Author: Robin Dehondt
“The costs for energy, transportation and raw materials surged with 334 million euros in the first quarter”. “Inflation pushes VRT in savings mode”. “Aldi will raise 400 of its prices due to inflation”. These days, our newspapers are filled with headlines talking about inflation. But what is inflation? How is it impacting our economy? And most importantly, what should B2B companies do to mitigate its impact?
What is inflation?
Inflation represents how much more expensive a basket of a relevant set of goods has become over a certain period, most commonly a year. In March, the inflation climbed up to 8.3% in Belgium. This means that a basket of 234 products, selected by the government, became 8.3% more expensive to buy compared to March 2021. Below, you can see the inflation rate for Belgium over time.
The consensus among economists is that sustained inflation occurs when a nation's money supply growth outpaces economic growth. Today’s inflation is caused by a mixture of shock waves stemming from covid-related surges in consumer demand and supply shortages. People quit going to see their personal trainers and set up garage gyms. Families stopped going to restaurants and bought air fryers and barbecue equipment. Two years later, that trend has not reversed: spending on goods is still roughly 15% higher than it was before the pandemic, while spending on services has not recovered. At the same time, the pandemic has increased demand, it has disrupted the world’s supplies of everything from fertilizer, to lumber, to medical equipment and made it as much as 10 times more expensive to move things around. All these forces create an imbalance in the traditional supply-demand equilibrium that underlies stable pricing.
What is its impact?
High inflation rates are regarded as harmful to an overall economy. They make it difficult for companies to budget or plan long-term investments. Firms must change their prices regularly to keep up with economy-wide changes. But changing prices is often a costly activity itself. For example, a restaurant needs to print new menus when it wants to update the prices. Sales teams require extra time and effort to change prices constantly.
What should B2B companies do to mitigate its impact?
Inflation causes higher costs. To preserve profitability, B2B companies should undertake actions that either boost their revenue or cut their costs. Yet before undertaking any such action, the finance function should compile a forecast of the future P&L to see exactly how much inflation has endangered the ambitions of the company.
Boosting revenue can be done by either raising prices or quantities. Since the inflation is partially caused by bottlenecks in the supply chain, it is probably not a good bet to focus on raising quantities. Raising prices, however, is an enervating activity that every salesperson will need to face. In B2B companies, prices are often contractual for a longer period. Therefore, it is advisable to build mechanisms in the contract that protect the company against future inflationary pressures. As a manager of a sauce company said: “We were able to raise our prices in January, but that increase is now already worthless. We have to re-open the negotiations with much reluctance from the supermarket”. Furthermore, the state of business intelligence tools is much more mature compared to previous inflation periods. These tools should be able to segment customers based on their willingness to pay, create an accurate picture of customer profitability, and reflect on other factors that you can include in your value-based pricing story.
There are many ways to cut costs in a company. Below, you can find some inspiration for initiatives based on real-life examples:
Adjust products to use what is available in the market: Ardo, a Belgian manufacturer of frozen vegetables, rapidly redesigned its products to no longer use sunflower oil. They were able to use no oil for some products and found substitute oils for other products.
De-feature products: Audi prolonged the delivery of the Q4 model with a panoramic sunroof for a year because of a shortage of specific chips used in the roof.
Optimize packages and transport efficiency: A manufacturer used its engineering expertise and tailored digital tools to completely rethink packaging and the loading of packages. It reduced costs significantly because of reduced freight demand.
Focus on automation and labour efficiency: automation should be a high priority, considering the raise in wages and always open vacancies. Thanks to automation, Van Hoecke can now create 48,000 different kitchen drawers with little human assistance.