5 Steps To Minimize Inflation’s Damage To Your Business

Inflation hit a record not seen in 40 years and it is worrying CEOs. According to the Wall Street Journal, a Conference Board survey found that inflation  — which hit 7 percent in December 2021 — is a top concern for 82 percent of the 917 CEOs polled. What’s more, over half those CEOs think inflation will persist until mid-2023.

One CEO thinks that inflation is real and businesses must choose carefully how to deal with it. Honeywell International CEO Darius Adamczyk told the Journal, “Inflation is here. We have to be very, very careful how it gets solved, too, because it’s a little bit like driving your vehicle. If you slam on the brakes too hard, we could see the other side of inflation, which is a recession.”

This raises many questions: Are these CEOs right? If not, what is likely to happen with inflation? What should business leaders do about inflation? Here are five steps I think business leaders should take to formulate the right inflation strategy.

1. Develop inflation scenarios.

Before taking any action, leaders should form their own view of how much inflation will affect their business. To do this, they should interview their customers, suppliers, and partners, as well as economists and industry experts. Questions to explore include:

Based on answers to these questions, business leaders should formulate three scenarios for inflation — best case, worst case, and most likely case. Such scenarios should include five-year forecasts of key input costs and how those increases will affect profit margins depending on whether the business holds constant or increases its prices.

2. Analyze customer sensitivity to price increases.

One of the most important elements of a company’s inflation strategy is that last point — whether to keep prices constant or increase them. To decide that, business leaders must try to anticipate how customers would respond to a price increase.

To find out, they should hire an independent analyst to answer questions such as:

If this research reveals that your customers are highly price sensitive, you should consider keeping your price below those of rivals. If customers are not price-sensitive and rivals are increasing their prices, you should consider whether to raise your prices as much or more than rivals. 

3. Forecast rate of increase in key costs.

At the same time, business leaders must examine whether their key suppliers are increasing their prices. To that end, business leaders should retain a consultant to examine questions such as:

If your suppliers are likely to increase prices to the same level as rivals, you should not switch. However, if reliable suppliers will charge you less than their rivals and your switching cost is low, consider moving your business.

4. Study competitors’ inflation strategies.

Before formulating your company’s inflation strategy, you should try to find out what competitors are likely to do over the next five years. More specifically, investigate questions such as:

Answers to these questions will help you determine how to maintain your competitive advantage.

5. Test inflation strategy and roll out company-wide.

Based on this analysis you should formulate an inflation strategy that sets future prices, picks suppliers for key inputs, and chooses rates of pay increases. Rather than impose this strategy on the entire company, test it out in a particular location, refine the strategy based on the outcome, and then roll it out across the company.