How can entrepreneurs deal with price increases?
From lumber to wages to transportation costs, input prices have risen in recent months. To avoid simply passing the bill on to your customers, it’s in your best interest to adopt different strategies to compensate for these increases as much as possible so you can continue to set yourself apart.
But before implementing strategies to deal with rising prices, it’s important to understand the causes and whether they are likely to persist.
Pierre Cléroux, Vice President, Research and Chief Economist at BDC and Jacques Légaré, Director of Business Strategy at BDC Advisory Services, share their advice.
What are the causes behind price increases?
1. Rapidly changing consumer demands
The pandemic effected increases in input prices by influencing the demands of consumers who were forced to stay at home.
As a result, spending on services (restaurants, entertainment, etc.) has partially shifted to the purchase of real estate and goods (computers, furniture, etc.). The explosion in demand had significant repercussions on supply chains.
“For example, the demand for house-building and renovations has skyrocketed, so the price of lumber has skyrocketed, and the supply has not been able to adjust quickly,” Cléroux says.
2. Supply problems
Even as global demand for many types of goods was rising, major freight delivery problems was driving up prices. Several issues plague the shipping and trucking sectors. Numerous commercial flights have been cancelled and shipping capacity everywhere has been reduced. Global commerce was even hampered by a shortage of shipping containers.
“The companies that manufacture these containers in China had shut down for two months, and that created a delay in production that caused a shortage,” Cléroux explains.
He notes that SMEs have especially suffered from these price increases because they are too small to be able to influence them. However, he believes that these supply issues should eventually disappear completely when pandemic-related restrictions are eased.
3. Labour shortage
A labour shortage already existed in Canada before the pandemic hit and caused the loss of three million jobs. With the economy recovers now underway the shortage of workers has grown more dire.
First, the aging population remains an issue. As much as 20% of Canada's population was at least 65 years old in 2020, up from 9% in 1980. “There are fewer young people entering the workforce, so the labour shortage is a direct result of Canadian demographics, which tells us that this reality will be with us for years to come,” says Légaré.
In addition, the pandemic has exacerbated the situation. “Many people retired at the beginning of the pandemic. What’s more, one of our surveys shows that 20% of workers have carved out careers in new sectors and plan on staying there,” says Cléroux.
In addition, an estimated 400,000 immigrants did not come to Canada because of the pandemic, so that’s 400,000 fewer potential workers.
The shortage therefore forces employers to invest heavily in attracting and retaining staff.
4. Climate change
Droughts, heavy rains and other consequences of climate change also have an impact on businesses. The cost of insurance is going up, while agricultural production is going down.
“And with lower crop yields, the costs of all commodities are rising,” Légaré explains.
The carbon tax also raises costs for businesses.
“A company that generates more greenhouse gases will have to pay a premium,” explains Légaré. “Before, these costs were nowhere to be found, because the most environmentally damaging parts of production were often relocated to regions where environmental standards were not at the same level. This is becoming less of possibility and will increase costs in the long run.”
What strategies should I implement to deal with price increases?
1. Automate processes
Going into a supermarket late at night? It’s possible you will only encounter self-service checkouts while paying for your items.
“This type of technology investment can be made in virtually any sector to replace employees with repetitive tasks, and it works very well to reduce the impact of labour shortages,” notes Cléroux.
Mapping out your company's processes is a good starting point for automating your business.
2. Invest in staff retention
To counteract the effects of staff shortages, you also need to invest in staff retention. “Often you see a big ‘We're Hiring’ sign at the main entrance to the business, but at the same time, their current employees are walking out the back door,” says Légaré. “Businesses need to develop a culture that ensures that once they attract employees, they keep them because they’re a good fit.”
He believes that in order to reduce turnover, companies first need to assess the cost of turnover. “Taking the time to look at résumés and hold interviews, or dealing with a staffing firm and then training new employees; it all costs money,” says Légaré.
You need to know how much your staff turnover costs to know if it warrants hiring a human resources person to reduce turnover. It’s important to quantify these things to be able to make pragmatic decisions.
3. Establish a consolidation strategy
Whether it’s investing in automation or hiring a dedicated human resources person, it’s easier to move forward when the company has reached critical mass.
“It takes a certain amount of volume to make these investments, and that’s why we could see consolidation in certain industries,” says Légaré. “By joining forces, several small businesses will reach a larger sales or production volume that allows them to obtain economies of scale and consequently have a return on investment. It’s something that could help stabilize prices.”
4. Diversify your sources of supply
While there’s something reassuring about always dealing with the same supplier, the pandemic has shown that it can also cause problems.
“It's good to look at what other producers are doing, in different countries,” Cléroux says. “Sometimes you can even find similar products, but cheaper than what you’re used to buying. Opting for a substitute can help reduce the impact of increased costs.”
Diversifying your suppliers in this way can also help you reduce your inventory.
5. Reshore your activities
While some companies still need to purchase raw materials or have certain parts produced on the other side of the world, others have taken advantage of the pandemic to start doing business with local companies again.
“Often, when we count the carbon cost, it’s the same price or even cheaper to produce here than to outsource,” observes Légaré. “When local producers start to have several large orders from different companies, they can achieve economies of scale and invest in automation, which will allow them to lower their prices.”
A final piece of advice: take the time to analyze your situation
While some of the factors driving up prices may disappear with the pandemic, others will remain in the long term and raise inflation.
“You can’t bury your head in the sand,” Légaré warns. “Entrepreneurs cannot just wait for hard times to pass. They must take every opportunity to continue to improve. Acting represents a cost, but not acting also represents a cost, because it represents untapped revenues.”
Need help analyzing the impact of price increases on your organization? Don’t hesitate to contact us.
You can learn more on the subject by reading The 5 most common pricing strategies.