Five Ways Business Owners Cope With Rising Costs

From introducing new products to targeting foreign markets, entrepreneurs in diverse industries share their strategies

 

If you build it, cook it, sew it, ship it, or import it, chances are your cost of business has spiked over the past two years. Even Internet entrepreneurs are feeling the sting of a weak dollar. "As we expand our coverage of hotels in Europe, we pay people in euros and pounds, but we make money and raise money in dollars," says Elie Seidman, chief executive of Oyster.com, a hotel research and booking website in New York with 40 employees. As commodity prices rise by double-digits and the greenback falls, business owners across industries are struggling.

Passing on higher costs to customers chastened by the Great Recession is getting tougher. With gas prices around $4 per gallon, up about 25 percent from 2010, the more consumers spend at the pump the less they have left for discretionary spending. "Consumers are sensitive to prices because the past few years have trained them to be this way," says Lisa Mayock, co-founder of eight-year-old women's fashion brand Vena Cava in New York. "We can't raise prices and expect the customer to just deal with it."

Searching for ideas to protect profit margins in your own business? Five strategies from entrepreneurs across the country follow.

1. Introduce entry prices. If raising prices is unavoidable, soften the blow for existing customers by introducing new, lower-priced items. In July 2009, Mayock and her co-founder Sophie Buhai introduced Viva Vena Cava, a new dress line featuring lower-cost fabrics, including jersey, which they fashioned into less-expensive dress styles. "Keeping a range of prices ensures we won't exclude customers," says Mayock. Sales have climbed 10 percent at the four-person company since the line's introduction.

2. Shift production location. Reduce the bite of rising transportation costs by moving production closer to customers. SOL, a Palm City (Fla.) solar lighting manufacturer, imports components from China to build solar lights in Florida—only to ship half of them to customers abroad. To offset the impact of rising copper prices and fuel surcharges, the 45-employee company is in the process of setting up production in Africa and China. "It will be far more efficient to ship components from all over the world to a factory closer to our customers in Africa and the Middle East," says CEO Michael Sonnenfeldt.

3. Alter products. In industries where there is little forgiveness for price increases, modifying your offerings can help build customers' loyalty. Although its food costs are up 20 percent, Kiran's, an upscale Houston restaurant that employs 42, has reduced the cost of its prix-fixe lunch without shrinking its Texas-size portions. "Seasonal changes in the menu allow the flexibility to weed out ingredients that rocket in cost, while the cross-training of employees has [cut] payroll expenses," says Kiran Verma, owner and chef of the five-year-old restaurant.

4. Ensure that your product stands out. By offering uniqueness, business owners can rise above price pressures. The dark chocolates and fruit treats marketed by 10-person Kopali Organics in Miami are sourced from independent farmers in Central America. Touting the sustainable farming methods their farmers use differentiates Kopali and insulates the business. Revenue is up 50 percent over last year, says President Jacqueline Holmes.

Similarly, Capital Builders & Designers is reacting to a 10 percent rise in steel and cement prices by selling homes equipped with so-called smart technologies. Nina Magon, president of the six-person construction company in Houston, says she ignored the gizmos in better times but is now betting they'll set her homes apart.

5. Sell abroad. A declining dollar makes U.S. goods more attractive overseas. Hedge your currency risk by seeking more customers in foreign markets. With broadcast industry budgets notoriously tight in the U.S. over the past 24 months, Weather Central, a 178-employee provider of professional television weather graphics and forecasts, made significant headway selling abroad—particularly in China, where weather technology budgets are increasing, says Bill Baker, president of the Madison (Wis.) company.

Monica Mehta is managing principal of investment firm Seventh Capital in New York City. She has advised hundreds of small businesses over the past 15 years. Follow her on Twitter @monicamehtanyc or read more of her writing at monicamehta.com.

Thanks to Monica Mehta / Bloomberg Businessweek
http://www.businessweek.com/smallbiz/content/jun2011/sb2011061_073348.htm