How to Manage Stagflation in your Freelancing Business
How to Manage Stagflation in your Freelancing Business
Where does stagflation affect your business and what can you do about it
Stagflation has no bias, and brings equal justice to the wealthy and to digital nomads. Where will stagflation affect your business and what questions can you ask to minimize the damage of it?
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What is stagflation?
Stagflation denotes a stagnating economy with persistent high inflation. With rising prices and money losing its purchasing power, consumers tend to spend less even though there is a healthy supply of goods and services.
Stagflation occurs because central banks want to pump the brakes on a hot economy by raising the cost to borrow money. The last time stagflation occurred in the United States was back in the 70s when the inflation rate top over 7%. Currently, the inflation rate stands at 8.5% (as of March 2022).
How stagflation affects your business
There is a popular saying from Economist, Milton Friedman: inflation is always and everywhere a monetary phenomenon. The same can be said for stagflation.
Rising prices will affect your daily consumption such as the cost of purchasing food to your next excursion. A good rule of thumb is that any product or service which is directly affected by rising energy costs will inherently affect your business. What’s more, rising prices and discouragement of spending will trigger your customer to rethink about purchasing your next service. In economics, this is known as the marginal utility value of products and services. How much more value will the customer receive by purchasing the product/service now versus later?
In order to assess your customer lifecycle, segment your customers into those requiring a deadline vs ongoing maintenance.
For your customers who have a target deadline in which your services are being rendered, then you will have greater security and predictability into projecting your finances. Upon completion of the project, there are two activities to consider, one internal and the other external.
Consider conducting an assessment and audit of your business with your customer. For beginners, this may simply entail a phone interview. For more seasoned freelancers, a business audit entails additional services you may charge in order to save your customer money or make them money. As an example, a website developer may propose a laundry list of web improvements which are necessary and since there will be some downtime, then it’s an ideal time to perform these services.
If your customer lifecyle mirrors a subscription or regular recurring fees, then be cautious of the ability for your customer to put on hold certain services. Apply the customer rule of thirds where one-third of your customers will continue to renew, one-third will contemplate continuing services, and the last-third will stop or cancel your agreement altogether (and there’s not much you will be able to do to salvage this.) By securing two-thirds of your customers, this should be enough business data which will allow you to stabilize your income and make predictions on how to handle the impending slow down of the economy and rising prices.
Cutting expenses is automatic savings
While your customers will be thinking about the marginal utility of value of continuing business with you, similarly freelancers should look in the mirror. Are there existing expense(s) that can be cut? By definition, a cut in expenses is automatic savings. But a cut in expenses does not mean doing less things. Arguably, the lesson from digital nomads are the best adventures are the ones that didn’t cost a penny.