If you haven’t heard that inflation is way up, then you haven’t been paying attention to the news.
The last time inflation touched the stratosphere like this, Chairman Paul Volcker and the Federal Reserve Board raised the federal funds rate to a peak of 20% in 1981 to tame inflation. Unfortunately, the National Bureau of Economic Research, this period overlapped with the 1980-1982 recession.
A recent article from the Wall Street Journal suggested that up to four interest rate hikes may happen in 2022 to tamp down inflation. Fed Chairman Jerome Powell recently said, “If we see inflation persisting at high levels longer than expected, if we have to raise interest rates more over time, we will.” So, what should you expect in 2022?
History Doesn’t Repeat but it Rhymes
Based on the quotes above, it’s a safe bet that increases in the interest rate are coming, but they probably won’t be as severe as the early 1980s.
Let’s start with the bad news: Increased interest rates tend to decrease customer spending, meaning your customers will buy less. However, customer spending won’t fall to zero. Unless you have 100% of the share of wallet of your customers, there will still be room to grow. Analyze your share at each customer in your book of business, find product lines where you are under-penetrated, and deliver relevant sales campaigns where you can content.
Potential Bright Spot: Commodities
In some form or fashion, commodity prices affect your business, as they are inputs into every product that is created. Higher interest rates tend to lower the price of commodities, which may provide relief on your purchasing team in the form of lower prices for your commodities.
However, cost reductions come with an organizational risk. I have lost count of the number of times that companies have found a way to reduce their cost and end up lowering their prices to such an extent that they write down their entire book of business. It is fair to push through the benefit of cost reductions to your customers. However, keep some of that benefit for yourself.
As a rule of thumb, keep at least half of your cost benefit for yourself. You’ve worked hard, so protect your margins.
Read other expert posts about the inflation challenge.
Deal with the World as it is Today and Prepare for Tomorrow
As the cliché goes, predictions are difficult to make, especially about the future. Perhaps the Fed raises interest rates, perhaps they don’t. Rising interest rates typically correspond to increased borrowing costs, so it makes sense to invest today in your agility to deal with the unpredictable business environments of tomorrow.
Specifically, investing in the ability to modify specific customer or segment price will pay dividends in the future, as it most closely aligns with the market. Improve your segmentation today to improve your price yield tomorrow. Finally, empower your account managers with relevant pricing information to ensure they go to market with a price that will let them win.