The rising cost environment for businesses

EconomyBusiness Advisory

1 June 2022

It is the perfect storm. Economic conditions are changing at a fast rate. Inflation in Australia and New Zealand are at an all-time high with the cost of wages increasing and the Reserve Bank of Australia (RBA) announcing increased interest rates for the first time in 11 years.

Businesses are finding it difficult to attract and retain staff. Central Business Districts (CBDs) are quiet due to the change in the working environment. And, as more people work from home, foot traffic in the CBD decreases, meaning demand for goods and services in these areas is not as high, impacting smaller businesses.

On top of this, there has been a post-pandemic shift with people spending more off the back of COVID-19 restrictions, causing inflation to go higher. It’s no wonder that businesses are being forced to review their pricing strategically.

There are several market factors contributing to the challenging economic conditions. Read on to understand how these could impact your business and clients and, more importantly, some tips to help you maneuver through.

Market factors that make it necessary to review pricing

The economic conditions in Australia and New Zealand are fast-changing, with prices rising at the fastest rate for 31 and 21 years, respectively. Interest rates in both countries are also increasing and are expected to increase even further. All this comes at a time, when it is proving difficult to attract and retain staff. As such, clients need to adapt their businesses to this changing environment.

Rise of costs

Costs are rising – the cost of living, salaries and wages, and goods are increasing. Basically, the cost of goods and services is growing, and individuals' daily inputs are also growing.

Repricing is important, and doing it right is even more important. At this point, most businesses should actively look at repricing their services and products. You don't want to be the business that ups its prices in one go.

Instead, businesses need to proactively stage the increases brick by brick now and not leave it for later. As a business owner, have a plan – don't follow the others. Your pricing needs to be tailored for the customers by looking at their tolerance and then implementing any changes in phases.

Don't forget that wage costs have also increased, which will strongly impact businesses with low margins, like hospitality and car dealerships. Low margin businesses will be affected severely as well, and their best bet is to keep costs down and keep the price rise low for customers.

Unfortunately, the war in Ukraine isn't making the situation any easier. Supply issues are impacting costs – the war in Ukraine and suppliers being impacted have caused prices to increase.

Inflation

Inflation - the rise in costs and the wage cost increase are significant in Australia and New Zealand. Businesses that sell products (not services) need to be particularly careful as they consider how much of the cost increase can be passed on to customers without losing them altogether.

Larger companies tend to have in-house teams that focus on pricing analysis, so they have their pricing strategies covered. For small and medium-sized businesses, it can be challenging but here are some tried and tested methods to get you started:

  • Bundle pricing: Sell products together to move more inventory faster, rather than individually. For this strategy to work, profit on low-value items should be higher than losses for high-value items in the bundle.

  • Value-based pricing: Price goods based on how much a customer believes they're worth. This helps find a balance in price based on the customers' ability to pay and the business's profitability margins.

  • Market penetration pricing: Businesses just entering the market set their price bar low and gradually increase it as the customer-based increases. It is a risky but effective method as businesses must lose to gain a loyal market.

  • Dynamic pricing: Set the price of items based on the current market trends. If the demand for a product or service is low now, businesses should adjust prices to make it more affordable. Seasonal demand and supply price go hand in hand.

Interest rates

When interest rates rise, return on investment (ROI) is calculated, which results in less money pouring into the high growth types of companies. People become picky about what kind of investment they choose. Because of this, we will see more people and companies declaring bankruptcy, and businesses relying on external capital for survival.

The best solution is to assess your current interest rates and determine if they can be reduced or made sharper. When the RBA cash rate is 0.1%, we tend to forget about interest rates. But, with the forecasted increases, it would be wise to review them now and actively look at interest rates and refinancing if required.

Key takeaways

Navigating a rising cost environment requires you to understand your business and have clear, accurate and up to date accounts so you have the information at hand to pivot when and where you need to.

Against the backdrop of rising interest rates, the increasing costs of goods and wages, and escalating inflation, make the time to review your business to ensure you are prepared for economic change:

  • Review and understand your business and competitors 

  • Review your labour, access to staff, skills and salaries 

  • Review prices – ensure covering costs and phase the increases 

  • Understand your cash flow 

  • Understand the incoming costs from suppliers/services

  • Review your interest rates and actively look at refinancing if required

Need help? Our Accounting and Business Advisory team can provide the expertise your business needs to navigate the challenging economic environment. Get in touch with us today.

Author: Jim Softsis

Jim is an experienced business adviser specialising in taxation, business consulting and statutory compliance. Jim works with a range of clients including large domestic trading businesses, foreign subsidiaries, high net worth individuals and investors. Jim prides himself on delivering advice and solutions that his clients value and respect.