The main economic worry the U.S. economy is now facing is deflation. And while the impact of such an environment on small business may not be readily evident, here’s what every small business owner should know about a deflationary economy.
Deflation starts with a reduction in the value of assets. That start, in this deflationary period’s case, is with home and further real estate prices. This is likely something that, as an individual, you have either experienced or felt first hand. With all that loss in value of property, individuals have now become more concerned about paying down their debts. This scenario is sometimes called a balance sheet recession, where the impetus to pay down debt defeats the desire to spend.
Many individuals and businesses are choosing to pay down debt rather than spend. So, while owners and people believe they are being responsible, they are actually slowing down the economy by not spending or expanding their workforce.
And that process tends to run in a loop, where a consumer will pay down debt rather than spend, and a business will see its sales decline forcing it to layoff workers who will not spend, reducing the wealth of business further. As more people and businesses stop spending, the value of assets, everything from clothing to cars to homes, continues to decline. This slows the pace of price inflation, measured through the consumer price index (CPI). Right now, the CPI is at a low 0.9 percent.
It’s in no way certain that we’ll see the CPI turn negative, but every small business should know how to prepare for it. Fortunately, there are some things you can do to respond.
In order to prepare for this, businesses should realize that consumers are more reticent about spending than ever before. That could be a chance for businesses to offer goods that are low in cost, but high in value.
Restaurants and food retailers that offer an escape in a good night out, rather than expensive events, are likely to do well. As are the sort of relatively cheap excursions like the movies and video games, rather than ski vacations and other expensive trips.
Offering significant discounts for the latter, or specializing your advertising to key clients still willing to spend, could offer opportunity.
It is a difficult environment for businesses to deal with, but that doesn’t mean it’s impossible to market what you do to your potential consumers. Think about how you could provide value for less money, small pleasures rather than items or services that could be perceived as decadent.
Deflation means the economy is slowing down, but it doesn’t mean your business has to slow down with it.