Strategies for maintaining SME profitability amid inflation

Inflation poses a major challenge to businesses globally, hitting small businesses harder due to thinner margins and less flexibility to absorb cost increases, JOSEPHINE OGUNDEJI writes

Each year, numerous small and medium-sized enterprises introduce new product solutions to the market, especially in developing economies like Nigeria.

This economic phenomenon, characterised by rising prices and decreased purchasing power, can significantly affect a small business’s operations.

According to Moniepoint, in Nigeria, small and medium enterprises contribute 48 per cent to the national gross domestic product. SMEs account for 96 per cent of businesses and 84 per cent of employment.

Despite the glaring impact of the SME markets for a country like Nigeria, stakeholders in the industry have continuously lamented setbacks in overall business profit.

The Nigerian Association of Small and Medium Enterprises’ South-West regional Vice-President, Solomon Aderoju, told us that SMEs are prone to shocks from inflation, interest rates and other factors.

He said, “The monetary policy rate does not favour us. That means nobody can borrow less than 16.5 per cent and no SME can thrive with such.

“Also, infrastructure has to be in place to address the issue of energy. We have to look into that because the cost of production is very high.”

Despite the challenges forcing entrepreneurs to compromise on quality, business owners believe that effective strategies can help safeguard their future and maintain profitability, ensuring the long-term viability of their enterprises.

Regular review

According to Forbes, regularly reviewing cost management and improving operational efficiency strategies were essential.

It stated, “One of the primary strategies to combat inflation involves rigorous cost management and improving operational efficiency. It’s crucial to conduct regular reviews of all expenses and identify areas where costs can be reduced without compromising the quality of your product or service.”

According to Forbes, diversifying suppliers can also provide a buffer against inflation.

The report added, “By not relying on a single source for materials or products, businesses can mitigate the risk of price hikes from specific suppliers and ensure more stable supply costs. Partnering with multiple suppliers provides businesses with negotiation leverage and options should one supplier raise prices excessively.

“In addition, adjusting pricing is a delicate balance in times of inflation. While it may be necessary to pass some costs onto customers, you need to do so thoughtfully to avoid alienating your client base.”

Embrace technology

Leveraging technology can drive efficiency and reduce costs.

The world’s rapid conformity to technology has given birth to a digital era, which has changed the business landscape. SMEs must utilise technology tools to improve profit, especially with the growth of e-commerce in Africa.

Advising MSMEs to embrace digital change, the National Information Technology Development Agency urges SMEs to adopt and adapt to digital technologies if they are to survive in the 21st century.

According to the agency, the adoption of digital technologies boosts the productivity and profitability of businesses.

The Director-General, NITDA, Kashifu Inuwa, while delivering his keynote speech at the 10th edition of Abuja Enterprise Agency’s Business 360 Clinics themed, ‘Technology utilisation and innovation: Its effect on SME profitability and productivity’, said, “Technology utilisation exerts a significant impact on the economic survival of nations.”

Big players like Jumia, Konga and other businesses have leveraged online marketing to drive sales, improve profit and deepen connections with customers through various programmes.

More than ever, as a business owner, you must take matters into your own hands to ensure maximum profit and improve your chances of business success, by plugging into the tips shared by operators and economists in the SME industry on the best practices for sustainable progress amidst inflation.

Focus on customer experience

A data analyst, Damola Adedoyin, asserted that during inflationary times, businesses face heightened pressure to maintain profitability amidst rising costs.

He noted that SMEs, especially those in developing economies like Nigeria, often find themselves in a precarious position due to thinner profit margins and less room to absorb increased expenses.

He said, “In challenging economic environments, delivering exceptional customer experiences becomes crucial. When customers feel they are receiving significant value and superior service, they are generally more understanding of price adjustments necessitated by inflation.

“For SMEs, focusing on customer experience can be a strategic advantage. By consistently exceeding customer expectations through personalised service, efficient problem-solving, and reliable product delivery, businesses can build strong customer loyalty. This loyalty is invaluable during inflationary periods, as satisfied customers are more likely to remain loyal despite price increases, reducing the risk of losing clientele to competitors offering lower prices but potentially inferior service.

“Moreover, enhancing the customer experience goes beyond transactional interactions; it involves understanding and anticipating customer needs. SMEs can achieve this by leveraging customer feedback, conducting market research, and adapting their offerings to align with changing consumer preferences. By staying agile and responsive, businesses can maintain relevance and continue delivering value even as economic conditions fluctuate.”

Explore pricing strategies

Adedoyin advised that SMEs could explore strategic pricing strategies that emphasise value rather than merely competing on price.

He advised, “Communicating the quality, reliability, and unique benefits of products or services can justify higher price points to customers who value these attributes. This approach not only helps in mitigating the impact of rising costs but also positions the business as a provider of premium solutions in the market.

