According to Global Data, the global inflation rate is forecasted to be 7.5% by 2022. This number is staggering if you compare it with 2021 when the global inflation rate was 3.4%. The impact of such an inflation rate is especially great for startup businesses. Inflation can cause prices of raw materials and other inputs to rise, which can, in turn, lead to higher costs and lower profits. For example, for a startup business working on a service model, the salaries of teams will start to increase as the cost of living increases. Similarly, e-commerce startups will have to grapple with the rise in transportation and warehousing costs.
As a way to discuss this all-important topic, this article has been written. It discusses the seven ways to protect your startup business from inflation:
1. Improve your product
People will be willing to pay the price for a product that offers value and is constantly improving. A startup that solves a genuine problem and creates ease in people’s lives will always find takers. If you have a subscription-based business model, it becomes all the more important to improve your product so that people keep paying you month after month, despite the inflation.
For example, compare a new iPhone’s price with an old Nokia phone. The constant innovation by Apple has resulted in people being willing to pay a higher price for the iPhone, despite rising prices. The same principles apply to any product or service that your startup offers.
In the contemporary era, if you’re a software company, you can easily manage remote teams without needing to have an office space or set up a travel budget. So instead, the aim should focus on developing an exceptional product.
2. Hedge against inflation
Hedging against inflation is a risk management strategy that can help protect your business from the effects of inflation. There are several ways to hedge against inflation, but one common method is using software for managing risk. It helps you know the risks beforehand and adopts methodologies to mitigate them.
When the inflation rate is high, hedging can help your startup business limit its potential losses.
When the inflation rate isn’t high, hedging can be a preemptive measure to protect your startup business from future price increases. By using hedging instruments, lock in a price for a currency, commodity, or security at a future date, which will protect you if the price goes up due to inflationary pressures.
3. Reduce operating costs
Focusing on operational excellence is another way to offset the effects of inflation. Cut costs by automating some processes or reducing waste in your production process. Focus on the core operations of your business and let go of the non-essential ones.
Even with inflationary pressures, the goal is to be profitable. One way of doing that is by cutting down on expenses.
When startups receive funding, they get a lavish office to show a “great” company culture. Unfortunately, unsustainable startups also made the mistake of hiring an army of employees to showcase growth. Additionally, spending on unnecessary perks such as free food and foosball tables is how startups burn through cash.
Although employee well-being is essential, it is important to remember that every penny counts, especially when your startup business faces the effects of inflation. When startups focus on the ultimate goal of becoming profitable, they can make better decisions about how to spend their money.
4. Raise prices gradually
Startups are the most affected by inflation as they can’t raise prices easily. Therefore, their competitive advantage is in the pricing. However, when there are inflationary pressures, you need to review your pricing regularly to ensure that it is in line with the current market conditions.
A gradual price increase also gives customers time to adjust their budget to afford your product or service still.
Another way to combat inflation is to raise your prices gradually. This way, you won’t lose customers because of a sudden price hike, and you’ll be able to make up for the higher costs associated with inflation.
Startups looking to retain their customer base (if growing it is getting difficult due to inflation) can adopt a usage-based pricing model. People pay based on how much they use your product, creating a win-win situation for you and the customer.
5. Use technology to your advantage
Technology can help you combat inflation in several ways. First, online marketplaces can help you find suppliers willing to sell at lower prices. Additionally, technology can help you automate processes and reduce waste, which will help reduce your overall operating costs.
To offset the effects of inflation, focus on increasing productivity.
It can be done by investing in technology that will help employees work more efficiently. Use business tools such as project management software to get the most out of your team.
Additionally, by following lean methodologies such as six sigma, streamline your processes. Six sigma aims to make processes stable so that there are as few errors or deviations as possible. This will not only help you improve your quality but also your efficiency.
6. Raise capital
If you’re having difficulty offsetting the effects of inflation, you may need to raise additional capital. This will give you the necessary resources to invest in technology, hire new employees, or expand into new markets. Understand the importance of series A B C funding and how it can help your startup become successful.
Remember, raising capital is not a measure of success but a way to fuel your company’s growth.
After raising funding, many startups do heavy PR campaigns to show off their new cash. But, while this might get you some good press, it could also put your startup business on the radar, where stakeholders and competitors closely look at how your company is performing.
You’re on the right track if your goal is to showcase to potential acquirers. However, if you intend to make your startup self-sustaining, take note of the aforementioned advice and use it to help weather any economic storms that come your way.
One long-term yet effective way to protect your startup business from the effects of inflation is to diversify your sources. This means if you are a commodity-based startup, you have more than one supplier for the raw materials you need. If one supplier raises its prices, switch to another supplier with lower prices.
Although keeping costs down is important, don’t compromise on the quality of materials.
Reviewing contracts with suppliers in light of inflation is important if you have long-term contracts with suppliers. In some cases, you may be able to renegotiate the terms of your contract so that you’re not as exposed to rising prices.
Raising prices without losing customers may be difficult if your business focuses on a specific market. In this case, it may be beneficial to explore new markets. This will allow you to reach new customers willing to pay higher prices. Additionally, expanding into new markets can help diversify your business and reduce overall risk.
The article overviewed how your startup business can be protected from rising prices. No two businesses are alike, so what works for one company may not work for another; if any point is relevant to your startup, deep-dive and does further reading on the topic. Experiment. See what works best for your business. Then, prepare a contingency plan.
Inflation can significantly impact startup businesses, but there are ways to protect yourself from its effects. Diversifying your sources, raising prices gradually, reducing operating costs, using technology to your advantage, and hedging against inflation are all effective strategies that can help keep your business afloat during periods of high inflationary pressure.
Remember to regularly review your pricing model to insulate your business from the effects of inflation.
It’s always a good idea to stay informed about economic changes that could impact your startup business. Despite adopting best practices, review your business model if you’re struggling to offset the effects of inflation. In particular, take a close look at your pricing strategy.
Osama Zahid is a technology content strategist passionate about content marketing and SEO. He has helped various companies rank their content on the first page of search engines. In his free time, Osama loves to play football and travel.