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How does inflation affect sales?
Hello everyone, firstly thank you to sales professor Ramez Helou for this opportunity. I greatly appreciate it.
Thank you to the Hult university for again giving me this opportunity to teach you.
So I will teach you about a topic called inflation and specifically, how does inflation affect sales?
You might have heard this a little bit on the news recently, there’s something called Pareto’s Law (commonly referred to as the 80 / 20 rule).
So this tells me that if I am teaching a group of people; 20 percent of those people are really going to absorb what I am saying.
The other eighty percent might be distracted with some other activities and that is fine because this is a universal law.
However I ask you; please try to be part of the 20 percent.
This is because what I am teaching you can have much greater implications for your life, your ability to generate an income and your ability to generate great levels of wealth and keep it.
I don’t know if many of you know of individuals who have made a lot of money only to lose a lot of money.
This topic ties up all of that.
Just a few words about myself i have four pillars to my background; psychology, economics
marketing and sales.
I have been in the middle east now for over 28 years so i have a very strong
understanding of this region specifically.
I have had a very diverse portfolio of clients in my time for B2B to B2C
I have been awarded for my campaigns.
I am highly performance and ROI focused and I am also committed to learning.
The businesses that I have worked with in my career include Microsoft, Amazon, KIA, Honeywell and Isuzu just to name a few.
Most of the companies I have worked with are multi-billion dollar publicly traded businesses.
I am saying this so you believe that i have credibility in the area and on what I am
about to advise you on today.
There is a quote by a motivational speaker named Jim Rohn that reads “Formal education will make you a living; self education will make you a fortune.”
This quote has a very special meaning to me because not only does it sound interesting or it reads nicely,it’s actually true because it happened to me in my lifetime.
A number of years ago I was in a very sad and desperate place and one of my clients came to me and she could read me like a book.
She recommended a book to me and by reading that book it completely transformed my life. The book was called ‘Awaken the Giant Within’ by Tony Robbins.
If you had asked me a few months before to read a book I would have made excuses.
However when I read the book that the lady recommended to me it completely transformed my life, my income and my net wealth.
From that moment onwards I knew what this quote really meant and I started to read five to ten books every single month depending on the thickness of the book to consume as much knowledge as I could so that I could then add value to my clients.
In turn the more valuable I became to my clients the more valuable I was to them and so they depended on me more and more for the successful operations of their business.
In the function of sales; above anything else you have to become more valuable in your area of expertise and you have to stand out from the competition.
During this time of learning I discovered inflation and i discovered the dangerous effects
of inflation.
I want to explain inflation to you not just in a personal context but also in a business context and also in a sales context.
So you understand how you can navigate with it or how you can use it potentially
to your advantage as you move through your career or if you go on to manage a
Business.
So I call it the silent threat because you don’t see it and you don’t hear it.
You only hear very specialist individuals talk about It and what happens is many of us just go through our lives and we don’t know the very damaging effects it has on us and on our businesses.
So what is inflation?
If you were to google it or to bring up an economic textbook; you would see two points describing it.
The first point is that it’s a general increase in prices.
The second point is that it is a fall in the purchasing value of money.
This is the critical element that will impact your businesses and your personal lives and it’s what I really want to teach and make you understand.
In extreme scenarios in history, toilet paper was actually more valuable than people’s money due to inflation.
In 2020, there were lockdowns because of the Covid-19 virus and there were stories about toilet paper shortages and people were fighting in supermarkets to get toilet paper and there was even a black market for it.
Inflation right now is actually the highest it’s been in the last thirty years. It has not been this high since nineteen ninety two and in the last year the rate of inflation has increased by one hundred percent.
The impact of corona is impacting supply chains and because of that there are product shortages.
For example, I was trying to buy a treadmill to go under my desk but because so many people are working from home and have had the similar idea, the supply of those treadmills is completely off the market.
So that means if I do find one; the retailer has to charge a premium.
What many people don’t realize is that the currencies that we’re using are actually losing their value.
Ultimately just know this, it takes more currency to buy the exact same goods or services so whatever item you might have purchased a year ago you have to spend more currency to buy
the exact same good or service .
Nothing has changed in the product but you’re having to shell out more of your hard earned capital in order to buy that item.
Some people utilize a currency called the United Arab Emirates Dirham.
This DIrham is actually pegged to the United States dollar.
What does that mean?
It means as the dollar goes up in value the UAE dirham has to go up in value as well.
As the dollar goes down in value the UAE dirham has to go down in value as well.
We need to understand that the dollar is really the backbone of international transactions so businesses generally use the dollar in order to do business with each other.
