Small and medium-sized business (SMB) owners are constantly dealing with unique challenges on a number of fronts. Understanding the source of the issues as well as potential solutions can help you address challenges in ways that best leverage your company’s resources. And in 2024, the challenges may not be as intense as in recent years. Here are three financial trends to be mindful (but not fearful) of:
1. Wobbling demand
Consumer spending, which represents the majority of U.S. economic activity, is giving what NBC News called “mixed signals” to retailers, many of which curbed hiring during the 2023 holiday season compared to past years. MarketWatch reported that consumer spending “was not as strong as it first appeared,” as seen in revisions to the U.S. Bureau of Economic Analysis (BEA) Gross Domestic Product estimate in which consumer spending was lowered. According to the BEA, consumer spending slowed to +0.2% in October 2023, down from +0.7% the month prior.
What can small businesses do to manage wobbling demand?
- Expand your market footprint. If you currently serve one city or town, consider expanding to neighboring locales. If your business solely serves consumers, consider providing an offering for small businesses or small offices with a similar profile to your existing customers.
- Rev up your marketing game. If your customers love you, capture their feedback in writing, audio, or video, and add these glowing customer testimonials to your online or social media campaigns. Lean into authenticity and burnish your business persona to the extent you and your employees feel comfortable.
- Use PR. If your business has a great story to tell or is doing timely things, you can capture the attention of other businesses and publications. If you — or someone on your team — exude charisma, leverage that in radio or TV interviews, podcasts and more.
While the above involves going on offense to reach more customers, implementing the following suggestions can also help your business in a softening market:
- To retain existing customers and enhance loyalty, provide the perception of a deal. Package products and services in one or more combinations that customers typically buy, and then offer this bundle at a discount to singular pricing. Sell services over a time frame at a discounted price. Limit that time frame to encourage use, such as three haircuts within 90 days.
- Maintain pricing on higher-cost items but offset with smaller quantities. According to Fortune, many restaurants used this technique during peak inflation to offset costs and keep customers. Some food product companies are doing the same with smaller server packages at the same price point.
- To further support your bottom line, re-examine your product or service line. What sells the most? If you have products or services that are losing money, determine how to make them profitable. If you cannot, consider discontinuing them.
2. Easing interest rates
While inflation has perhaps been tamed, it appears that high interest rates may remain, at least for the time being. There are reports that the Fed will lower interest rates several times in 2024, but it’s unclear when or to what extent. By focusing on SMB best practices, you can prepare for and overcome challenges thrown your way in any marketing conditions. In the meantime, consider these actions based on where interest rates stand as of Q1 2024:
- If you’re thinking of getting a business loan but don’t need it urgently, consider hanging tight, given that rate hikes appear to have plateaued, and cuts may be on the way. For technology purchases such as computers and mobile devices, consider Samsung Business Financing, which lets you continually shop Samsung online using a business line of credit.
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- Upon rate cuts, consider folding a working capital loan into an equipment or other term loan to lock in rates and avoid the variation you typically see in lines of credit.
- Pursue extended terms with suppliers, such as net 30, 45 or 60 days. These carry zero interest charges for timely payments.
3. Pricing adjustments
Business owners often focus solely on sales volume dollars as the determinant of business success. Although this is a natural reaction as sales drive business growth, only paying attention to sales can lead to margin deterioration, cash flow issues and losses.
In a competitive market, business owners often feel pressured to reduce prices to maintain sales volume. In such cases, many owners want to provide discounts or cut prices. However, even temporarily, this is rarely the answer. Few companies can generate extremely high (Walmart-like) volumes to justify low pricing.
Pricing is critically important. You need to price your product and services high enough to maintain the operating and net profit margins your firm needs to achieve strategic goals. In addition, the higher your profit margin, the more revenue flows through to your bottom line. Conversely, the lower your profit margin, the more revenue you need to generate to experience the same impact on the bottom line as certain cost reductions. For example, if you have a 10% profit level, a $10,000 increase in sales will produce the same impact as a $1,000 cost reduction on the bottom line. However, if your profit margin drops to 4%, you now need to generate $25,000 in revenue to match a $1,000 cost reduction.
To weather a changing market and strengthen your operations, try two things:
- Strip out or reduce costs wherever you can. Reduce what you pay for goods and services by buying in bulk, negotiating lower prices or switching suppliers. Automate operational steps where possible.
- Add “value” to your product or service by offering warranties or guarantees, high-level customer service, and customer checkups and follow-ups. Ensure you clearly communicate that value to customers so they fully understand your firm provides this as part of the price paid.
Being a small business owner has its challenges, but it’s also immensely rewarding — especially when you overcome these challenges with strategic actions and solutions. Hurdles can be dealt with and lead to a stronger, more sustainable firm. Keep going and growing!
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