Inflation + True Value
Issue 41: February 3, 2022
This is the first time since 1982 that inflation has grown at such a fast pace and become such an urgent short-term issue for so many organizations and individuals around the world. It is clearly affecting consumers forcing them to make fundamental changes in their choices and their overall lifestyles. The consumer who is now having to be more discerning about their own expenses contributes to a set of challenges faced within most organizations as they seek to determine how to manage their own increasing expenses. As The New York Times reports, there are higher home heating prices, surging rent costs, and rising food and gas prices. Refrigerator staples including meat, poultry fish and eggs rose 12% over the past year.
Inflation isn’t the only problem in the present and foreseeable future. Organizations also face increased expenses in response to the scarcity of skilled employees and the increased costs for retaining and acquiring employees. The impact of inflation and changes in workforce dynamics presents existential challenges – particularly for associations and subscription-based organizations that majorly rely upon recurring revenue models.
How does an organization continue to create value while contending with operations that cost significantly more than they did two years ago?
- Does an organization increase its dues or monthly subscriptions?
- Does an organization increase its prices on other products to counter increased expense?
- How will inflation continue to influence and impact members and subscribers and the willingness to continue to be a member or subscriber?
We have not seen 7% inflation in a long time, and we have never seen a workforce environment of such scarcity and competitiveness.
Reevaluating Value Proposition
The larger issue here is the required and somewhat forced necessity to reevaluate your overall value and value proposition before any price changes can be considered. Value, simply put, is how much money someone would pay to purchase a particular product or service.
- In short, how does an organization determine if the current value offered will support an increase?
- Should it decrease other costs to sustain prices at the current rate?
- Do decreasing expenses result in a quality compromise and therefore create impacts in the value offered?
- And if there is a consideration of increasing price, is it clear that the offered value proposition equates to members, customers or subscribers as reasonable for the value delivered?
Reevaluating your value proposition under normal circumstances is critical to remaining competitive. Forced reevaluation is more stressful and can lead to poor decision-making under pressure. Using critical thinking to review your value is a useful exercise to ensure you can weather the storm of inflation and financial disruption. The exercise requires contextual analysis that brings forward the factors and variables across the external environment.
We all have institutional knowledge and experience we bring to the” table” which may often short circuit a productive discussion. It is hard and challenging, given knowledge and experience, to take the external viewpoint and look inward to see if our perception of the value delivered stands up to reality across the member, customer, and subscriber marketplace. We have not been in this situation before. We are now dealing with several different dynamics at play impacting the cost of providing service and maintaining/growing an organization. And the thorn in the side of most organizations today is the dilemma resulting from external financial pressures combined with a systemic attitudinal shift in the workforce. The demands of today’s workforce for an empathetic workplace culture have a significant long-term impact … and costs.
The Value of a Workforce
For any organization, its workforce is its greatest resource. In contending with the great resignation and the need to maintain a workforce at high-performance levels, the cost of retaining and acquiring staff has become a major expense factor. As any leader, manager or supervisor knows, increases in labor costs are more than short-term budgetary impacts. As employees continue with an organization, they expect annual and performance-based increases in salary or hourly rate. As such, decisions made today to retain and acquire employees by offering higher pay come with consequences that result in increasing year-over-year costs.
According to the Wall Street Journal, employers have spent 4% more in 2021 on wages and benefits than they spent in 2020, which is an acceleration of expense not seen since 2001. The U.S. Employment Cost Index, reported on a quarterly basis, shows the increases will continue for the foreseeable future.
How does an organization react and adapt to its new contextual environment? There are no shortcuts. Some organizations believe that publicizing the reason for higher prices is because of good wages paid to its workforce, which will engender goodwill and keep paying customers engaged and retained. However, this is only an exercise in optics. In reality, living through a time of extreme inflation when most essentials needed to survive day to day have increased, individuals are making decisions based on what they can afford, not on what business model attributes you are communicating and seeking them to align with.
Organizations are contending with two distinct but connected challenges. The increased cost of retaining and acquiring staff has resulted from the work-life balance demands as the pandemic deepened its impact. The labor market has tightened, and many left the workforce for retirement. Add to this, today’s market forces are at play, with supply chain distribution and material availability challenges that clash with consumer and overall market demand. The result is scarcity and higher prices for products or materials that organizations must bear to continue to operate as expected.
Whereas inflation may normalize over time as supply begins to equal demand, the increased costs of retaining and acquiring staff will continue to impact and influence as an ongoing and growing factor of an organization’s sunk cost/expense. Organizations hope, via investments in technology and retaining staff that, over time, organizational operations will become more efficient. The premise is that operating expenses will then normalize or diminish when efficiencies realign.
Tech Transformation in Times of Inflation
As reported by HBR, “A Bain survey found that 76% of digital transformations settled for dilution of value and mediocre performance.” Organizations are being driven and influenced by their constituents to do more and more with technology including to digitally transform. This is in response to competitors and competitive forces, new entries to the market who are more agile, and consumer/customer expectations that any interaction or service with an organization can be conducted and executed online.
We all know technology, particularly where an organization seeks to transform itself, comes at a high cost in both the short and long term. Although some represent that technology eventually decreases expenses, most recognize that is rarely the case. Expenses may shift but rarely do they decrease.
- Do you then increase your prices to ensure you can cover your operating expenses?
- Does your value proposition to your current members, customers, subscribers support and represent enough value to sustain a price increase?
