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Three Strategic Options to Deal with Inflation. Which one is right for your startup?

Inflation is particularly difficult for startups. Typically there are three traditional options to tackle inflation, none of which is an attractive choice. You need another approach.

A couple of weeks ago I talked about the move from abundance to scarcity we are seeing in many sectors of the economy. To listen click here. With scarcity comes inflation. Based on a poll of economists taken last summer and comments from the US Federal Reserve we may be in an inflationary environment for some years to come.

Inflation is particularly difficult for startups. Typically there are three traditional options to tackle inflation, none of which is an attractive choice.

You can raise prices and upset your customers. Difficult for startups, you do not have a long history with your customers. They have just started buying from them and now you hit them with a price rise.

You can absorb the cost of inflation and cut your margins. Not easy if you are already barely, or not even, covering your overheads. Companies with an established profitable business can survive on lower margins. As a startup it could be impossible to survive.

Maybe you can cut some corners? Do things a little more cheaply? Again not an ideal choice for a startup trying to establish your reputation in the market place. Cutting corners creates an only just good enough culture, where the bare minimum of standards are maintained. Not great if you are trying to displace incumbents in your marketplace.

The first action you should take is to quantify the problem for your company. Update your forecasts and cash flows to determine what the future looks like with higher material and or labor costs. As always be realistic in your forecasts, gather as much information as you can about the likely impact of inflation on your business. Futures markets can be a helpful guide particularly if your raw material prices correlate to a commodity such as oil, or corn, or iron. Compare the revised forecasts with your original plan. How big is the gap? Now at least your have estimated the size of the problem you are facing.

Rather than adopt one, or a combination of, the three traditional approaches what alternative strategies maybe available for you. In an HBR article published at the start of this year Oded Koenigsberg suggest three new options for you to consider.

Clean up your product portfolio.

If you current product offering is a bundle of products or services consider unbundling parts of your offer to allow customers to buy only what they need. This may support customer retention. It is better to retain a customer at lower sales than to have them go to your competition, Alternatively bundle up, to create new value propositions. A sort of McDonald’s value meal concept. You may make slightly lower margin percentages but the higher sales volume will deliver higher margin dollars. And remember it is margin dollars that cover your overheads not sales dollars.

Customers are not only price sensitive, they are also quantity and quality sensitive.

If customers are more sensitive to price than they are to quantity, which research shows the majority of customers are. Then selling less for the same price is an option. This is a well know strategy in the FMCG retail industry. Just put a little less in the box.

Quality sensitivity identifies features that the customer could live without or accept at a lower level. Can you offer a stripped down version of your product, with fewer features at a lower price point? Conversely could you add features to offer a premium offering, making your standard offering seem more affordable.

Reposition your brand. Look at your price vs value.

Is your product under or over priced versus the value delivered? Surprisingly many products are.

Are you are spending a lot of money on marketing to prop up the image of your product as a premium product when in reality it is not so premium? Then a price reduction and a significant cut back in marketing spend may fix the problem. It could even improve profitability if sales volume increases offset the impact of lower margins.

The more common situation is that the product is underpriced versus the value being delivered. Now is the time to reposition your product as a higher tier offering. If you have been following a penetration pricing strategy, move to a more sustainable pricing strategy. Consider value pricing to ensure you are getting your fair share of the value you create. To learn more about value pricing listen to episode 20 in season 7 when I discussed this topic. click to listen. Your customers are aware of inflation and will be receptive to an increase if the value outweighs the price.

Is it time for a new pricing model?

Can you sell your product as a service? Airlines flying jets using Rolls Royce engines not longer buy them, they pay by the hour used. The way you charge your customers can bring numerous advantages.

It can move their perception of your pricing from being unaffordable to an affordable. Car companies saw this when they introduced leasing options. Not many buyers have enough spare cash to buy a car outright. But by leasing a car to the user for an affordable monthly fee, the car of their dreams became a reality.

Can you reposition your product offering from outright purchase to a pay per use model? A great advantage of the pay per use model is that you set up predictable income streams for your company into the future. Yes you might have to absorb some initial decline in income and profit as you transition but it could be a long term winner. Adobe made the transition from selling their products in the form of CDs to a subscription based model via its Creative Cloud. When it made the transition in 2013 Adobe had a market valuation of $22.5 billion, its market cap is now $238 billion, a more than tenfold increase in less than 9 years.

There are better ways to tackle inflation as a startup. Maybe one or a combination of these three strategic alternatives is right for your company.

For a Link to the original HBR article: Click Here

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