The NFIB Research Center’s new survey on the current impact of the Coronavirus outbreak on small businesses shed some light on small entrepreneurs throughout the U.S. The study found that, while most small businesses are not currently impacted, owners are concerned about future disruptions if the outbreak continues to escalate.
Of those businesses negatively impacted, most are experiencing slower sales and supply chain disruptions.
What does this mean? Due to the reaction to the Coronavirus spread, supply chains have been disrupted, numerous factories have temporarily closed their doors, and shipments all over the world have been delayed or canceled. That leaves businesses struggling to get products to their customers. Slower sales, on the other hand, are a consequence of the social distancing consumers are experiencing. In other words, staying at home seems to be becoming the norm.
In this scenario, pricing becomes a critical focus for small business owners. Business owners are struggling at both ends of the spectrum, either with a lack of product, lack of demand, or both.
If this is your case, how should you adjust your prices to mitigate the impact of supply chain disruption or the impact of lower sales? There are a few strategies you can take based on what you’re seeing from your customers.
The goal with each of these strategies is to achieve equilibrium where supply and demand meet. You want a balance so that customers don’t run you out of stock, nor you get too much amount that you can’t get rid of it.
Before you get to these strategies, evaluate your business. Decide whether you provide goods or services that people can or will do without. Chances are home deliveries will skyrocket, while auto repairs would decline. Categorizing your business will help you forecast the response from your customers.
Next, think about whether pricing changes will make a difference to stimulate or prevent demand. If you run an autobody shop, probably lowering prices won’t bring more people out. However, restaurant delivery fees will undoubtedly change the outlook for food delivery.
How to Adjust Your Prices Depending on the Supply-Demand Scenario
Scenario 1: Low Supply & Low Demand
Getting hit from both is a double whammy. However, it makes pricing relatively easy. Since both your supply and demand dropped concurrently, there’s no need to do anything drastic with pricing. Any adjustments that you make would be balancing change on a week to week basis.
Scenario 2: Low Supply & Normal/High Demand
If you produce goods like paper products or sanitizers, you’re likely experiencing outsized demand at the moment. It’s important to balance your relationships with your customers with any price increases you take.
Ideally, you want to keep your best customers happy by keeping their pricing the same and hopefully locking in volume commitments further down the road. With the marginal customer that comes in, who you see as a one time buyer, you want to price it to try to balance out so that you service your main customers first. Also, make sure you don’t go so high as to run afoul with any price gouging laws.
Scenario 3: Normal/High Supply & Low Demand
This is where you work more on volume. You need to balance your profit margins with price reductions to move your goods. Depending on the length of the problems, you may need to move goods at a slight loss in order to maintain healthy relationships with your suppliers. Ultimately, dropping prices here becomes a must.
Other Considerations When Pricing Your Products
As you consider the various strategies available it’s important to think about the following:
- Business relationships – Will any of the changes you plan to implement cause disruptions with key customers or suppliers down the road? It’s important to adapt to the new circumstances, but you don’t want to dig yourself into a hole by going overboard.
- Debts and expenses – It’s important to think about all the outstanding bills and expenses you’ll need to pay during this time. Factor these into your decision-making process. If you can cut back on expenses without major impacts on your business, consider taking advantage of those opportunities.
- Profits – Regardless of whether your adjustments raise or lower your profit outlook, you need to be aware of the impact. Think about how this will play out in the short and long term. While some businesses will scale back, others may have an opportunity to maintain pricing and grow their customer base.
While everyone’s situation is unique and no prepackage strategy can cover your circumstances, one piece of advice goes for every small business owner: keep calm and prepare your business accordingly as you see changes in your customers’ habits. If you experience an abnormal drop in your sales and therefore a shortage of cash flow, this could be the moment to apply for a business loan.
However, not every business loan will be beneficial under critical circumstances. You need a loan with fast funding, so you can have the cash available when you need it most. Also, extended terms are critical: they will allow for lower monthly payments that won’t stress your finances while the crisis lasts. Last but not least, look for a lender with minimal requirements: you don’t want to go through loops or wait for months only to be declined because you don’t meet the requirements.
We invite you to keep reading How To Use A Camino Financial Loan As A Bridge Loan to discover how a business loan from Camino Financial can be the answer to the lack of cash flow your business may experience during a crisis.
At Camino Financial, under any circumstance, we continue offering you tools, answers, and insights into how to manage your business.
Sign up today for our Coronavirus Newsletter (in Spanish only) to receive timely updates and resources.