Consumers continue tightening their belts as the cost of living crisis bites. And the outlook isn’t ideal; UK inflation remains stubbornly high, especially compared to the Eurozone and the US.
The cost-of-living crisis, combined with the rising cost of raw materials, packaging, transport and labour, is putting insurmountable pressure on retailers and increasingly price-conscious consumers.
Many e-commerce businesses, especially those operating in the last decade, were set up on high-growth, low-profit models after years of cheap lending. Now, the glory days of rapid growth are over and they’re left struggling against ratcheting borrowing costs, as interest rates creep up and capital becomes more expensive.
“The era of being rewarded for hyper growth at any cost is quickly coming to an end,” US venture capital firm, Sequoia Capital, warned in an advisory note to its portfolio companies this month.
But is it all doom and gloom? Thankfully not. There are several strategies that e-commerce firms can use to fight inflation and stay profitable:
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Increase Operational Efficiency
In the battle against inflation, improving operational efficiency is key. By leveraging technology like retail automation software, inventory management or planning systems, and order management platforms, e-commerce firms can streamline their business processes and reduce costs. This can offset the impact of inflation.
“We’ve invested heavily in automation, which has allowed us to reduce our operational costs and save time,” says Jorge Henriques, COO, Bond Touch, who manufacture unique touch bracelets.
“Our aim was to stop our team doing almost all manual tasks. Automating tasks like order processing, shipping, and inventory management has saved us three full time hires – equating to around 120 hours a week, or 480 hours a month.”
Mark Hook, VP of Global Brand Marketing at retail technology firm Brightpearl, agrees with Henriques assessment and says that e-commerce brands must rethink their approach to operations to fight inflation.
He says: “When sales slow, it can expose e-commerce business models, which are reliant on high volume, but low margin.
“To survive, they should focus on automating everything from order fulfilment and returns, to inventory management, shipping and accounting. Automation can have a significant impact on overheads. It’s the best way to reduce costs at pace.”
Businesses can also improve efficiency by using technology that grants them greater visibility into their stock levels, so they can make more informed purchasing decisions.
Jill Liliedahl, Product Marketing Director at retail technology firm Inventory Planner by Sage explains why this is essential: “Gaining more visibility over inventory can help e-commerce businesses avoid overspending and overstocking items that can decrease in value as inflation rises, while also ensuring that they have enough inventory to meet future demand.”
Implement Strategic Pricing
In addition to managing their inventory more efficiently, e-commerce firms can also consider increasing their prices strategically. While this may seem counterintuitive, it can actually be a smart move during times of inflation.
By raising prices slightly, businesses can offset the increased costs of goods and maintain their profit margins without scaring off customers.
However, it’s important to approach price increases with caution. Too large a price increase can lead to customers switching to competitors, which can be damaging in the long term.
According to Hook: “Adjusting pricing strategy can be an effective way to maintain margins during periods of inflation. However, it is essential that you don’t scare off customers with overly aggressive pricing.”
Strategic pricing can include tactics like targeted price increases. With high inflation comes the need to adapt prices to each product and each customer segment. Although the costs of your supplies may be rising, that doesn’t necessarily mean that all your product prices should increase. It is also important to monitor the prices of your competition – if they are selling more under the same circumstances as you, it might be due to their pricing.
“Inflationary cycles are actually a good time to test consumer price sensitivity across your different products and categories, ” says Josh Vervack, Director of Finance and Analytics, Tomorrow.
“Increasing your price by 5% may tank your conversion rate in one product category but have no impact on your conversion rate in another category. Keep the price increases that don’t impact conversion rate heavily, and recapture lost profits on rising unit costs.”
Tony Preedy, managing director of global marketplace Fruugo, says it’s crucial that online retailers measure, understand and manage unit economics to overcome rising inflationary pressures.
“Ultimately, businesses are going to have to make trade-offs between profit now and growth later, so it’s important for them to analyse their data closely,” he says. “Inevitably, rising costs are likely to cause retailers to put up their prices in the short to medium term. But online retailers can be highly agile in how they price to optimise how they sell through their inventory, and they can also be cute about how they target discounts to prompt a purchase.”
Whatever the pricing strategy, it is important to make sure to effectively communicate the reasons behind the decision, as this also affects customers, who are equally affected by inflation.
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Focus on Product Diversification
Another strategy that e-commerce firms can use to fight inflation is by diversifying their product offerings. By offering a wide range of products, businesses can offset the impact of inflation on individual items by relying on revenue generated by other products. This can help to minimize the impact of inflation on the overall profitability of the business.
By expanding their range of products, businesses can also be better positioned to tap into new markets and potentially reach a wider range of customers.
Finally, ecommerce firms can also consider offering discounts, promotions and loyalty initiatives to attract and retain customers as a way to boost sales and generate more repeat business – and revenue – in the long term.
However, discounting is a strategy that needs to be deployed with caution, as Danielle Malconian, Founder of plus-size fashion brand Vikki Vi warns: “The more you discount, the more customers expect discounts. They aren’t going to buy at full price if you keep giving them 40% off.”
Preedy agrees, and warns about a strategy of indiscriminate discounting to drive volume. “Very few businesses properly calculate the impact on gross margin of reduced prices and the massive growth in units required to keep income stable, never mind growing,” he says.
Hook says building out more value to existing customers is now essential to fight the effects of inflation.
“Focus on what consumers want most and prioritise convenience, exceptional experiences, and value. Every brand should be concentrating on retaining and strengthening their relationships with their existing customers. This can be accomplished through expanded product offerings, or exclusive offers, alongside loyalty programs and member-only promotions and events. Combined with delivering a superior customer experience, built around top-notch technology, brands can employ a winning strategy that will see them out the other side in a stronger position.”
In conclusion
E-commerce firms can take a number of steps to fight inflation and maintain their profit margins. By focusing on inventory, pricing, product offerings, and their operations, businesses can weather the storm of inflation and remain competitive.
