UK consumers are experiencing unprecedented pressure on household budgets, as record levels of inflation drive up the cost of everyday essentials. In the year to July 2022, fuel prices increased by 43.7%, while prices for housing and household services increased by 9.1% in the same period, driven in large part by soaring energy costs [1].
This trend is also concerning for small business owners, since even small changes in the costs associated with running their business will eat into their profit margin if left unmitigated.
However, there are certain actions business owners can take to mitigate rising costs - making the pinch feel less severe. Raising prices is likely the first and most obvious option that springs to mind, but it isn’t the only solution. Read on to discover four strategies to limit the impact of rising costs on your gross profit margin.
How does the rising cost of goods affect gross profit?
Gross profit is the money left from the sale of your goods or services once the costs of producing and delivering them are deducted. Known as cost of goods sold, (COGS), these costs include things like raw materials, shipping costs, and manufacturing equipment. If these costs go up, your gross profit margin is reduced.
“Rising costs are having a major impact on our business, and small businesses in general,” says Natalie Bamford, founder of corporate gifting company Colleaguebox, which opened during the pandemic. She says she has seen a sharp increase in fellow Covid start-ups ceasing trading as a direct result of raising costs, and is anxious to avoid the same fate.
“We receive emails almost daily from various suppliers informing us of their price increases, which has a knock-on effect," she says.
Strategies to cope with the rising cost of goods
Protecting your gross profit is essential to business survival. Here are four strategies to consider putting in place if your COGS is increasing.
1. Pass the costs onto the customer
Seb Robert is founder and CEO of same-day delivery business Gophr. The rising cost of fuel quickly became an issue for the couriers that Gophr works with, and Robert felt he had to act.
“Our pricing structure hadn’t changed for three years," he says. "But then it got to the point where we needed to reflect the increased fuel costs that couriers were contending with.
But raising your prices must be navigated carefully, since there's a risk of losing customers if they can't afford the higher price, no longer feel that they are getting value for money, or believe they can find the same product or service at a lower cost.
Retail strategist Wizz Selvey believes that a good rule of thumb for businesses looking to raise prices is to act with "authenticity and transparency".
“If businesses need to increase their prices, they should think about what is right to pass on to the consumer," she says. "Do they need to pass on the full increase, or can they absorb some of it?"
If a business decides to absorb some of the increase, Selvey advises that they make this clear to their customers by communicating the COGS increases that they are experiencing, what proportion of that they are passing on to customers, and why.
“We were very up-front and open with our customers about the reasons for [raising prices]," says Robert. "We acknowledged that price increases were a last resort, and that we knew everyone was experiencing challenges.
"I think that approach of being open and honest was the right one for us. We got some very positive and supportive feedback.”
2. Ramp up your customer service
Good customer service should be a central tenet of a successful business at all times, but it is especially important when customers, and businesses, are feeling the pinch.
Selvey believes that many companies – from startups to big brands – focus their efforts and budgets too heavily on the early, customer acquisition stages of the customer journey (of which there are six key stages: awareness, interest, purchase, retention, loyalty, and advocacy).
According to Selvey, improving the experience of existing customers is often a better strategy. Not only does it help sweeten the pill of a potential price increase, but good customer service can also help to tip the balance of customer acquisition cost and lifetime value in your favour if it results in further purchases.
"Digital advertising and social media are getting increasingly challenging [on price] for many," says Selvey. "Driving retention, loyalty, and creating brand advocates that rave about your business to their friends are good ways to counteract this."
3. Cut costs in other areas of the business
Economic uncertainty provides an opportunity to review and improve your ways of working to ensure they're as lean as possible. Gophr's Robert has cut costs by streamlining processes and encouraging more thoughtful decision-making.
“The use of technology to automate very traditional, very manual delivery practices is fundamental to our business," he says. "We’ve been looking at how we apply that level of automation to other operations, like customer service.
“We’ve also been trying to instill a mentality of ‘spend it like it’s your money’, which has led to a bit more rigour around the tools and platforms we use, and people challenging themselves to justify spending decisions.” ONS, Consumer price
4. Manage supplier relationships and negotiate
When it comes to negotiating with suppliers, relationships are crucial, says Bamford. She has found that appealing to shared experience offers a good platform for negotiating deals that could benefit all parties. Clear communication, friendly relationships, mindfulness and understanding of your suppliers are all ideal qualities when it comes to negotiating contracts.
Bamford has found that suppliers have been understanding, and she has managed to negotiate deals that include buying in bulk in return for a discount. This widens her margin and eases cash flow for her supplier at the same time.
If you're thinking about bulk purchases and how to protect your cash flow, you can use the American Express® Business Gold Card, which offers payment terms of up to 54 days. Plus, you can earn 1 Membership Rewards® point for every £1 spent¹ – points you can redeem as statement credit to offset your expenses.
1. Membership Rewards points are earned on every full £1 spent and charged, per transaction. Terms and conditions apply. If you'd prefer a Card with no annual fee, rewards or other features, an alternative option is available – the Business Basic Card.