No matter where you are in the world so if the dollar is losing value this has great and potentially disastrous consequences for your ability to do business and if you know what you’re doing
you can use this to a tactical advantage in the field of sales.
Examples of how the United States Dollar has lost value against many of the common currencies used around the world today:
So in the last year the US Dollar has lost 10 percent of its value to the Euro.
It’s lost about 12 percent of its value to the British Pound.
It’s also lost about twelve percent of its value against the Australian Dollar.
It’s lost about three percent to the Japanese Yen.
It lost about five percent to the Swiss Franc.
It’s lost about 20 percent of its value to the South African Rand.
So what does all this mean?
I just need you to really understand this concept before I tie it into sales.
So inflation steals away at the purchasing value of your capital.
That means it will impact your business income and business capital as well as your personal income and your life savings.
So here’s a very simple example
Let’s say now today you take a hundred dollars or dirhams and you put it in your account. Now if you do not touch that money for one year until 2022, nothing happens to it.
In 2022 when you open up your bank account it will still be 100.
That does not change, it still shows you 100.
Since inflation was at 5 percent the purchasing value of your money has now gone down by five points.
So although it says 100 in your bank account, you only have 95 in terms of purchasing power.
If I’m only using an example of a hundred it doesn’t sound like much but when you’re talking about billions it becomes a lot of money.
For example, 5% of 1 Billion of any currency is the equivalent of 50 Million lost in purchasing power.
When you start putting this into a business context you see that that five percent can be the difference between a business being profitable or making a loss.
It can also mean a difference in your personal lives of having a good year in terms of income or having a bad year in terms of income.
Imagine a business and that business has three options available to them.
The first one is maybe they lost sales and their sales went down by three percent.
The second one is maybe they didn’t lose sales but they also didn’t grow either so they broke even.
Then finally maybe they had a better than average year. They’ve increased by three percent that means they are on a nominal level.
When you as selling professionals or as business leaders take into account inflation.
Let’s assume right now that the USD inflation rate is at about five percent.
As a salesperson or as a business operator if you have a growth in sales of three percent, you are actually experiencing a real net loss of two percent of purchasing value.
If your sales did not grow you’re actually seeing a real net loss of five percent and if you lost sales you’re seeing a real net loss of eight percent.
How did I get that?
You just do your nominal sales minus five percent (inflation rate) and that will show you the real net loss of the purchasing power of your capital.
In a business context what happens if the inflation is at five percent but you have a good year and you’re able to grow sales by 10 percent?
Well actually because you have to subtract the inflation your real net gain is only five percent.
I hope you can visually see how inflation slowly robs away your business income but this also applies to your personal income as well.
So the moral of the story is to grow wealth again whether it be in a personal context or a sales capacity or as a business your income has to be greater than inflation.
So that means as professionals we have to be aware of what the current rates of inflation are.
So how long does inflation last?
In order to answer that question we have to understand what causes inflation and there are three factors.
Primarily one is called demand pull factors.
The second factor is called cost push factors.
The third is monetary and fiscal factors.
What is the demand pull factor?
This is when the demand for a product or service suddenly shoots up.
It is when the market really wants this product to service but there’s not enough supply.
A great example was at the beginning of the lockdowns when everybody needed masks and gloves the whole supply chain was not ready for that sudden level of demand.
Manufacturers right through to the retailers right through to the selling professionals of
gloves and mass they have to jack up the price they have to charge a premium.
If the prices did not increase for masks and gloves what do you think the average consumer would have done knowing that there was huge demand for masks and gloves?
They do something called hoarding.
So when the prices of these items in high demand go up, it keeps the market in check. It makes
sure that only you buy what you can afford and leave the rest to others so that there’s more to go around.
So this is the balance and check system that nature has to make sure that everything stays in equilibrium.
So that’s an example of demand pull.
The next one is called cost push. This is where the cost side or the supply side suddenly increases.
An example of this is when a Government decides to add tariffs to protect their car industry.
This is an example from India when they wanted to protect their native car industry so they put a massive tax on foreign manufactured cars coming into the country.
So this is where the government has stepped in and manipulated the market forcing the price up and the consumer is the one who gets punished.
Now if they want to buy a BMW or a Honda they have to pay a price premium and it means that they’re forced to buy a local product which might not be a superior quality for the same amount of money.
So that’s not particularly fair for the consumer.
In a sales context somebody has to sell through these times even if there are government tariffs or if there is a massive demand.
Finally the last thing that causes inflation is what’s called and monetary and fiscal factors.
So in terms of monetary and fiscal factors there are really three that really lead to inflation.
One of them is called the supply of money.
If the supply of something especially a currency all of a sudden goes through the roof the demand is constant but because the supply is so much greater than the demand it’s easy to get that item so the value of it has to go down.
