Will Price Inflation Hit Your Business?

By Carol Tice

After a couple years of inflation-free bliss, the cost of goods has started to creep up again. The leading culprit is the price of gasoline, which rose 8.5 percent in December alone. The skyrocketing price of gold is another example of rising costs that can affect retailers and manufacturers.

In all, the Consumer Price Index rose 1.5 percent in 2010, the Bureau of Labor Statistics reports. Most of that gain was in the second half of the year, leading economists to suspect price inflation is picking up steam and will continue in 2011.

Some companies are responding by raising prices. Driven by rising coffee-bean prices, Starbucks said it would raise prices on some lattes back last fall. Hanes is among the big-name apparel brands that began hiking clothing prices last fall due to the rising cost of cotton.

Higher prices on raw materials can be dealt with by retailers and manufacturers one of three ways: Raise prices, make smaller profits or cut other costs. But often, it's tough for small businesses to raise prices on their customers.

What else can you do? Here are five tips for coping with cost inflation:

1. Buy smarter. If your cost of goods is rising, build that into your budget so you understand your costs up-front. Also, shop around for lower-cost vendors, or buy in more bulk to get a discount. Consider substituting other raw materials that aren't as costly.
2. Cut overhead. Analyze all your variable and fixed costs to see where fat could be cut. Maybe you could move the factory to a cheaper neighborhood, find a better deal on phone service, or buy office supplies from a cheaper vendor.
3. Repackage your products. It's possible you could raise prices if you presented your products in a more appealing way. Bundle items into sets, or offer them in more upscale packaging to convey more value.
4. Target new customers. If your old customers won't take a price hike because they're used to your current low price, seek new customers and bring them in at a new price level. Consider selling in new geographic areas, or through new channels that target more upscale customers.
5. Avoid or pay off debt. Small-business finance expert Barbara Weltman notes that if you have an adjustable-rate loan, your rate may well rise this year -- so endeavor to pay it off or refinance to a fixed rate, before interest rates go higher. If you need to borrow now, inflation means your borrowing will cost you more. Try to cut expenses or postpone capital expenditures to avoid debt if you can.

How will you deal with price inflation? Leave a comment and tell us your strategy.

Photo via stock.xchng user srbichara