Deflation? What does it mean for small businesses?

Food for thought? News reports deflationary times ahead. Lets start with what does deflation mean:  It’s the danger of  falling prices, (according to Wikipedia)  “In economics, deflation is a decrease in the general price level of goods and services.[1] Deflation occurs when the annual inflation rate falls below zero percent (a negative inflation rate), resulting in an increase in the real value of money – allowing one to buy more goods with the same amount of money.”

What does that mean for those of us who have small businesses? Well lets dwelve a little deeper into it.   The Effects of deflation: decreasing prices for goods and services (ok that’s not so bad), cash money increases in value over time, discourages savings & decreases in investments (BAD~ fewer loans available), enriches creditors at the expenses of debtors (interest rates increase~ most of us), benefits fixed income earners (not most of us) and finally it is associated with recession & unemployment.  This does not sound like a good environment to be running a business?

What can you do to safe guard your business? These days it’s very hard to decipher what information to act on and what information is purely scare tactic.  I can tell you that I for one will be limiting my large expenses to ones I know I can sell easily because if deflation happens I could be stuck with very expensive supplies that I can not get rid of at a profit.  I have been in the process of diversifying my talents as well.  Specialization may also mean stagnation in the future.

Some important things to do to prepare for deflation:

  • If you carry a large inventory of supplies, try to reduce it and buy only what you know you can sell at a reasonable rate to make a profit. If you have large inventory reduce it now. Or if you have a high specialized business and need an item that is already scarce~ purchase them now because it may not be affordable later or not available at all.

  • Know your demographics~  While most of the populous will be in down spiral, he upper income earners (fixed income population) should come out of this fine. What this means to you now is don’t continue to fight for bottom best prices instead offer a non-competing product.  Something of value that they cannot get anywhere else. Create a value over price. For an example in my Middle Georgia market I can successfully sell my soap at $6.00 a bar.  Not too bad for my area but lets say you are in California,  prices for soap can range anywhere from $9-12 for the same sized bar.  What I am saying is that if you are selling below market for your product you are competing for a demographics that will potentially be out of a job when deflation happens.  Which means you will have to either go out of business or start vying for the upper demographics.  Why not start now and create a demand before deflation happens?? If your prices are already too low~ increase them. But do it now while you still can. Your current customers may not like it but you will recover in the future by changing your demographics.

We as small business owners do not have the funds to bounce back easily but if we prepare for the future we can position our companies properly now so we ensure success for decades to come.

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