Cost and Pricing Strategy Hacks to Outsmart Unstable Supply Chains 🪇
As small business owners, you are no strangers to the pressures of maintaining profitability amidst unstable supply chains and unpredictable pricing. In recent times, factors such as tariffs, raw material shortages, and rising transportation costs have created a volatile environment, leaving many businesses wondering: how do you keep prices affordable while protecting your margins? The right cost and pricing strategy can make all the difference in navigating these challenges effectively.
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Big companies like Walmart, Home Depot, and Target are faced with four primary strategies when managing these disruptions. They have the financial power and resources to negotiate, shift production, and absorb costs. But what about small businesses? Should they follow these same strategies, or are there more tailored approaches that could better suit their unique challenges?
Cost and Pricing Strategy #1: Asking Suppliers to Lower Prices
It’s a tempting solution: go to your suppliers and ask for price reductions. After all, if suppliers can lower prices, you can maintain your profit margins without passing costs on to your customers. This strategy works best when your business has a strong, long-term relationship with the supplier and when the supplier is in a position to absorb some of the costs.
However, there are clear downsides to this approach. If your suppliers are already operating on thin margins, asking them to lower prices might not be feasible. For instance, a supplier in the textile industry might be already struggling with increasing raw material costs and may not have the flexibility to reduce prices further. Pushing them too hard could even strain your relationship, leading to delays, decreased quality, or worse, a lost supplier.
Case Study
A local café owner, Kelly, once asked her coffee bean supplier to lower prices when costs spiked. The supplier agreed to a small reduction, but only after compromising on the quality of beans. The customers noticed the difference in flavour, leading to a dip in business. While Sarah saved money upfront, the long-term cost to her brand’s reputation was far higher.
This strategy can provide short-term relief, but it’s a high-risk approach. It’s essential to understand your supplier’s cost structure and long-term viability before asking for price reductions. In most cases, this may only be a temporary solution that could backfire if the supplier can’t sustain the discount.
Cost and Pricing Strategy #2: Asking Suppliers to Move Locations or Diversify Supply Chains
Another approach is to ask your supplier to relocate production or diversify their supply chain to regions that might be less impacted by price hikes or geopolitical tensions. This may sound like an effective way to reduce costs, especially if shifting production to a lower-cost region could provide a more stable supply. For example, relocating production from China to Southeast Asia can help mitigate the effects of tariffs or trade restrictions.
However, this comes with significant challenges. Relocating production takes time, involves logistical complexities, and can disrupt the flow of goods in the short term. Even more, suppliers may be reluctant to make such a move unless they are guaranteed a long-term commitment. Moving production might also affect the quality of the product or lead to delays, which in turn could harm your customer satisfaction.
Case Study
John, who runs a tech accessories business, faced price hikes due to tariffs on Chinese imports. He requested that his supplier shift production to Vietnam to avoid tariffs. While the supplier agreed, the move resulted in a six-month delay and higher logistics costs. John’s customers grew frustrated with delays, and his business took a hit. Ultimately, the cost of moving outweighed the benefits.
This strategy can help mitigate risks associated with unpredictable pricing, but it is a complicated, high-investment approach that may not be feasible for all businesses. The logistics and transition period can result in disruptions that are detrimental in the short term.
Cost and Pricing Strategy #3: Strategically Absorbing Some Costs
Absorbing some of the increased costs is another potential strategy. This approach involves consciously deciding not to pass the entire cost increase onto your customers. By doing so, you absorb some of the price hikes internally, which allows you to keep your prices stable and maintain customer loyalty. This is especially effective if your business relies heavily on repeat customers or brand reputation.
However, the downside is clear: by absorbing costs, you reduce your profit margins. In a small business, where margins are often tight, this can be a risky move, especially if price increases are frequent or sustained over time. Over time, this approach can erode your financial stability, making it difficult to reinvest in your business or manage unexpected costs.
Case Study
Emily, who runs a boutique clothing store, chose to absorb part of the cost increase from her fabric suppliers rather than raising prices. This decision helped maintain customer loyalty and prevented a dip in sales. However, after several months of absorbing the cost, Emily’s cash flow became strained, and she had to adjust her pricing strategy to avoid financial stress.
Absorbing costs can be an effective way to protect customer relationships, but it’s important to have a clear understanding of your margins and cash flow before adopting this strategy. It’s best used in short bursts or when customer retention is a higher priority than immediate profits.
Cost and Pricing Strategy #4: Selectively Raising Prices on Less Price-Sensitive Items
One of the most balanced and often most effective strategies is to raise prices selectively on less price-sensitive items while keeping everyday essentials affordable. This approach leverages the fact that customers are willing to pay more for non-essential or luxury items, while basic or essential products should remain at the same price to avoid losing customers.
For example, if you sell both high-end and low-cost products, you could increase prices on high-margin, luxury items while keeping staples like bread, milk, or other essentials at the same price. This strategy helps maximise your revenue from customers who are willing to pay more without losing their trust.
Case Study
Mark, who runs a home goods store, used this approach when prices for materials increased. He raised prices on high-end décor items but kept the prices of everyday essentials like cleaning products stable. Customers still flocked to his store for the essential items and were willing to pay a bit more for the luxury goods. His sales remained steady despite rising supply costs.
This strategy offers a balanced solution, allowing you to maintain customer loyalty while also adapting to rising costs. It requires careful analysis of which items are price-sensitive and which are not. By focusing on leveraging customers’ willingness to pay more for non-essential items, you can keep your margins healthy without alienating your core customers.
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Approaching Unstable Prices and Supply Costs Management
So, what’s the best course of action for small businesses? It really depends on your specific circumstances. However, a strategic combination of these approaches might be the answer:
1. Build Strong Relationships with Suppliers — Work collaboratively with suppliers to find solutions that benefit both sides, whether that’s negotiating better terms, diversifying supply chains, or finding cost-saving alternatives.
2. Leverage Pricing Strategies — Don’t simply pass costs onto customers — selectively raise prices on high-margin items and keep essential goods affordable to maintain loyalty.
3. Absorb Costs Where Possible — In the short term, absorb some of the costs if customer retention is crucial for your business, but always have a plan to adjust your pricing as things stabilise.
Small Business Supply Chain and Pricing Management with Confidence
Navigating unstable supply and prices doesn’t have to be overwhelming. If you’re unsure where to start or need tailored advice, feel free to reach out. We’re here to help you make the best decisions for your business, and together, we can create a plan that works for you. Take action today and set your business up for long-term success.
For a comprehensive view of ensuring the continuous growth of your business, download a complimentary brochure on How to Drive Pricing Strategy to Accelerate Sales & EBIT Growth.
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