“Lastly, investing in operational efficiencies and cost management becomes imperative for SMEs during inflationary periods. By optimising processes, negotiating better terms with suppliers, and exploring alternative sourcing options, businesses can mitigate cost pressures without compromising on quality.

“These efforts contribute to maintaining competitiveness while safeguarding profit margins, thereby sustaining long-term growth and resilience in volatile economic climates.”

A legal practitioner and entrepreneur, Naomi Bankyu, said automating processes to reduce labour costs is a strategic approach that many businesses, including SMEs, are increasingly adopting.

She said, “Automation involves using technology and machinery to perform tasks traditionally carried out by human workers. This shift not only addresses cost concerns but also offers several advantages in efficiency, productivity, and quality control.

“Automating repetitive or labour-intensive tasks can significantly reduce labour costs over time. By replacing manual work with automated systems, businesses can streamline operations, minimise human error, and increase production speed.

“This efficiency gain often leads to reduced labour expenses, as fewer workers are needed to achieve the same output levels. This is particularly beneficial in industries where labour constitutes a significant portion of operational costs, such as manufacturing, logistics, and certain service sectors.”

Bankyu noted that automation enhances consistency and reliability in production processes.

She said, “Machines and automated systems can perform tasks with a high degree of precision and uniformity, ensuring consistent product quality and service delivery. This reliability not only improves customer satisfaction but also reduces costs associated with rework, defects, and customer complaints. For SMEs aiming to build a reputation for reliability and excellence, automation can be a critical enabler.

“Automation allows businesses to reallocate human resources to more value-added activities. Instead of focusing on repetitive tasks, employees can be trained and deployed in roles that require creativity, problem-solving, and customer interaction areas where human judgment and skills are irreplaceable.

“This not only enhances employee satisfaction and engagement but also contributes to innovation and business growth.”

She, additionally, asserted that adopting automation can enhance competitiveness and scalability.

She said, “Businesses that invest in technology to automate processes can respond more quickly to market demands, scale operations efficiently, and adapt to changing business conditions. This agility is crucial in dynamic markets where speed and flexibility are competitive advantages.

“However, it is important to note that while automation offers significant benefits, implementing it requires careful planning and consideration. Factors such as upfront costs of technology investments, integration with existing systems, and training employees to work alongside automated systems need to be addressed.

“Furthermore, businesses must ensure that automation complements their overall business strategy and aligns with their goals for growth and sustainability.”

Business research

In today’s fiercely competitive market landscape, continuous market research is indispensable for staying ahead and enhancing profit margins. It serves as the bedrock for informed decision-making, providing crucial insights into customer preferences, market trends, and competitor strategies. By leveraging data-driven insights, businesses can refine their offerings to better align with customer needs, thereby boosting customer satisfaction and loyalty.

Moreover, staying abreast of industry developments through market research allows businesses to identify emerging opportunities and potential threats early on, enabling proactive adjustments to strategies and operations.

This proactive approach not only enhances competitiveness but also optimises resource allocation, ensuring that investments yield maximum returns and risks are minimised.

Ultimately, integrating market research into business practices ensures that every decision is grounded in current market realities, fostering sustained growth and profitability amidst intense competition.

The Chief Economist and Head of Research/Intelligence at Coronation Bank, Chinwe Egwim, said market research was gathering consumer feedback on products, and services and collecting pertinent information in the marketplace.

Egwim explained during a virtual master class organised by the Lagos State Trust Fund that there was a need for businesses to take this seriously.

She said, “It is very important and this requires research on competition and our competitive analysis. Like general pricing by your competition, you should have a sense of what that looks like.

“Conducting market research would assist with identifying your target market and their motivation to purchase your product or service.”

She explained that the move would help business owners understand market size, and income ranges and help expand businesses to new markets.

“You should ensure that you are making more than your current spend as an entrepreneur to stay at the helm of business profitability. With inflation, this may mean cutting back on some expenses to maintain a healthy profitable margin but not necessarily reducing quality.

“There should be a keen focus on cost-cutting or minimising unnecessary costs, as this can save your business some money, especially if you are unable to increase the prices of your products or services, which, by the way, lots of SMEs are struggling to do,” Egwim said.

She noted that to identify and eliminate unnecessary costs, it was important to determine what drives value for your business, products, and services, and then exercise financial prudence by establishing and adhering to budgets, which is a crucial step in maintaining fiscal responsibility.

“For instance, adopting sachet marketing can help reduce costs and mitigate the impact of price hikes on customers. By offering products in smaller, more affordable quantities, businesses can make their products more accessible. This trend has gained significant traction since 2020.”

Even big brands have adopted these approaches after feeling the pulse of their customers and observing the financial temperature of the country.