The Harvard Business Review states, “The classic response to inflation is to select one of three unattractive options. Managers can upset their customers by raising prices, upset their investors by cutting margins, or upset practically everyone by cutting corners to normalize costs. Faced with this trilemma, most managers ultimately resort to raising their prices, then look for clever ways to mitigate the subsequent drama.”
We should also recognize that many organizations are taking the opportunity in the current environment to raise prices even if increased expenses of supply have not been a major challenge and/or where an organization may not yet contend with increased costs for retaining and acquiring staff. This is an environmentally opportunistic decision that may come with negative consequences later.
Even if inflation decreases over the short term, organizations, and consumers, are going to be left with inflated prices for the products and services they need and increased costs for adding technology to organizational operations.
Rarely do prices decrease after a baseline has been set and where the market and “consumers” realign their expectations and how they accord the value of the product or service to the new baseline price.
We then have a perfect stormfront of sorts where increased costs are coming from multiple avenues and where there is no point in a future time where those increased costs may decrease.
Are You Essential?
It is time to revisit the question: Ask yourself if you are essential. In a time when individuals are reassessing their needs and want based on increasing costs, being essential is critical. If the organization’s value is substantial with clearly articulated benefits, it may be able to consider increasing prices. But the trap is that most organizations formulate new ideas or draw evaluative value conclusions framed on past institutional knowledge without seeking external data and conducting analysis to determine whether customers will support those ideas. Specifically, how confident is the organization that it is essential, and its value proposition is still what customers expect and what they value.
We often see that organizations are weak on details in their value proposition. Instead, their understanding of their value is based on assumptions or guesses in what value they offer customers, whether personally or professionally. As we have reported, the most common mistake is confusing the value of what you sell with what you think is valuable. For example, selling on price is a sign that you have not done your homework. Even in times of inflation, if your primary reason for someone to buy a product or join your organization is a discount, you are missing the opportunity to sell your intrinsic value and solidify long-term recurring revenue. The race to the bottom of discounted sales also tells the prospective member, subscriber, or customer that you don’t understand them. Professionals don’t look to an organization for a bargain. Individual consumers may look for a bargain, but they also want quality services and products. They all are searching for insights, education, and inspiration to do their jobs better, meet a commodity-based need, create convenience and efficiency, or go deeper into their interests.
To be effective, a value proposition must answer three key questions to ensure success:
How does your product or service solve problems for your members, subscribers, and customers?
What specific benefits can members, customers, and subscribers, expect from you and how do these benefits address their needs?
Why should members, customers and subscribers buy from you rather than your competitors?
Read more extensively on how value is based on a deep understanding of the organization’s market. If that understanding doesn’t exist and or hasn’t been tested, an unrealistic perception may influence an organization’s decision to increase prices that will surely result in significant customer exodus, both in the short and longer-term. And living in a 24/7 transparent social media environment, the wrong moves may lead to an irreversible public relations nightmare.
Does Scarcity Lead to “Essential”?
Scarcity may be one antidote to devaluing ubiquitous content, products and services in the digital marketplace. Brian Morrissey states, “Never has more information been produced and yet people seem less informed and less satisfied than ever.”
Organizations are tempted to crank out large volumes of information and content, but it is more important to sort out what’s important from the surface noise. You can create value without massive volume. Take a page from luxury brands and make better products and services that customers really want and, of course, value in the short and long term. If they are less frequently introduced, they can provide more value. But the impulse is always to create more, not improve the value of what is currently offered. Quality versus quantity is a useful mantra – especially in times of inflation.
George Montagu of FT Strategies notes another challenge. “During periods of growth, it is very easy for organizations to get carried away with acquisition tactics – whether it’s a new paid strategy or a change to what is free content. While these optimizations are important, they often draw focus away from the more existential questions:
How can we make our product more valuable for our audiences?
How can we build long-term relationships?”
A common ducking-under-the-table practice is to carry on business as usual and hope for the best.
The Way Forward
In a disruptive marketplace with the collision of inflation, recovering from a pandemic and a massive workforce reset, it is more important than ever to use critical thinking to maintain discipline in charting the way forward. At 2040, we help clients devise strategies that keep them on top of the trends and informed about their particular customer needs and demands. We help them make intentional decisions that will yield long-term results based on data, analysis, and market intelligence. You can use this challenging time to reevaluate your value and value proposition … or you can try to hold steady and use wishful thinking to survive. We are here to help you take the right fork in the road that leads to sustainable transformation and the evolution of your business model to engage and retain your customers … and your workforce.
The Truth about Transformation
Book Preview Excerpt
Organizations, whether private companies, non-profits, charities or governments seek to transform to take advantage of new opportunities, including technological advances. Often, technology is the major driver of change that results in transformation. As a result, the organization often fails to achieve its objective and goal to truly transform. You see, technology remains an enabler, not a silver bullet. True transformative change requires understanding of the human factors at play, human conscious and subconscious behaviors, how humans inter-relate and how society itself and all of its members are changing.
Our workforces are changing, the expertise we need is becoming harder to acquire and roles are shifting. In addition, before and because of Covid in 2020, the world around us is becoming very different, a new reality is taking hold, one that will fundamentally change who we are, how we work and yes, how we seek to ensure organizations transform for today and for the future.
The Truth about Transformation, a new book by Kevin Novak, will soon become available. Enjoy a short preview.