What Rising Inflation Means for Small Business Owners – LJ Suzuki of CFOShare

The price of goods and services continues to rise. According to the U.S. Bureau of Labor Statistics, in September, the index for food rose to 0.9%, the energy index increased 1.3%, and the gasoline index rose 1.2%. No matter your sector, as a small business owner or entrepreneur, you’ve likely felt the impact, but how do you respond to this inflation?

On today’s show, we’re pleased to welcome serial entrepreneur, and CEO of CFOshare, LJ Suzuki, to discuss how small businesses are responding to inflation.

Transcription:

Jim Fitzpatrick :
LJ, thank you so much for joining us once again on the show.

LJ Suzuki:
Good morning. Thank you for having me.

Jim Fitzpatrick :
Sure. So things are going crazy out there right now. And everybody thinks the world’s coming to an end. We make it through this COVID situation or for the most part, make it through. We’re still dealing with it at some level, of course. And, but then all of a sudden inflation’s kicking in and people are concerned. Gas prices are more, everything’s just more. That’s if you can even get the product to begin with and it’s not sitting on some boat someplace off of the coast of California waiting to get into the port to unload. And then how do you find the trucker? And now everything’s more money. The trucks are more money. The boats are more money. Everything’s just more money. Right. So talk to us about what we’re seeing in terms of inflation. And how do entrepreneurs and business owners best deal with it?

LJ Suzuki:
Yeah. So this is a classic inflation scenario driven by really strong demand, along with various supply chain disruptions. And it’s getting a lot of attention and focus right now because we’re seeing the results of it. But this is actually something that a lot of economists have been predicting for five or six months now. Even us, maybe three months ago on the show, we were talking about planning for inflation and how we can manage it. And now it’s here. And we talk now about, oh, there’s congestion at the Port of Los Angeles. You can’t find containers. But five months ago it was that the Suez Canal was blocked and that you couldn’t get anything through there. Right. So this kind of thing has been building up for some period of time. And the good news is since it’s an economics 101 type problem, there is a classic business 101 playbook for how to manage it.

Jim Fitzpatrick :
Okay. All right. I’m all ears.

LJ Suzuki:
All right. So you alluded to it a little earlier in your introduction, which is that as everyone’s costs are rising, prices are naturally going to need to rise as well.

Jim Fitzpatrick :
Yeah.

LJ Suzuki:
And we’ve already seen a lot of big companies doing this, Kimberly-Clark, Kraft foods, all the kind of like big consumer brands, as well as the energy industry is passing those prices on. We’ve seen coal prices and natural gas prices, spike.

Jim Fitzpatrick :
Sure.

LJ Suzuki:
Those are all commodity markets where this happens naturally. But for small business owners, they typically aren’t playing in the commodity markets. A lot of small business owners are supplying bigger businesses or going direct to consumer with products. And so price increases don’t come naturally. As a product of their marketplace, it’s something that they need to take the initiative to do.

Jim Fitzpatrick :
Sure.

LJ Suzuki:
And what I’m finding is a lot of small business owners are reluctant to increase their prices.

Jim Fitzpatrick :
I would imagine so because it’s a scary thing. I mean, you’ve got your customer base and it knows that you’re going to be at one price point on a particular product or service or what have you. And as soon as you start to inch those up, it gives that great customer that you have all of a sudden pause enough to say, well, wait a minute, maybe I should be shopping around. Maybe they’re taking my business for granted. Maybe they’re just coming in on this inflation situation. When in reality, maybe this small business I’m dealing with doesn’t have any of those woos at all. And they’re just trying to take advantage of the situation, right? Because that might be what the consumers thinking.

LJ Suzuki:
Yeah. There’s always a fear that increasing prices is going to create negative backlash with your customer base. And that’s a very well founded fear because 90% of the time in business, as you increase prices, people are going to second guess,

Jim Fitzpatrick :
Right.

LJ Suzuki:
Whether or not they should be purchasing that good or service through you or through one of your competitors.

Jim Fitzpatrick :
Sure.

LJ Suzuki:
Now there’s something that’s different about the current situation that fits in that 10% exception instead of the 90% norm. And that’s that there’s not enough products or services to go around for all the demand that’s filling it. So what that means is you can afford to lose some customers and you’ll probably be able to backfill and gain new customers. And in fact, those customers who are willing to pay higher prices are probably better customers. They’re probably more loyal.

Jim Fitzpatrick :
Yeah.

LJ Suzuki:
They’re probably going to give you a better experience and have a better relationship with you.

Jim Fitzpatrick :
Good point. Very good point. Yeah, for sure. And people are expecting it. Right. I mean, for the most part, people are expecting to pay a little bit more. I guess the good news in all of this is that while prices are increasing, so are family’s incomes, right? I mean, we’re seeing now that to get a job at McDonald’s, you’re getting paid $15 an hour plus benefits, plus a sign on bonus, everything else. Everybody looks at McDonald’s as kind of like the new or the level set for the minimum wage. Right. It might be $7 and 25 cents an hour, whatever it is. But it’s whatever really McDonald’s is paying. It seems. Right.

LJ Suzuki:
Yeah.

Jim Fitzpatrick :
Or some of the big retail giants. Whatever they’re paying, that’s pretty much the new minimum wage out there. So you’ve got,

LJ Suzuki:
Exactly.

