How To Bullet-Proof Your SME In The Midst Of Rising Inflation In Kenya.
Updated: Sep 7
The inflation rate in Kenya was marked at 8 percent as of May 2023. This rate is beyond the Central Bank Kenya's guided upper limit of 7.5 percent. While the economic recession remains global and is majorly felt at an individual level by consumers it also bears a ripple effect on manufacturers, producers, and retailers of goods and services where most of the Medium and Small Sized Enterprises lie.
What is inflation?
Inflation is defined as the progressive rise in prices of goods and services over time. Inflation reduces the purchasing power of consumers as a result of a weakened shilling against major international currencies.
Inflation is not entirely a bad occurrence; if it stays too low it weakens the economy. On the flip side, however, when it is too high it burdens the consumers. As prices for goods and services continue to rise the consumer is forced to make tough decisions regarding cutting down spending. Consumers begin to reconsider their discretionary purchasing decisions.
In addition to that, SMEs across all industries are also grappling with the increased cost of supplies and services rendered to them.
SMEs have been forced to absorb high costs of production due to the rise in the prices of commodities. According to KEPSA prices of raw materials have shot up by 20 percent making production more expensive. This phenomenon is compounded by the unpredictability of supply chains.
As a result, this may mean lower output and a reduction of the workforce in the business.
Inflation also incapacitates SMEs that are servicing loans because credit facilities tend to review their interest rates upward.
With the increase in fuel prices shipping costs increased.
Rising inflation means reduced consumer spending
With the increase in price of goods and services consumers are cutting back on their general expenditure. Demand remains resilient only on select items as consumers are prioritizing staple goods such as food and other household essentials.
Should you increase prices to counter inflation? Should you reduce overhead costs? Should you lay off your staff?
Economists predict that with time some sense of normalcy will return but until then the big question remains; How can SMEs adapt and reinvent themselves in order to stay afloat and retain the existing customer base?
By offering a superior customer experience
With the likely rise in prices, even loyal customers tend to switch to cheaper substitutes. This brand-switching is rife particularly in household goods as consumers hunt for the most affordable bargain. Your business needs to differentiate itself by providing a superior customer experience at every touchpoint with the consumer. Good customer service is an edge over the competition. This may mean customization of orders, timely delivery, or warranties on products.
Offer differentiated products
Luxury brands might have to diversify their product offerings by introducing more value-packed and affordable products to cater to middle-income earners who form the bulk of the consumer base. For example a luxury car model with fewer features and hence a lower selling price.
This way brands expand their visibility and extract as much value from the market as possible.
Consider strategic pricing
With the increase in the cost of production, businesses pass the cost down to the end consumer. This might be a risky move as consumers might not be ready for the new price of commodities and services. Businesses should therefore offer shopping incentives and be ready to take home tighter profit margins. Additionally, smaller increments may be more palatable as consumers adjust.
Alternatively, apply a loss leader strategy. This means accepting lower margins in a specific product or service and upselling the rest to create balance. This is typical in supermarkets where lower prices in specific goods bring in customers who end up buying more commodities that have a higher margin.
Review your business model
Small business owners need to find a way to counter the impact of inflation in the short term or until normalcy returns. For example, diversification of product offerings to increase revenue channels. Small businesses may also strategize the value-chain process to optimize production and reduce costs.
In the same breath diversifying the supply chain may be critical for the survival of SMEs.Can you purchase supplies closer to home? Can you pivot from retail to manufacturing? An in-house team as opposed to outsourcing? This could cut your costs exponentially while maximizing efficiency.
Cutting overhead costs
To navigate the economic recession, SMEs need to exercise prudence in their spending and ensure that resources are only spent on the most necessary factors of production, reducing inventory and saving on marketing costs.
All is not lost. With the correct strategies, your business can weather the recessionary storm and emerge resilient and profitable.
Done by : Joy Waweru