For ecommerce businesses, the pandemic was a time of exponential growth and opportunity. Many ecommerce sellers felt they emerged relatively unscathed and ready to continue riding the wave of growth.
And then came 2022.
As a forward-thinking ecommerce seller, you should start considering how you can prepare your business for the current economic slowdown. In this blog, we'll discuss what is happening with today's economic shift and how you can arm your business with the arsenal it needs to thrive through a recession.
How will today's market impact your ecommerce business?
For the first time since 2018, interest rates in the U.S. were increased in March 2022 by 0.25% in order to combat rising inflation.
As a result, consumer prices are rising on food, gas, and basically everything. This will leave your customers with less discretionary income and they will start to ask themselves “what can I live without?”
According to the Mastercard SpendingPulse report, ecommerce sales decreased 1.8% as compared to 1 year ago (while in-store sales grew 10%). Shopify and Amazon both had their slowest revenue growth in Q1 2022, with Amazon’s growth at its slowest pace since 2001.
With the slowing economy and price increases, some of your vendors and suppliers will try to shift some costs to you. For example, Amazon is adding a fuel and inflation surcharge of about 5% to existing FBA fees.
Raising the prices of your products in turn may not be the best way for you to keep your customers coming back during such an uncertain economic time.
How to weather the storm of an economic downturn
The key to getting your ecommerce business to survive (dare we even say, thrive) through a recession is by increasing your cash flow and your bottom line (i.e., your net profit).
Here is your not-so-secret formula to increasing your bottom line and keeping you going through a recession:
Increase sales and/or decrease costs.
This super obvious statement should be your new mantra, your North Star of navigating the tumultuous waters of an uncertain economy.
How to get your ecommerce business through the economic downturn
Keeping in mind our North Star - increase sales and/or decrease costs - here are some tips you can start implementing TODAY.
1. Keep your customers coming back for more
According to a Harvard Business Review study, it costs five times as much to acquire new customers as it does to retain existing customers.
Focus on retaining existing customers by offering a loyalty program or discounts for returning customers. Loyalty programs are common tools used by ecommerce businesses to engage existing customers and encourage them to shop more often.
Great loyalty programs are not just about rewarding purchases. Think bigger and get creative to maximize customer engagement. For example, allow users to earn bonus points by writing reviews, or create online challenges, prize wheels, etc. Remember that the more points or rewards they earn, the more likely they are to come back and redeem rewards with additional sales.
Another way to retain customers is to offer a subscription model. Creating a subscription-based model gets your already happy customers into a recurring buying process so you can benefit from recurring revenue.
2. Don’t leave cash in the cart
Did you know that 73% and 86% of shopping carts are abandoned on desktop and mobile devices, respectively? This is leaving a lot of cash on the table (or, in this case, in the shopping cart).
Waiving or reducing shipping fees can help relieve your customer's anxiety at the point of sale.
For example, if you also have a brick-and-mortar store, you can offer a buy-online-pickup-in-store model, also known as BOPIS or click-and-collect. Variations of this model include curbside pickup or buy-online-return-in-store (BORIS).
This allows consumers the convenience of shopping online, while significantly reducing their shipment costs. If you don’t have a brick-and-mortar store, you can offer a buy-online-pickup-anywhere option (BOPA). BOPA is cheaper for you and enables shipping to commercial locations like pharmacies or grocery stores. In many cases, BOPA is around 30% cheaper than traditional delivery.
Any of these alternative shipping methods can be a great way for both you and your customers to save shipping costs and for you to increase your sales.
3. Consider your product offering
If you started your Shopify or Woocommerce brand in the past 2 years, you may have to start rethinking the way you relate to your customers. With the shift in the economy, comes a shift in consumer behavior and spending habits.
In a new economy, you may need to ask yourself some tough questions including whether you are selling the right products for the current, inflation-infected market.
Consider getting rid of less successful SKUs to save money on inventory and warehousing costs, creating bundle items to add value, or changing your package sizes to keep prices consistent. For example, selling a 6-ounce package instead of an 8-ounce package.
4. Inventory management
Properly managing your inventory and accounting for your inventory costs is key to keeping your inventory costs down and making sure you don’t lose out on sales from improper inventory planning.
Let’s say you have a customer that reaches your Shopify store and is looking to splurge on a designer scarf from your site. Yes, your customer is aware it's a recession, but she thinks YOLO, you do you, and all the other motivating words that get her to complete the purchase. Unfortunately, as a result of poor inventory management on your part, the product she wants is out of stock.
When consumers see that a product is out of stock, only 20% wait for that item to be in stock later. The rest are just going to your competitors to buy the product.
Don’t lose out on potential sales because of poor inventory management practices. To learn more about inventory management, check out our blog on Shopify Inventory Management Tools and Tips where you can also download a free Google Sheet inventory tracker to help you better manage costs and inventory count. You can also check out our blog on Fundamentals of inventory management: How to track your ecommerce inventory to learn more.
