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Inflation, Inflation, Inflation

When Margins Are Squeezed Due to Inflation, it is Easy to Look at Expenses or Delay a Purchase

We are all seeing and feeling the effects of the rampant inflation. Retailers are undoubtedly seeing it throughout the business. Margins squeezed by the increase in both raw and finished materials, as well as the supply chain costs of both the landed cost as well as the outbound freight. And then there is labor and the increase in costs to both retain and attract workers. It is a recipe for disaster and most definitely not grandma’s apple pie recipe.

I am not here to predict when inflation will subside. From the back row, it looks like it is not accelerating as much anymore, but also not necessarily coming back down. Maybe that is the silver lining. If you can live with the prices where they are today then you can adjust to that, but if it continues to accelerate, changes will be necessary.

What I do know is that there are only so many controllable costs in a business with so much of it a fixed cost. This is where I have seen so many make mistakes that are self-fulfilling prophecies. Usually, the first expense to cut is Marketing. This leads to less sales and people sit back and say “I am sure glad we cut expenses with sales off”. You probably could cut 10% of your marketing expense and not feel it or see it as many digital marketing campaigns are super bloated and tough to attribute, so you just run with it. But cutting off the lead generation engine should not be the first tool to combat margins getting squeezed.

This is also true with any optimization software. Back when COVID first hit, a competitor of ours told me that they were losing 30% of their customers as they only supplied product recommendations and retailers were trying to cut costs as fast as possible and product recommendations were seen as a luxury, not a need. The problem is that if the return on investment (ROI) is greater than 100%, you shouldn’t touch it and should be looking for superfluous spending that has low or no return on investment.

This is repeated throughout the entire P&L. The CFO sorts expenses from highest to lowest and tries to slice away at the highest spending, hence why Marketing is typically first as it is the largest variable cost. Not picking on the CFOs out there, but cutting expenses has never led to increased sales, but rationalizing is certainly necessary.

The real point is, don’t throw the baby out with the bathwater. Not all investments are the same. When margins are squeezed it is easy to look at expenses or delay a purchase. Be wary of this as you need to invest in things that give the highest ROI in the short term and the long term and absolutely cut excess spending.