Economic concerns about inflation have been particularly top-of-mind for many Americans since the start of the COVID-19 pandemic in 2020. In those early days of shelter-in-place orders, supply chain disruptions and employment uncertainty, the prices of many goods and services began to rise in disproportion to worker wages. The issue remained front and center for voters during the most recent 2024 election cycle.
While The Federal Reserve and other policy makers continue to grapple with managing inflation across the broader economy, it’s important to remember that many entrepreneurs, including small business owners, are also feeling the effects. For example, let’s take a look at some variables in payment processing.
Inflation, which represents the rise in the general price level of goods and services over time, erodes the purchasing power of currency. With higher prices comes pressure on payment systems to adapt. Merchant services, credit card transactions and card processing fees all stand to be impacted in these real-life scenarios.
Causes of inflation
Although the economic triggers which cause inflation can be many, some of the more common include a supply and demand imbalance of goods and services, the rising costs of doing business, government monetary policy, and even consumer expectations.
It’s important to remember that the concept of Inflation is both real and psychological. It can be a self-fulfilling prophecy. When households and merchants expect price increases, they may act in ways that guarantee that result. An example of this phenomenon was widely observed during the 1970s "Great Inflation" period.
During this time, sustained expectations of rising prices on everything from housing to fuel led to a wage-price spiral. As workers sought higher incomes to compensate for anticipated inflation, businesses continued to raise prices, thus perpetuating the cycle.
How can inflation impact merchants?
Inflation can affect businesses in a number of critical ways. In the face of rising costs, static prices for goods and services can lead to lower profit margins. However, passing those increases onto customers, by raising prices, could alienate them, while disrupting cash flow and forcing difficult decisions about inventory management and operations.
What’s a responsible business owner to do in this frequent predicament?
What changes can merchants make to help offset the cost of inflation?
Fortunately, small business owners do have a range of options for potentially managing the impact of inflation on their operations and bottom line. A great number of these tools are available through Payment Orchestration Platforms (POPs), giving merchants a good deal of flexibility in navigating challenging economic climates.
Buy Now, Pay Later (BNPL)
This staple of consumer purchasing habits can help small businesses manage inflation by immediately increasing sales, while improving structured cash flow. BNPL can also help businesses attract more, and newer customers, while potentially increasing sales and average order value.
Multiple Payment Methods
Offering customers alternative payment methods as part of your payment stack can help increase conversion rates. That means more than simply accepting cash, debit cards or Visa and Mastercard.
The more convenient and flexible payment choices customers have, including digital payments from digital wallets, the likelihood of choosing a method they trust and are comfortable with increases. Thus they are more likely to complete the purchase.
Additional payment options result in less cart abandonment, and a streamlined shopping experience that customers enjoy. This satisfaction can translate to customer loyalty and retention that boosts sales and profit margins. These are important bulwarks against the potential impacts of inflation.
Discounts and Promotions
While it may seem counterintuitive at first, offering price deductions and specials can actually help small businesses manage inflation by making products and services more affordable to customers. This can encourage them to purchase even when buying power is reduced. These offers can potentially help maintain sales volume and profit margins, despite increased costs.
Additional Surcharges
Inflation, while not a word evoking fun and opportunity, can often create opportunities in the form of new buyer segments. As prices shift, there’s real opportunity for improving customer experience.
Adding price options or tiers can help you retain current customers, while enticing new ones. Lower tiers can support repeat customers that are struggling, while higher tiers or surcharges for perks, can be marketed as “premium,” goods or services. This has the potential of appealing to customers craving exclusivity.
Summary
Economic inflation, like death and taxes, is a phenomenon that is merely a question of “when?” The good news is that merchants, and developers like yourself innovating new payments solutions, are far from powerless against its forces.
Look to North as your payment gateway provider partner, with a diversified product platform that offers solutions for every business, at every stage of growth.
