September 21, 2010 at 1:39 pm | Blog
What Deflation Means for Your Business
As if business leaders didn’t have enough to worry about in the tumultuous times that we’re in, now some economists are worried about the possibility of deflation. What is deflation, and what does it mean for your business?
In “normal” economic times, prices tend to rise year after year – this basic phenomenon of the business world is known as “inflation.” Cars, houses, gallons of milk, health care, a tank of gasoline, whatever the product or service may be, prices tend to go up over time as incomes rise, as costs of production and labor rise, and as businesses try to continue to grow and improve their profit margins.
Inflation in itself is not a bad thing. (Too much inflation – “hyperinflation” – can be very bad, as seen in the nation of Zimbabwe, where the currency has become worthless due to the corruption and chaos of the government.) But a small, steady level of price inflation helps fuel the overall economy – it gives businesses an incentive to make sales, it helps the labor market stay flexible, and it helps give consumers an incentive to buy products – if people expect that prices will be higher a year from now, they will be more likely to buy today.
The challenge that America is facing today is the prospect of deflation – a steady lowering of prices due to excess supply or insufficient demand. Deflation is a rare occurrence in economic history, but it can be devastating.
When an economy is going through deflation, prices gradually decrease as consumers are reluctant to buy, businesses and consumers are reluctant to borrow, and there is not enough demand in the economy to keep up with the supply being produced.
In the worst cases, the economy can enter a deflationary spiral where businesses cut their prices, leading to lower wages and lower production, leading to lower consumer confidence (and even less demand), which makes businesses want to cut their prices again.
Deflation is a vicious cycle. In a deflationary spiral, no one wins – the entire economy gradually shrinks and everything – businesses, houses, assets of all kinds – becomes less and less valuable.
How to Identify Your Competitive Advantage to Fight Deflation
Here at Smart Advantage, we’re big proponents of competing on value instead of competing on price. Even in tough economic times, instead of feeling tempted to cut prices and compete on lower profit margins, businesses need to be ever more vigilant about finding ways to exploit their competitive advantages. What do you do better than anyone else? Do your customers know it? Can you phrase your competitive advantage in a clear, memorable and compelling way that resonates with your customers?
If every business in America cut its prices, the end result would be bad for our economy. Instead, we should all do our part to fight deflation by defending the value of the products and services that we provide – because after all they are worth it.
Don’t cut your prices. Find your competitive advantage instead. Your company – and your country – will thank you for it!