Conquer rising costs: five key strategies

Many businesses across Europe are feeling the pain of higher costs. Unfavourable economic (and macroeconomic) factors are pushing up expenses which can prove hard to pass on - either to other businesses in the same situation or consumers battling cost-of-living increases.

The latest inflation figures (at the time of writing*) show annual inflation in the EU at 2.8%, having steadily increased from 2.1% in September 2024.¹ Rises in labour costs are coming in significantly higher at 5.1%, adding more pressure to businesses.² And while energy prices have stabilised recently, they are still substantially higher than their historical averages and well above those in competitor nations such as the US, China and India.³

And it’s not just economics. Businesses are facing other cost impacts too, including from supply chains that are being increasingly disrupted.In fact, the European Investment Bank says that disruptions in logistics and access to raw materials are now ‘major obstacles’ for businesses in the EU.⁴

So, what can you do? While there are no easy answers or quick fixes, there could be steps you can take to gain a better understanding of the cost pressures and, hopefully, implement measures that could help alleviate them. Take a look at these ideas to see if they can help.

The more you understand about your costs and how they may be changing, the more likely it will be that you can implement effective strategies to protect your business. There are lots of metrics you can track, but a good place to start is the Cost of Goods Sold (COGS). This is the direct costs associated with producing your products. A simple equation is:

Starting inventory by value + purchases during a set period (including materials and labour) – end inventory by value = COGS

This tells you how much the sales you have made in a period have cost you. It’s a key metric used in strategies ranging from pricing to inventory management, and tracking it closely could be essential to maintaining profit margins. If it is rising, it’s a signal that material costs or production inefficiencies could be having an impact.⁵ The earlier you spot this, the better able you are to mitigate against the effects.

Similarly, it could be useful to monitor your break-even point – the amount of goods you need to sell to cover your costs and start making a profit. This can change over time but watching it closely (including by analysing both fixed and variable costs) can help enable you to spot expenses you may have missed and see the impact from any changing trends in your costs.⁶

A simple formula to follow is:
Total fixed costs / (sales price per unit – variable costs per unit) = break-even point per unit

But it’s not just costs to keep an eye on when things are getting more expensive. It’s pricing and sales strategy too. It may be worth researching the market closely and benchmarking against your competitors’ margins and prices, as well as evaluating whether customers interaction and purchasing habits are changing. You could even look outside your industry to identify new pricing strategies or routes to market that may make a difference to your business too.⁷

Controlling your inventory more carefully can help you to reduce the expenses associated with it, for example by cutting storage costs, combating high raw material prices by reducing overstocking, or minimising additional costs from the need to scramble quickly if you don’t have enough stock.

Technology can be your friend here, with many systems available to help make sure your inventory better aligns to your business needs. One example is in forecasting, where AI is transforming the process. McKinsey suggests that using AI in supply chain forecasting can reduce errors by up to 50%, which equates to up to a 65% reduction in lost sales and product unavailability, plus a 5-10% fall in warehousing costs and a 25-40% reduction in admin costs.⁸

It's not just forecasting though. Other technology, such as inventory control systems and the ability to monitor stock in real-time, can help reduce costs through better efficiency and leaner operations.⁹

And don’t forget about shrinkage. If you’re losing too much stock from your inventory due factors such as damage, loss or theft it can have a significant effect on your profit, so it’s worth paying attention to. To work it out, follow this formula:¹⁰

(Recorded inventory – actual inventory) / recorded inventory X 100 = shrinkage

This will give you a percentage figure, and the lower it is the better it is for your business.

The more efficient your operations are, the better it is for your overall costs. Again, technology can help here and the more administrative processes you can automate, the better.

Another area that software can assist in is resource planning and utilisation. The more effective you are at allocating materials, equipment and labour, the more efficient you will be and the lower costs you will have.¹¹

With that in mind, it’s also worth considering whether you can speed up your lead times, for example by eliminating unnecessary steps in your production process, researching alternative suppliers or building strong relationships with existing ones so that any issues that may cause delays can be addressed promptly. As well as having the potential to reduce inventory costs and storage requirements, this can also help strengthen your cash flow.¹²

When costs are rising, it can pay to work more closely with suppliers to see if you can negotiate a better deal. Offering longer contracts, larger order volumes or faster payment terms are all ways that could help move the dial more favourably in terms of prices they may offer. Research other suppliers too, so you have a good idea of prices you may be able to get elsewhere.

As well as finding savings, businesses can also engage in negotiations designed to avoid higher costs in the future. This is a proactive step that can be very valuable. Examples could include saving money on expected annual price increases by negotiating multi-year deals in advance, or – before a current deal ends – proactively negotiating to pay a higher price to begin a new long-term agreement. This would be more expensive in the beginning, but if prices are expected to rise it would save money in the long term.¹³

It's also a good idea to be mindful of your supply base and consider the impact if a delay or other problem was to occur within it. Supply chain disruption can have raise costs and lower profits so, depending on your business and it’s needs, it may be worth negotiating agreements with multiple providers to ensure you are not too reliant on one supplier, country or even region.

The way you ship your goods can also have an impact on costs, and doing so more efficiently can save you money. For example, optimising your packing strategy can enable you utilise the available space most effectively and help you avoid having to pay to transport air. Lighter weight packaging can cut costs too, as can making sure you use the right size packaging for the products you’re shipping.

There are several other things you could do too. Buying packaging supplies in bulk or on discount to save on costs per unit is one tactic, as is choosing a supplier that offers free packaging. You can also try to find ways to lower the cost of shipping itself. For example, you could try to plan shipments around busy (and likely more expensive) periods, negotiate fixed prices with carriers in advance, or see if you could benefit from any discounts available for shipping last minute.

Consolidating deliveries could also prove effective in reducing costs, if you are able to combine several smaller shipments into fewer larger ones. And partnering with other businesses may be an option too, potentially allowing you to share transport resources, benefit from economies of scale and negotiate better rates.¹⁴