Jim Fitzpatrick :
A double income family, even at the $15 an hour is $60,000 a year coming in. So is it not true that these consumers feel like maybe there’s a little bit more money in their pocket, certainly coming off of COVID there’s been more, a lot more consumer savings. You have it, a lot more stimulus checks that were hitting these people as well. That in many cases went into a savings account. So it almost seems like it levels itself out. There’s so much talk about inflation, but to your point, demand is driving this. It’s not like there aren’t consumers out there wanting the products. There are. I guess the good news, right?

LJ Suzuki:
Yeah, absolutely. In aggregate, you’re right. I mean, there’s more money in the economy now than there’s ever been in mankind’s history.

Jim Fitzpatrick :
Right. Wow.

LJ Suzuki:
And that’s because of federal reserve actions.

Jim Fitzpatrick :
Sure.

LJ Suzuki:
And that’s because of robust demand and a healthy economy. But one thing that we need to be conscious of is the fact that there is kind of an unequal distribution to the recovery. Right. And so a certain group of people are doing very well right now. So for example, homeowners are doing very well.

Jim Fitzpatrick :
Right.

LJ Suzuki:
Because the equity in their house is increasing in very significant ways.

Jim Fitzpatrick :
Right.

LJ Suzuki:
On the other hand, renters are really struggling because their rent is going up and they don’t necessarily have that asset that’s rising in value.

Jim Fitzpatrick :
Right.

LJ Suzuki:
So I think it’s important to know who your consumer is and whether or not they are benefiting from the current recovery. In aggregate, the overall country is doing very well, but there are certain pockets that are not doing very well. And if that is your consumer, you do need to be sensitive to that.

Jim Fitzpatrick :
Right. Yeah. There’s no question about it. Is there a concern? I mean, you work with hundreds of small businesses and have been and are, and have been an entrepreneur, is there a concern on your part that this might be a bubble and there may be a crash when all is said and done? What happens when all those boats make it in and things get going again? Are we going to see all of a sudden, a drop in demand because it has reached a saturation point or will we see prices coming back down? Or do you think that this is the new normal and a year from now, we’ll see prices continually increasing?

LJ Suzuki:
Yeah. So the pendulum definitely swing both directions. I do think that the current supply chain constraints will eventually become unclogged and the price of containers will go back down to $1,500 a container, whatever it was historically.

Jim Fitzpatrick :
Sure.

LJ Suzuki:
However, what we tends to find and what’s proven through history, is that prices experience what they call a ratchet effect, which is that they’ll go one direction, but generally not the other, which is that in general prices go up, they tend to not to go down. Now there’s always exceptions, right? Again, the energy industry is a very fluid market. Anything that’s commoditized like agricultural product, very fluid, but in general, prices tend to go up and then they don’t really go down. If they do go down, it’s going to be seasonal through discounting or through having sale events, that type of thing. Again, like now is when the time when everybody is raising their prices. And so it’s all about how are you going to competitively position yourself in the long run? Do you want to be viewed as that low priced competitor? Do you want to be the Walmart of your industry?

Jim Fitzpatrick :
Right.

LJ Suzuki:
Or would you rather be like the really premium and the Rolex or the Tiffany of your industry, or do you want to be something in between? Now is the time when everybody is jocking for those positions and you as a small business owner, have an opportunity to either reinforce your image or reinvent your image.

Jim Fitzpatrick :
Yeah. It’s a very good point. Do you think that during times like this it’s important that small businesses communicate if there has to be a price increase because the fact is they just, the small business owner can’t get the materials or the goods at the old price, and they’re already working on a smaller margin. Is it a good idea to communicate that and get out in front of it with your customer base to say, Hey, there is a price increase and here’s why rather than just increasing prices. Said it was a price increase. Well, why is there or price increase, right. That’s important.

LJ Suzuki:
Well, here at CFOshare transparency is one of our five core values. And we live that out with our clients as well as with our employees, as well as with our community. And so we naturally lean towards, yes, it is important to say that there is a price increase and why there is a price increase. There’s two benefits to that. So first of all, you’re not surprising people. And then they feel betrayed the next time that they’re in line to buy your product and suddenly discover it and feel like they’ve been had a little bit, right? So you’re being proactive and you’re informing your customers to reinforce your relationship with them as their brand. But the second thing is you’re also signaling to the market that this is what you’re doing. And the market, which would be your competitors primarily has an opportunity to respond to that proactively as well, which might be to also raise their prices because they feel that the entire industry’s moving that direction.

Jim Fitzpatrick :
Right.

LJ Suzuki:
Or to rebrand themselves as something different so that if they do want to be the Walmart, they are marketing themselves as the Walmart, while you’re marketing yourself as the Rolex. And you’re not confusing your consumers by contradicting each other.

Jim Fitzpatrick :
That’s right.

LJ Suzuki:
So I do think that that transparency is important. Now, obviously there’s some markets where you can’t do that. If you are bidding on defense contracts and there’s secret bids, you can’t tell your competitors what you’re going to bid. But generally speaking for most small business owners in markets where they do have some pricing power, it is good to have that relationship with your consumers where you’re explaining to them what you’re doing and why.

Jim Fitzpatrick :
Yeah, for sure. Well, LJ Suzuki, CEO of CFOshare, financial specialist and small business expert. I want to thank you so much for joining us once again on the show. That I know our viewers and subscribers get a lot out of your appearances here on the show. So thank you so much. Love to do a follow up and see where things are going on this topic.

LJ Suzuki:
Thank you. My pleasure. And we will.

Jim Fitzpatrick :
Thanks.

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