5. Consider your pricing model
As a DTC and CPG brand, it's key to price products to optimize profitability while understanding how much your customers are willing to pay.
Unit economics should be at the forefront of your business decisions - how much does each sale cost you. If you’re not already focused on this metric, it’s never too late to start.
Let’s say you do your market research and decide a 50% markup on your product is best for a specific SKU. You buy the item for $20 and sell it for $30.
Unfortunately, this decision can put you out of business.
When pricing this product, you need to consider all costs directly associated with the sale of this unit. For example, when you sell the item you would need to pay fees to Stripe for $1.17 (2.9% +$0.30 per transaction) and shipping costs of $5.50. This leaves you with a markup % of only about 17% instead of the 50% you need to cover all of your overhead.
If you find that a particular unit isn’t profitable, consider selling it at a discounted price or stop selling it because the more you sell that unit, the more value you destroy. Unit economics can help you decide what to stop selling and where to focus your marketing spend. Try our ecommerce pricing calculator to make sure your margins make sense.
If after considering your pricing model carefully, you feel raising prices is a must, remember that not all products are created equal. Essential and non-essential products are impacted by inflation very differently and the pricing model for these products should reflect this. For example, consider raising prices for essential products but finding other ways to balance out inflation impact for the non-essentials.
6. Outsource. Outsource. Outsource.
Outsource admin tasks to reduce your overhead and increase your productivity.
Let’s take a real example from one of our customers, Eric. Before he started using Finaloop’s automated bookkeeping services, he paid a bookkeeper $400 a month. The bookkeeper, unfamiliar with the various ecommerce apps, needed a lot of manual assistance from him to pull reports and categorize expenses.
Eric invested a lot of time and money. At the end of the year, he also paid a CPA a one-time fee of $2,000 to adjust his books and file his taxes.
After spending $6,800 during the year between his bookkeeper and CPA and losing too much time, he decided to try Finaloop to automate his bookkeeping. In one year, he reduced his annual accounting costs from $6,800 to $2,340 (67% savings), reduced his time investment from about 6 hours a month to about 15 minutes a month, and got more accurate financials customized for his ecommerce business.
Automating workflows can help reduce labor costs and allows you to focus on higher-value tasks that can generate better returns for your business.
7. Cash is King
In addition to outsourcing, it's a time to take a step back and consider how to maintain a lean company to increase your cash runway.
Runway refers to how many months your business can keep operating based on its current spending, or 'burn rate' before it runs out of cash. Your cash burn rate is the rate your company uses its cash. In order to extend your runway, consider all of your expenses and identify where you can ‘cut the fat.’
Here are some great examples of ways our customers reduced their costs to increase their cash flow:
- Save money on shipping and warehousing costs by using a dropshipping model.
- Speak to banks and vendors to stretch payment terms. Unless there is an incentive to pay something sooner, don't pay a bill faster than you have to.
- Cancel any subscriptions you are paying for that you no longer need. Consider if there is a cheaper option if you pay for 1 annual subscription instead of monthly payments.
- Look for ways to optimize your packaging to reduce fulfillment and logistics costs.
- Hold off on major purchases unless it's an investment that will start paying off immediately.
If you need short-term cash, you can consider various borrowing options. But, if you decide to take on debt, consider whether a merchant cash advance, such as Shopify Capital, Stripe Capital, or Clearco, may be a better option for you since they are repaid based on your sales revenue rather than a fixed interest rate.
Make sure to check out this free ecommerce loan calculator to compare the cost of different financing options and find the best fit for your business.
9. Market like your business depends on it
Focus on creating a strong brand built on a solid marketing strategy can help you build a connection with your customers. This can help you more easily bounce back from any economic impact on your business.
Creating good content can be an extremely cost-effective way to deliver comparable or even better results than paid advertising in terms of customer acquisition.
If you go with paid advertising, make sure to monitor the marketing spend very closely to ensure you don't start bleeding out funds through a hole in your sales funnel.
Final thoughts on navigating through the downturn
People prefer the certainty of misery to the misery of uncertainty - Virgina Satir.
The current economy brings about a lot of uncertainty for ecommerce, an industry that until now has been organically booming. But, uncertainty also comes with opportunity.
Rethink the way you have been doing things, reassess your current strategies, and recondition yourself to run a more lean, efficient, and cost-effective business. Think about our North Star to navigate your business through the recession: Increase sales and/or decrease costs.
To get a better handle on your expenses, reduce your bookkeeping costs and time investment, and get better insights into your ecommerce business' financial health, try Finaloop for 30 days free. We'll give you the tools you need to steer your brand to calmer waters.
We are a technology company providing automated end-to-end accounting service to ecommerce businesses. Our system connects to your apps, syncs all your data, and reconciles your books in real-time, replacing your bookkeeper. We offer reconciled books available 24/7, tax-saving insights, and a single place for all your financial data.
The information provided on this website does not, and is not intended to, constitute legal advice. All information, content, and materials available on this site are for general informational purposes only. Readers are advised to consult with their attorney or accountant with any questions or concerns.