The central bank of the United States of America, the organization which is allowed to print and create U.S dollars goes all the way back to about 1995 and around 2007- 2008 there was something called the Great Recession.
During this time all the banks and businesses couldn’t get money; the banks didn’t have money to lend.
The businesses couldn’t get money to utilize from the bank so that they could continue their operations.
The whole economic system around the world started coming to a grind, dead still.
The central bankers around the world understood this and so what they needed to do was inject cash into the system so they had to dramatically increase the supply of money.
Over 12 years from the beginning of the 2008 recession, the supply of dollars doubled.
In 2020 corona kicked off and central banks in this case specifically the US Fed responded and you should determine for yourself if this looks like a normal activity and will inflation be here only for a short period of time or for a very long period of time.
In 2020, there was a 375 percent increase in the money supply in 6 months only.
In fact the U.S central bank is injecting 120 billion more dollars every single month.
The second factor is what’s called the cost of money.
This is interest rates.
What does this mean?
If interest rates are high it means for you to borrow money it’s going to cost you a lot.
Your credit card premiums are going to go up, your mortgage bills are going to go up, your auto loans are going to go up, the cost of borrowing is very expensive in a high interest rate
environment.
When interest rates are low,it encourages people to go into debt.
This is not just individuals, businesses also go into debt to finance their operations.
Bad businesses will go into a lot more debt to finance their bad operations because they’re not profitable.
In 2008 central banks were controlling interest rates at about five percent.
When the recession kicked off they had to drop interest rates down to virtually zero.
Not only did they have to increase the money supply, they had to encourage businesses and private citizens to get into debt.
So that they would take the money and go buy things such as laptops, cars and houses to stimulate the economy.
In 2016 the central banks around the world started to increase interest rates because they knew if another recession happened they would have no buffer.
They were already at rock bottom.
Later on they had to start lowering interest rates again.
Why was that?
It was because it started impacting the global economy and global businesses including private citizens were in so much debt.
As interest rates started to creep up everybody’s repayments started to increase. Utilities such as petrol became too expensive so people started driving less.
The demand for oil decreased and oil prices around the world started coming down.
When Covid 19 hit; the central banks had to drop the little buffer they had back to zero.
Today we are at the highest amount of debt around the world.
We’ve never had this much debt so you can understand why central banks are hesitating to raise interest rates because it means everybody’s repayments will go up.
That will have a negative impact on the economy. We’ve never had interest rates be so low.
Such factors encourage debt, spreading money and inflation.
Around 1973, in the U.S there was the removal of the gold exchange standard.
Money wasn’t backed to anything tangible and it gave governments and central banks the free reign to just print money as they wished.
This allowed governments to in place spending programs as they wish and this ultimately allowed people to take out debts and loans as free as they wish.
The last factor is called the velocity of money. What does this mean?
If I buy something, the money goes from my wallet into that supplier’s hands. The supplier then uses that money to maybe pay salaries, the salaries then go to groceries or rent.
Money is exchanging hands multiple times and this is called velocity.
If the velocity of money is very high that means there’s lots of activity happening in the economy.
It means people are buying and spending over and over.
On the other hand, if the velocity of money is very low it means people are taking their money and they’re scared to spend it. It means they just want to save.
Typically when the velocity of money is very high, we have inflation and when the velocity of money is very low we have deflation which is the opposite of Inflation.
Once again in 2008 the recession started. People were fearful they didn’t want to spend and buy so that means the velocity of money came shooting down, in fact it decreased about 25 percent.
When corona hit, the velocity of money decreased by 21 percent more. The velocity of money has never been so low and economic productivity around the world was at its lowest.
So what does this have to do with inflation?
As mentioned above if the velocity of money is low that means we have deflation and not Inflation.
Right now inflation is the highest it’s ever been over the past 30 years. What will happen if the velocity of money starts going back up as the world starts normalizing again?
People will start traveling again, people start buying and spending again and the velocity of money will naturally Increase.
The moral of the story is that in order to grow wealth sales income must be greater than inflation.
The very honest answer as to when inflation will end is that no one knows.
You have to take this Information and apply it to your learning, to your careers, to your businesses and just assume that it could be with us for a very long time.
So how can sales professionals overcome the challenge of inflation?
The answer is we need to stop competing on price. This means we have to focus on value.
At one point we all have made a purchase from an individual or a company knowing we could have gotten that item cheaper from somewhere else, but because you like the brand or because you like the salesman or the saleswoman you chose to buy it there and give that little extra premium to them.
This is the meaning of selling Value.
Ultimately if you can really master the art of value selling you’ll be giving yourself a competitive advantage over everybody else who is still focused on selling by price alone.
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