Pricing And Profitability

First supply chain issues created by Brexit and Covid. Now that's been compounded by massive global instability. We'll have to be smart in an era of rising costs, says Catherine Erdly.

Mortgage rates are soaring, energy bills on the rise and the cost of the weekly shop recently rose at its fastest rate in a decade. The cost of living crisis is on everyone's minds – retailers and shoppers alike and the devastating humanitarian crisis unfolding in Ukraine makes for a bleak 2022 outlook.

Helen Dickinson, chief executive of the British Retail Consortium (BRC) said in a statement: 'Retail faces significant headwinds in 2022, as consumer spending is held back by rising inflation, increasing energy bills, and April's national insurance hike.'

Despite the doom and gloom businesses can take proactive action to mitigate some of the pressures. Knowledge is power, there's no hiding from these major challenges but if business owners have a comprehensive understanding of their figures right now, coupled with insight of how their customers are feeling and behaving they'll be in a much better position to weather this storm.

Profit margins

Check your profit margins! Retailers should be double- and triple-checking their profit margins, especially if they haven't reviewed them in a while. Knowing, to the penny, how much it costs right now to buy or create their products is vital. They must check every invoice as price increases have taken place across most items and services.

So go through each invoice to see where any costs have risen so that you know the exact profit for each product. Even if you did this exercise six months ago – now is the time to revisit your profit margins. With that knowledge comes power – it might be that you decide to discontinue a product because it just isn't viable anymore and focus on the more stable and profitable ones.

Review your pricing

The British Retail Consortium is clear at the moment that pretty much everybody is going to have to put their prices up. The question is how.

If increasing prices isn't a straightforward option, business owners should look to see if they can trim the cost of their product without compromising brand or beliefs. Small businesses should check their stock levels – cash tied up in excess stock at times like these is an area of the business to tackle. There are many ways to cut this cake but I'd advise being transparent and even talking to your customers first. Incremental price increases are also more palatable than a sudden hike – planning this now and forewarning your customer base is a wise move.

Do some competitor analysis. Retailers may find that they've not raised their prices in some time when everyone around them has – it's always good sense to check within the industry.

Once businesses take the decision to make the price rise leap, they should give it six weeks then review. They can analyse which products are still selling, where the conversion rates drop and if customers are giving negative feedback. Retailers should then revisit their profit margin list – if a low profit margin product isn't selling even with a price increase it may be time to discontinue it, or they may want to offer it in a bundle with some higher margin products.

How is your customer?

Keeping their customers at the heart of the business always helps retailers through the toughest of times and of course future-proofs their loyal base. Small businesses especially should not shy away from talking to their customers about the cost-of-living pressures. Retailers can test out any price increases to further understand their customers' wants and needs, and then only increase prices incrementally.

Be clear

Authenticity and honesty matters to consumers – especially with bad news – so be clear. Tell customers prices are increasing and avoid other terminology when communicating this. Customers are still buying and spending but confidence is low so communicating value to customers is crucial. Do this often and consistently.

For example, James Leinhardt, CEO of sleep posture experts Levitex, said: 'We've been very honest and open about price increases with our customers, we've communicated it via both organic socials and email, and the reaction has actually amounted to an increase in sales.'

There is no one-size-fits-all answer. However, retailers who give time to review and analyse exactly where their costs and profits are right now have more power. Managing this profitability roller-coaster and walking the line between what they need to charge and what their customers pay will be key for business owners navigating 2022.

Catherine is a regular columnist for New Natural Business. She is a small business retail expert, a Forbes.com contributor, a judge for the Good Retail Awards, is on the Editorial Board of Modern Retail, has featured as an expert commentator in national newspapers, and has been a speaker at various trade shows and industry-led events across the country. Join her at The Resilient Retail Club (resilientretailclub.com).