How inflation is impacting your ecommerce business, and what you can do to minimize its impact
It’s difficult to ignore the rising prices of a gallon of milk, a carton of eggs, or a tank of gas these days. A recession looms like dark clouds on the horizon, and inflation is the signifier. Knowing how to navigate the wind and waves caused by inflation can help ecommerce businesses succeed and stay ahead of their competitors, even in the face of a recession.
According to a recent study by Shopify, the average person is 102% more concerned about inflation than the coronavirus. Even if a recession is not certain, the possibility of one can affect how your customers shop and how you make decisions.
In this article we explain why inflation is a tricky problem for ecommerce businesses, and how you can grow your business despite the market conditions. We hope you can use these tips and tricks to meet your sales metrics, even ahead of a recession!
How Inflation Can Impact Your Business
Inflation is a problem for most ecommerce businesses because it erodes profit margins. When the cost of goods and services increase, you may have to raise your prices to maintain your profit margins. However, if your customers are not willing to pay those higher prices, you’ll be responsible for absorbing the higher costs, reducing your profitability. Inflation can also lead to higher borrowing costs, which can further reduce profitability.
Consumer purchasing power also goes down during periods of high inflation. When prices rise, consumers have less disposable income to spend on discretionary or luxury items. This can lead to a decrease in demand for your products and services, which can place a dent in your revenue. Knowing how to navigate inflation will also help you maintain consumer purchasing power.
Another unfortunate result of inflation is increased competition. When the cost of goods and services increase, it may become more profitable for new competitors to enter the market, and existing competitors may lower their prices to maintain market share. By keeping costs low and maintaining profit margins, you can position your business for long-term success.
Because inflation is so intricately intertwined with product demand and the amount of competition you’ll face, combating it can feel like a losing battle. Luckily for you, we have more than a decade of experience helping ecommerce businesses succeed, even in the face of economic downturns. We want to share six ways you can ride out economic challenges caused by inflation.
Inflation Hack #1: Cash is King
Imagine being able to make investments or expand your operations on your own terms, without having to worry about the impact of rising interest rates or repayment obligations. By holding onto cash, you can protect your brand from the effects of inflation and have the flexibility to make decisions based on your own financial situation instead of as a reaction to the market.
Cash reserves can help cover your expenses so you don’t have to rely on loans or credit amid periods of high interest rates. Additionally, having cash on hand can allow you to take advantage of opportunities that arise, such as purchasing inventory at discounted prices, without having to worry about the impact of inflation on your purchasing power. Overall, cash provides ecommerce businesses with stability, flexibility, and independence in a high-inflation environment, making it a crucial strategy if your business is looking to weather the storm.
Inflation hack #2: Manage Inventory Levels
One of the most important ways to maintain your cash reserves during periods of high inflation is to keep your inventory levels lean. This will help you purchase the items you need at lower prices in the future rather than paying inflated prices in the present.
Managing your inventory levels can be tricky, but doing so will lower the risk that you’ll run into overstocking, which can tie up capital and lead to excess inventory that may need to be sold at a loss. However, there is a tradeoff between keeping inventory lean and the risk of stockouts, which can result in lost sales, dissatisfied customers, and other negative consequences. You can mitigate the risk of stockouts through accurate demand forecasting, keeping safety stock, real-time inventory tracking, and collaborative planning with suppliers. By monitoring your inventory levels closely, you can ensure you have the right amount of product in stock to meet customer demand without incurring unnecessary costs or risks.
Inflation hack #3: Negotiate with Suppliers
Your suppliers are likely experiencing the same challenges you’re facing when it comes to high inflation. Engaging in open and transparent negotiations will help you and your suppliers find mutually-beneficial solutions that can help both parties weather the effects of inflation.
Through negotiation, you’ll be able to better secure your supply chain and ensure you’ll have the materials and resources you’ll need to operate effectively. This will help you maintain a high level of trust with your customers and suppliers. Negotiating with your suppliers is critical when thinking of ways to manage costs, maintain relationships, and secure your supply chains during high inflationary periods.
Inflation hack #4: Increase Prices
As we all know, businesses usually find it necessary to increase their prices to maintain profitability when inflation is high. Failing to increase your prices can lead to lower profit margins, which can make it difficult for you to invest in furthering the growth and development of your business. Shrinkflation, the practice of reducing the size or quantity of a product while maintaining the same price, should never be considered as an alternative option. This practice can lead to customer dissatisfaction, negative reviews, and lost sales, as customers may feel misled and cheated when they receive a smaller product or one that offers less value for the same price. This can damage their trust in the business and discourage future purchases.
Increasing your prices while maintaining the integrity of your product will signal to your customers that your business is taking proactive steps to manage the effects of inflation. While they may not be thrilled about paying more for your products, they may appreciate the transparency and honesty of a business that is upfront about the need to adjust its prices in response to economic conditions. Increasing your prices is a challenging but necessary step to maintaining profitability and stability in the face of inflation.
Inflation hack #5: Explore Financing Options
Financing options such as loans, lines of credit, and invoice factoring can provide you with immediate access to capital, allowing your ecommerce business to continue to meet customer demand and maintain a healthy cash flow. Exploring financing options is especially important during periods of high inflation because it can protect your business against future inflationary pressures.
Because inflation is often accompanied by rising interest rates, securing financing at lower rates during periods of lower inflation will help you mitigate the impact of future inflationary pressures on their borrowing costs. During times of high inflation, investing in growth will help your ecommerce business position itself to take advantage of new market opportunities and emerge stronger in the long run.
Inflation hack #6: Leverage Technology to Cut Costs
As difficult as it can be for ecommerce businesses, cutting costs is often necessary to maintain profitability and competitiveness in the marketplace. One simple way to do this is by leveraging technology to cut costs. By automating repetitive tasks such as order processing, inventory management, and customer service, you can reduce labor costs and drastically improve the efficiency of your ecommerce business.
You can also leverage technology to cut costs through data analytics and machine learning, which will help your business optimize pricing and promotions. By embracing technology, your ecommerce business can streamline its operations and reduce costs, which will help you remain competitive in the face of high inflation.
Choose Nogin to Help You Combat Inflation
To combat decreased demand during periods of high inflation, online retailers must prioritize customer loyalty and acquisition by providing top-notch experiences and competitive pricing that can compete with big retailers like Amazon.
But that’s a daunting task at best, especially for small to mid-sized ecommerce brands that are running their business in-house and already have limited capacity.
Here’s the good news: Nogin has more than a decade of experience helping ecommerce businesses like Kenneth Cole and Bebe succeed, even in the face of economic challenges and turmoil.
Nogin is an all-in-one ecommerce solution that takes on the heavy lifting of all the factors needed to combat inflation. We’ll help you maintain your cash reserves because we don’t require an upfront investment for redesigns and replatforming. Our enterprise technology solution will deliver a personalized experience for your customers, manage your inventory levels, keep costs down, and help you increase profitability.
Best of all, we’re built to scale with your business over time. We sit directly on top of Shopify Plus, meaning you won’t have to worry about replatforming to start leveraging enterprise-level features like a Customer Data Platform (CDP), AI-powered customer segmentation, and algorithmic merchandising.
Taking a proactive approach to inflation can help ecommerce businesses thrive, even during periods of economic uncertainty. (Read: 6 Ways Nogin Recession-Proofs Your Ecommerce Business).
You could do it all yourself, rowing through rough financial waters just to stay afloat – or you could let the experts take the helm.
To learn more about how to prepare for a recession, schedule a call today.