continue to become entrepreneurs. According to the
U.S. Census Bureau, over 5 million applications were filed to form new businesses in 2022. And now, many of these companies are facing an impending recession—or an economic squeeze at the very least.
For these fledgling startups, it’s important to proactively combat the rippling effects of inflation to stay afloat. From reassessing margins to cutting costs, the following inflation tips can help startups and entrepreneurs lessen the impact of economic headwinds.
How startups can survive inflation
1. Reassess your margins
With the cost of procuring and delivering goods and services on the rise, startups need to take a second look at their margins. This is especially true for businesses with already slim margins. You might find that your original 30-40% take is now down to 10-15%—or, that your low-margin offerings have inadvertently become loss leaders.
As you review the margins for each product or service, be mindful of sales volumes. It might make sense to leave some of these margins alone during a period of economic hardship. Just make sure you’re not stretching yourself too thin.
2. Raise prices where necessary
If your margins have vanished and dragged your profits down with them, it might be time to levy a price increase. You just need to be tactful about it and make sure your effort to keep your startup afloat isn’t confused with a money grab by your customers.
When raising prices, it’s best to look at a range. How much do you absolutely need to raise them? How much do you need to raise them to hit your target margins? How much would you like to raise them? The market will only pay up to a certain price. It’s up to you to find it.
3. Renegotiate net terms
Cash flow can be a killer for startups and small businesses. If you’re paying your bills faster than money is coming through the door, it’s time to take a second look at the net terms you’re offering (and on). The goal is to have your accounts receivable outpace your accounts payable, and to do that, you need to balance terms.
Try to get your customers and clients on net 30, and then renegotiate terms with your suppliers to net 45. If you can, you’ve got a 15-day buffer that can alleviate cash flow concerns—assuming everyone pays on time.
4. Get access to a line of credit
A line of credit—be it a traditional line of credit or a simple business credit card—is a major asset to startups. Credit can help you cover the float if your cash flow still doesn’t align, and can help you fund growth opportunities to create new revenue.
5. Explore new technologies
Technological innovation, powered largely by artificial intelligence and machine learning, is changing how we live and how businesses operate. No matter what line of business you’re in, you can make use of these technologies to your benefit—you just need to determine where it makes the most sense for your business.
Discuss it with peers or search online for recommended AI-powered tools that are relevant to your industry or for services you use every day, like bookkeeping software or a CRM platform. You’ll be amazed at how affordable tech solutions can be and how much time, energy, and money they can save you.
6. Tap into new markets
Now might not seem like the ideal time to branch out of your target market, but it could be the best time. Inflation has created hardships across industries, and people are on the lookout for new service providers, products, and solutions.
Take a look at your core capabilities and see how they apply to new markets. Adjacent markets can create new revenue with very little investment. Moreover, you might just find that there’s overlap with your current target market, which means people are already familiar with your brand.
7. Build brand loyalty
Don’t forget about your loyal customers—you’ll need them now more than ever. Take the time to reward those who stay true to you, whether that means offering a discount or simply giving them your thanks. A little recognition goes a long way and it can ensure that customers stick with you through hard times.
8. Bundle products/services
Achieving economies of scale can be important to the success of any business. The more customers you can bring into your ecosystem, the more diversified your revenues are. Bundling products during an economic pullback is a great way to get those all-important unit sales, while also enticing people with a deal.
If you’ve got two products or services that naturally fit together, consider bundling them with a small discount to entice customers. You’ll attract customers who are already familiar with at least one of them, and you can introduce a complementary product or service that could turn into future repeat business.
9. Cut extraneous costs
Finally, you should consider cutting costs. Take a 30,000-foot view of your budget and look for opportunities to trim the fat. Whether it is eliminating a nice-to-have subscription or reducing energy consumption, even lean startups have extraneous costs that could be reduced or eliminated to help the bottom line.
Fight inflation and grow out of your startup roots
Startups face major headwinds due largely to the problems caused by recent rapid inflation. But just because the cost of doing business has increased, it doesn’t mean young businesses can’t adapt. Find inspiration and guidance in these tips to position your business for success in the coming year—and for years to come.
FAQs about inflation and small business
Below we have summarized the most important questions and answers on the subject:
How can small businesses fight inflation?
Small businesses can fight inflation by increasing prices to cover additional costs, reducing expenses by cutting unnecessary costs and negotiating better deals with suppliers, and adding new products or services that are less affected by inflation.
What businesses are hit hardest by inflation?
Some of the businesses hardest hit by inflation include retailers due to price increases of goods they sell, restaurants due to higher food and ingredient costs, and construction due to increased building material and labor costs.
Should startups worry about inflation?
Yes, startups should be concerned about inflation as inflation can increase costs for labor, reduce access to funding due to higher interest rates, and reduce consumer spending. Inflation can also affect hiring as employees might seek higher wages due to higher costs of living.
About the Author
Post by: Eytan Bensoussan
Eytan Bensoussan is CEO of NorthOne.
Company: NorthOne
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