Inflation is a constant force in the economy, averaging around 2-3% annually for many countries, although recent years have seen spikes closer to 8-10%. For businesses, this means that the cost of rent, utilities, goods and salaries steadily rises. The impact may be imperceptible over just one year but the compound effect can have a huge impact on a businesses profitability.
To give an example, let’s say your business has annual expenses of £100,000. With inflation averaging 3%, that means your costs increase by £3,000 in the first year and a little more every year thereafter. If your prices remain the same, you’re effectively absorbing this loss directly into your profit margins. Over five years, you’re looking at £16,000 in increased costs.
Unfortunately for many businesses, inflation has gone up by a massive 21% over the last 3 years, with the majority of smaller businesses not passing on those increased costs to their customers and instead eroding their margins.
Inflation is coming down to more manageable levels but there are always new challenges such as recent changes to National Insurance contributions in the UK so it’s more important that ever to get your pricing strategy right and make sure to increase your own prices on an annual basis.
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