Europe’s economy is still growing, but the pace is slowing and prices are rising. According to Eurostat’s flash estimate published on 30 October, euro area GDP grew by 0.4% in July–September compared with the previous quarter. At the same time, inflation stands at 3.8%. For small business owners, this combination is familiar and awkward: the customers are there, but the margin on every sale is under pressure – which puts small business pricing at the top of the agenda.
What do the numbers say?
Euro area growth slowed from 0.6% in the second quarter to 0.4%, and across the EU as a whole from 0.7% to 0.5%. Year on year, the euro area grew by 1.3% and the EU by 1.5%. Finland’s GDP grew by 0.5% on the previous quarter and by 1.8% year on year, which is better than the euro area average.
The differences between countries are large. Estonia, Spain and the Netherlands grew by 0.6%, while Lithuania’s economy shrank by 1.0% and France’s by 0.1%. Ireland’s 5.5% growth is, according to Eurostat, an experimental figure based on incomplete data, so it is best not to rely on it. The next, more accurate estimate will be published on 13 November.
Inflation quietly eats into your margin
Annual inflation in the euro area accelerated to 3.8% in September, up from 3.2% in August. According to Eurostat, most of the increase came from energy and services. For small business owners, this shows up in the electricity bill, transport, rent and subcontracting – exactly the costs that are hardest to cut.
If your prices stay put while costs rise by 3.8%, your margin narrows every month without anyone making a decision. That is why leaving your margins unprotected against inflation is often the owner’s own choice, even if it doesn’t feel that way.
Financing is getting more expensive, too. On 29 October, the European Central Bank kept its deposit rate at 2.50% after raising it twice this year. When both costs and loan interest are rising, a business owner cannot wait for the margin to fix itself. Pricing is the one tool that is entirely in your own hands – and that is exactly why it pays to use it early, not only once cash is tight.
How to price when costs are rising
- Calculate margins product by product. An average margin hides the products that are already losing money. Start with those.
- Raise prices in small, regular steps. Two moderate increases a year are easier on customers than one big one every three years.
- Add an indexation clause to long contracts. In a one-year contract, a fixed price shifts the entire inflation risk onto you.
- Justify with value, not costs. Customers care about what they get. Tell them what has improved in your service, and offer a lighter option if needed.
- Track demand every week. When the economy grows slowly, the effect of a price increase shows up in sales quickly. Measure, don’t guess.
Growth is an opportunity, not a given
Slowing but positive growth means customers still have money to spend. They are, however, more selective about where they spend it. That is why pricing is a management issue this autumn: it has to cover your costs and tell customers why what you offer is worth the price.
A good goal is to build a business that grows even when the economy is slow. The cost of financing is part of that picture: your growth target should be well above inflation, so that the business grows in real terms and not just on paper. Read also what the ECB rate decision means for small business loans.
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