4 Ways Startups Can Beat Inflation Startups can be particularly vulnerable to market fluctuations, but strategizing and running lean can go a long way to helping keep things afloat.
Opinions expressed by Entrepreneur contributors are their own.
Startups are famous for doing big work on a small budget that pushes society forward, often succeeding against the odds. In fact, small businesses and the startups behind some of them are responsible for creating 1.5 million new jobs each year in the U.S.
But right now, we are all feeling the pain of inflation.
CNBC has reported huge jumps in both the consumer price index, which measures the cost of goods and services; and the producer price index, which measures the costs paid by wholesalers. Amidst what is already a pretty risky endeavor, startups can be particularly vulnerable to market fluctuations.
But we must go on. So, if you want to create and maintain a strong startup in the face of inflation, what can you do?
Related: Inflation Is a Different Beast for Entrepreneurs. Here's How to Protect Yourself.
Strategize your spending
It's easy for founders to fall into certain traps when it comes to spending. Some entrepreneurs are so passionate about their vision that structuring their spending is the last thing on their minds. On the flip side, there are financially savvy founders who become obsessed with a more barebones approach to operating their company.
But this mindset can also increase the potential of missing out on critical investments and opportunities which could ultimately help their company grow. To cope with inflation, a healthy and realistic attitude toward your company's financials is key.
As operating becomes more expensive, many will have to restructure. If you want your startup to thrive, any changes you make should be in response to real-world conditions. Many young ventures fail simply because they run out of capital. No founder wants to create that situation.
However, you do not want to cut costs so intensely that your company cannot effectively do what it is supposed to do. If cuts make it impossible for anyone you might employ to work, or negatively impact your customers, this will likely do more damage to your startup than inflation. So, get smart and develop a spending strategy that responds to inflation, but protects the core needs of your startup.
Related: 4 Ways to Protect Your Business From Inflation
Embrace being a young startup
Even if your startup is a week old, you likely have already felt pressure to scale and grow it. We live in a world where many founders dream of having the next game-changing unicorn, and ambition is a powerful motivator. But in times of high inflation, there are actually a lot of benefits to being a smaller startup.
Often, larger corporations have so many moving (maybe even extraneous) parts that it can be difficult to track where the money goes and why. If you are a small startup, tracking what you spend is much simpler. Knowing why those resources are being spent and exactly what value they bring should never be complicated.
Remember, many startups begin with just one entrepreneurial founder. This means that this one founder is likely wearing a dozen different hats, which comes with its pros and cons, of course.
But one big plus is they won't have to schedule meetings with multiple departments, and maybe even hire outside help, to reconfigure spending and efficiency. Startups simply have lower operating costs in general. This means that they are less affected by inflation than larger businesses. The fewer expenses a company has, the less threat inflation poses. Depending on your type of startup, this is still a great time to be in business.
Related: How to Calm Financial Panic During Inflation Surges
Think about contracts for materials
If your startup requires a lot of materials, or specific materials which are prone to price hikes, creating long-term contracts with suppliers is something to consider. These contracts are often mutually beneficial: You receive materials at a consistent price for a length of time, even in the event of inflation. Suppliers, on the other hand, have guaranteed business for a length of time.
While it may not always be possible to do so, it is something to think about. Long-term contracts with locked prices are a popular hedging tactic for businesses, especially during inflation spikes.
For example, say you own an ethical swimwear startup. As a part of your operations, you have a year contract with a material supplier that includes locked-in prices. Due to this, you will know exactly how much you will spend on your main material for an entire year. This gives you more financial stability and lets you create a more strategic budget upfront.
Find the right price
The question of whether or not to raise prices is on the minds of most business owners right now. Some may feel if they raise their prices, they risk losing customers. Others may feel they have no choice, as the costs of operations and materials soar.
According to a recent NFIB survey, 31% of small business owners are taking on debt instead of raising prices or making changes. That is simply not sustainable. When it comes to altering the price of products or services, inflation should not be the only factor startups consider.
Usually, startups and small businesses are not the main influence when it comes to overall market prices. Instead, a good rule of thumb is to look at larger businesses in your niche. If most have raised their prices within a certain range, you probably can as well.
Related: Inflation Is a Risk for Your Business, But Doesn't Have to Spell Doom
In instances like this, understanding your customers is key. If your consumers are drawn in by superior quality, clever branding, or a unique service, raising your prices is unlikely to push them away. However, if consumers mainly choose you because you offer lower prices, you may want to explore other avenues. This can include strategies like bundling or different pricing models to lower your costs.
For one thing, it is common knowledge that prices are rising due to inflation. Consumers are always willing to pay more for things they find valuable. Also, data shows Americans trust small businesses more than larger companies, and generally want to support them. Regardless of inflation, the principles of what it takes to run a successful startup are more or less the same.
Run as lean as possible, spend resources only on what brings value and know when to make the right investments to move your business forward. The reality is that it's truly a challenging time to be in business — but many startups are in a better position to weather the impending storm than they might think.