The cost of doing business is increasing and at the same time there's a cost of living crisis, making it difficult to raise prices. This squeezes profit margins and forces businesses to explore different models for retaining profit margins. Risk management and insurance may need to be re-addressed also.
Several factors continue to drive the cost of living crisis. Inflation is central, with rising costs of essential goods, energy and consumer products eroding consumers' disposable income.
Rising energy, transport and material costs affect consumers and businesses alike. For energy intensive sectors like manufacturing this is adding to operational costs, pressuring companies to raise prices, which can further dampen consumer demand.
Economic instability, driven by geopolitical tensions and supply chain disruptions, creates an unpredictable financial environment, complicating business planning and growth investments.
As household budgets tighten, consumer spending declines, especially in discretionary sectors like retail and hospitality, forcing businesses to adapt to lower demand.
Businesses are being pushed to consider what they need to do differently, which might include implementing measures such as reducing the number of employees, increasing efficiency or using more online tools. These changes can affect the approach to risks and insurance cover requirements.
Business mitigation strategies that help address cost of living impacts
These strategies may help businesses better navigate the challenges posed by rising costs of living and maintain stability in uncertain economic conditions.
Adapt pricing models
Explore value based pricing, offering more affordable options or bundling services to attract budget conscious customers without eroding profit margins. Increase the pricing for what customers value most while maintaining basic offerings at a lower cost.
Reduce operational costs
Look for ways to increase efficiency and cut unnecessary expenses, such as renegotiating supplier contracts or optimising energy use. This might involve streamlining processes, adopting new technologies or reorganising workflows.
Diversify revenue streams
Explore new product lines, services or markets that may be less affected by consumer spending cutbacks. Entering new geographic regions or industries may access untapped customer bases.
Improve customer engagement
Focus on customer retention by improving service and offering flexible payment options to your existing customer base. Providing exceptional customer service can differentiate a business from its competitors and foster long-term relationships. This might involve training staff or implementing systems to resolve issues quickly.
Prepare for long-term uncertainty
Use scenario planning and flexible budgeting to adjust quickly to changing economic conditions, allowing for more resilient business strategies in times of crisis.
Some of the cost of living impacts on businesses
The cost of living crisis has led to reduced consumer spending, particularly in non-essential categories. Many businesses face shrinking revenues as customers cut back on expenditure, prompting them to rethink pricing strategies, reduce costs or delay investments, especially in the retail, dining and tourism sectors.
Operationally, rising costs for raw materials, energy and services squeeze margins. On the other hand companies risking alienating customers by pushing up pricing in competitive markets where there is high price sensitivity.
Financial strain further extends to the cost of labour, as employees demand increased wages to match inflation, adding more pressure. Medium to large companies with large numbers of staff are forced to consider the cost of salaries as a business risk concern.
Business risk management needs to include how the cost of living crisis affects staff retention, recruitment and overall quality of output.
Each of these factors has its own associated risks, such as a decline in quality or availability. As a result businesses may need to hire temporary staff, which can also increase costs and introduce new risks.
How insurance can support businesses in mitigating potential cost of living impacts
Business insurance policies to consider as protection against cost of living impacts might include:
- business interruption insurance: helps businesses maintain cash flow when they are unable to operate due to unforeseen events by ensuring they can continue to pay their expenses and support their employees
- liability insurance: there may be an economically motivated increase in litigation or claims against businesses. Liability insurance can help cover the financial cost of lawsuits, covering legal fees and settlements
- credit insurance: protects against the risk of non-payment by customers struggling to pay for goods and services by mitigating the financial impact of unpaid invoices
- employee benefits insurance: offering comprehensive employee benefits can help businesses attract and retain talent and improve employee morale and productivity
- risk management services: can help businesses identify and mitigate potential risks to reduce the likelihood of costly incidents that could further strain finances
- customised insurance solutions: insurance brokers like Gallagher can tailor insurance solutions to meet the specific needs of a business.
By leveraging these insurance solutions, businesses can better manage the financial uncertainties associated with consumer cost of living challenges, ensuring continuity and resilience in their operations.
How Gallagher can help
Businesses should work with their insurance broker to tailor these policies to their specific needs and ensure comprehensive coverage against potential supply chain disruptions.
