Average online prices have dropped every year from 2015 to 2019, leading some economists to comment that ecommerce is “virtually immune to inflationary pressures.” But the pandemic ended the deflation streak that many online retailers enjoyed, and experts say that the changes are here to stay—at least for a while. Let’s take a look at why ecommerce inflation is now an issue and how you should adjust your business to set yourself up for success in the current landscape.
This graph from CNN Business depicts the findings of the 2021 Adobe Digital Economy (ADE) Index report that tracked inflation over 18 categories for the past six years. The ADE is a well-trusted source of information that over 80% of Fortune 500 retailers use. The graph shows the year-over-year (YOY) change from July 2020 to July 2021. It is clear that the apparel sector has suffered the highest inflation rates since the first COVID peak in mid-2020 (+15%) but the majority of categories have risen dramatically. Overall, US consumer prices increased by 5.4% YOY, ending in July 2021.
Adobe and various analysts pointed to supply chain bottlenecks and higher shipping and labor costs as the primary reasons for the rapid rise in the rate of ecommerce inflation, largely caused by the pandemic. COVID fears and quarantine orders also spiked demand for online shopping as people avoided going to physical stores. The increase in demand alone would cause predictable issues due to insufficient inventory, order, and shipping schedules, and lag time as each piece of the supply chain reacts to the changes. But, combined with a global pandemic, each component of the chain–including supply, manufacturing, shipping, and distribution—was impacted individually with massive demand and minimal staffing resulting from COVID-19 illnesses, shutdowns, government regulations, and other factors like lack of childcare. Nearly 20% of working parents in a Harvard Business Review survey had to leave or reduce work solely due to lack of childcare.
Since supply chains are typically global in scale, when one country changed regulations or instituted a shutdown, an enormous number of companies across multiple countries were impacted—without means for influencing or negotiating a favorable change at the government level. The now-infamous computer chip shortage exemplifies this point.
For years, consumers have begun to shift to online shopping for its convenience, savings, and ability to comparison shop for the best features, reviews, and prices. That market demand combined with many new technologies that make the zero-to-launch process of starting a new online business simpler than ever has created a deeply saturated online marketplace.
However, the demand for the lowest price items invited a new kind of competitor that played by different rules. Chinese companies entered the American ecommerce market with a unique ability to produce a massive quantity of products for the lowest prices. These companies and many of Amazon’s own branded products appeal to cost-conscious consumers. As a result, some ecommerce companies are leaving Amazon because of the slimming profit margins.
Now, as ecommerce inflation is a new issue, the online marketplace faces more traditional business issues and is beginning to lose its price advantage over brick-and-mortar stores. This change may cause some consumers to shift back to traditional retail if online prices are no longer competitive and as people become more comfortable with COVID-adapted life.
So, the question is how can your ecommerce company adjust to this shifting business landscape and remain competitive? Here are some tips for staying ahead of your competition.
As costs rise, your company has two options—pass the costs on to your consumers or let them eat into your profit margins. While it may be tempting to absorb the costs yourself to keep your customers happy, consider how that drop in profit will impact your business as a whole. Shrinking margins means a more stifled cash flow, which we will see is a vital component of your thriving business. There are massive opportunity costs associated with passing on that income. Also, consider that most of your competitors are in the same boat and will need to make these crucial decisions as well. As companies raise their prices across the board, the playing field becomes even once again.
Enable yourself to raise prices—even beyond what is necessary to survive—by building a brand that inspires loyalty. Branding is the key to creating a company that thrives and is no longer as sensitive to the ebb and flow of inflation. Focus on building trust, delivering unique experiences, and developing a community that reinforces itself. You will see the impact of this in AOV (average order value) because your customers are more willing to try new products and CLV (customer lifetime value) as you groom customers into brand aficionados.
In these uncertain times and with so many moving parts, it’s critical to plan at least six months in advance to ensure you have the inventory you need to serve your customers. The company that runs out of stock first will suffer significant losses and leave the door open for its customers to switch to a competing company—whether they want to or not.
Planning ahead will also necessitate larger orders, which means you can benefit from volume discounts with your supplier base. If you’ve already raised prices on the front end and can secure cost savings on the back end, then your business could successfully increase profit margins, even in the midst of ecommerce inflation. The secret to accomplishing this sort of inventory management strategy is healthy cash flow.
Cash flow is crucial to any growing business. It enables you to take advantage of opportunities when they come along, including bulk ordering. Cash flow is what allows you to strategize and be flexible enough to not just respond to situations but prepare for them.
One of the easiest ways to get the funds you need for your business is through growth capital. Yardline is an innovative growth capital provider built specifically for ecommerce businesses, providing flexible access to the money you need without enormous interest rates or strict prerequisites that come with traditional loans. The more tailored the financial services are to ecommerce, the better, as most standard loans and investor options are not a good fit for online business—especially for young companies. Ecommerce business owners rarely qualify for these types of loans or for venture capital (VC) funding and when they do, they tend to struggle with the cost of the debt, repayment terms, or the need to share ownership of the company. So, ecommerce growth capital that offers flexible options, pay-as-you-earn repayment plans, and additional advice and support services is a better fit for cash flow solutions.
Another way to maintain steady cash flow is to negotiate favorable payment terms with suppliers that enable you to pay overtime or at a later date (typically up to 90 days after purchase). This arrangement will help ensure you have the money from sales to pay off your debts. Also, consider working with a supplier that is geographically closer to you to cut down on shipping costs and mitigate potential issues. If your supplier is local, the same regulations, changes, and expectations will apply to you both, making it easier to predict and respond to any roadblocks. Local suppliers will also enable greater control and oversight to ensure your products meet your expectations and standards of excellence.
Though some companies may be tempted to hang on to the standard ways of doing business and wait out the current situation, economists anticipate this ecommerce inflation trend to continue and become an increasingly prominent issue for ecommerce companies. Don’t be the last to adapt to this significant change. Seize the opportunity to figure out the solutions now before your competitors do and benefit from being among the first to adapt to the current ecommerce landscape.