27 / 08 / 2021

Whip Inflation, Whip It Good (Or the Pressure’s on Startups Now)

In 1943, MGM put out a short film titled “Inflation” that showed Hitler making a pact with the devil to defeat America by driving up costs and urging people to cash in their war bonds. Now rising prices are in the news again, and small businesses are on the front lines.

Carey Smith | Founding Contrarian

Usually, no matter how real the problem or how small the genuine risk, the media pulls out their sandwich boards and starts proclaiming the end is near. It’s their job to scare us, and though I wouldn’t say they do it well, at least they take it seriously. So it was interesting how, up until very recently, they weren’t covering the issue of inflation with quite the same gusto, often putting a positive spin on it as a sign of recovery. It was almost as if they were protecting someone from criticism — the way the White House press corps once kept mum about JFK’s dalliances.

But it’s obvious now that the Federal Reserve and other supposed luminaries no longer see inflation as a temporary glitch in the recovery, making it hard for anyone in the media to suggest otherwise. Before long, rising prices may well be leading the news each night instead of Covid and its variants.

Besides their desire to sweep any potential flaw of the current administration under the rug, I’m guessing that many in the media have been downplaying the threat of inflation because they simply don’t understand it. They haven’t experienced it, and they don’t appreciate the hardship it creates for both recent startups and small businesses that have been around for years. The same goes for young entrepreneurs, many of whom aren’t old enough to remember the price increases of the late 2000s, much less the double-digit inflation of the 1960s-1970s. Now-retired journalist Robert J. Samuelson described it as a time when “large price increases were the norm, like a rain that never stopped. Sometimes it was a pitter-patter, sometimes a downpour. But it was almost always raining. From week to week, people couldn’t know the cost of their groceries, utility bills, appliances, dry cleaning, toothpaste and pizza. People couldn’t predict whether their wages and salaries would keep pace. People couldn’t plan; their savings were at risk. And no one seemed capable of controlling inflation.”

I lived through that time; I also ran a rapidly growing company for nearly 20 years, from 1999 to 2017, so I can tell you: Inflation is a bitch, especially if you’re trying to run a business and sell a product. It can throw a monkey wrench into all your projections and chip away margins that are already too small. Inflation is frightening, too, because once in motion, it’s impossible to know when and where it will stop.

Neither the media nor most politicians understand the predicament faced by small businesses trying to stay afloat in the midst of inflation. They can’t appreciate just how difficult a decision it is to raise the price of your product — first, because you don’t know what your competition is going to do, and second, because your customers have stacks of proposed purchase orders based on current prices. Few things are worse than having to go back to customers and say, “Sorry, the price has gone up,” knowing that you’re likely to hear, “Then, I’ll just go buy from somebody else.”

Is there anything a startup can do to mitigate the impact of inflation? First, make sure your margins are generous enough to be able to withstand a few hits. You (should) make a quality product, so don’t be afraid to charge for that quality. And second, if at all possible, keep enough inventory on hand that you can avoid having to raise prices on standing orders. Third, don’t be afraid of increasing your prices a little bit every year to keep up. Let your customers know beforehand and offer them the opportunity to secure this year’s price with a purchase order.

Younger generations that haven’t experienced real inflation may look at the price of gas or lumber and see that it goes up and comes down. But those are commodities. Finished goods are a different story: Once their prices go up, they aren’t coming down. So forget about this latest inflation being a temporary phenomenon — a financial side effect of the pandemic coming to an end. Higher prices are here to stay for a while. How high they go depends on how badly the Fed bungles its attempts to keep them in check.

If I were a betting man, I’d bet on prices going through the roof.