There has been a lot of talk lately about a possible global recession coming in the coming months. Although it is not yet certain, the threat of a downturn is something that e-shop owners should prepare for.
In a recession, prices can rise. Supply chains may be disrupted. Customers will buy less. How this would specifically affect your business may vary depending on the nature and area in which your business operates.
The recession of 2008 should serve as a warning to entrepreneurs. Small businesses struggled during this period with many ending up closing their doors. Therefore, it is important to create a strategy for sustainability in a tougher business environment.
Here are five ways to keep your e-commerce business afloat during a recession.
- Prepare cash reserves
Having cash on hand provides agility and flexibility to spend or invest when needed. But not all startups come with a solid war chest. This is usually where finance can come in.
“Financing is not just an obstacle at the beginning of an e-commerce business plan. Once your store is up and running, you’ll need constant cash flow to order inventory, run effective advertising, optimize your supply chain and innovate your products,” according to e-commerce finance company 8fig.
A recession may exacerbate this need. For example, inventory and fulfillment costs typically rise during a downturn. Having extra cash can help absorb these price spikes quickly.
The most direct way to protect a business against this is to save to build capital. Instead of spending profits on non-essentials, think about investing money back into the business. Another idea is to sell some assets such as machinery or equipment that may not currently be critical to operations. You can always buy them back once things are back on track. Dispose while you can.
Finally, if external funding from investors or funding firms is available, consider it if the terms are clear to you.
- Adapt to customer needs
The pandemic has highlighted how quickly businesses should adapt to changes in shopping behavior and customer preferences. The closings hit brick-and-mortar stores hard. While many businesses failed to adapt, those that survived were those that were able to turn around quickly. Some changes were even quickly implemented. For example, offering delivery services and outside pick-up options and adapting to digital payments.
“The most adaptive marketers don’t do different things; they do things differently. In particular, they listen differently and plan differently,” says Cassandra Nordlund, director of the consulting company Gartner.
The same need for adaptability applies to e-commerce businesses. Put on your marketer’s hat and pay close attention to what your customers are saying. Approach them and talk to them. Create a survey of what they are likely to do or buy in the event of a downturn. This should help plan ahead.
For example, a recession can make customers more price conscious. If you’re in retail, you can tweak your catalog to include more items than luxury items.
- Get lean and mean in operations
In addition to raising capital, you can also improve your finances by managing your cash flow more carefully. Wasteful spending will eat away at your margins and capital.
It is important to streamline and optimize operations before a crisis hits. Review your business expenses and see which areas you can cut. Some common sources of wasteful spending are uncontrolled use of office supplies, unnecessary technology (devices and subscriptions), and unproductive workers. Focus on these costs when making cuts.
However, keep in mind that while you may be tempted to completely cut back on spending, it can be counterproductive. For example, you can try to remove some of the digital tools and subscriptions that you use to manage operational tasks. But if cutting them seriously affects efficiency, it might be a bad idea to do so. Dig into the details and see how each line item benefits you before you decide whether to cut it or keep it.
Remember that not all expenses are bad. Opportunities can arise even in turbulent times. A sudden market demand can make offering a new product or service profitable. If such chances arise, consider taking a calculated risk. This is also where it comes in handy to have cash reserves.
- Explore ways to add value
Despite the preparation, many e-commerce businesses will likely still feel the brunt of the recession. A drop in sales can and should be expected, as customers are also tightening their wallets.
When this happens, a common knee-jerk reaction from businesses is to compromise on price by offering discounts and promotions to lower prices in order to increase sales. However, keep in mind that price cuts can hurt margins and financial flexibility.
Warren Buffet once said about pricing, “If you have the power to raise prices without losing business to your competitors, you have a very good business. And if you have to have a prayer session before you raise the price 10 percent, then you’re in a terrible business.”
Instead of cutting prices, consider other ways to offer value. Offer extended returns or warranties, free shipping or loyalty points, and communicate these benefits well to customers to justify your price.
But if you really need to attract price-conscious customers, offer bundles rather than an item discount. This way, you can promote your other products and services or move stagnant inventory while avoiding across-the-board price cuts.
- Pivot the Business
Pivoting, or changing the direction of your business, can be a painful decision for entrepreneurs. But if things look bleak, it could be a life-saving decision for your business.
For example, many e-commerce entrepreneurs have made a killing using the drop-shipping business model. Drop shippers can keep operating costs low usually by not dealing with inventory and logistics. However, this may not be the case during a recession.
Without direct control at the warehouse, any disruption to the supply chain can easily hurt shippers, who are forced to appease customers when they are actually at the mercy of their suppliers.
Exchange rates can seriously affect the price of goods. Traffic will probably be affected as well. Both usually result in volatile prices and long lead times. Drop shippers would have very little control over these circumstances and could end up with unhappy customers.
In anticipation of these changes, such businesses may reassess their model and move to one that is better able to deliver value to customers. Drop shippers can move towards a more conventional retail e-commerce business where the business acquires, stores and handles inventory. This action may require more capital – and labor – but it provides control and minimizes the uncertainties associated with the drop-shipping model.
From resilience to success
Building business resilience is essential in tough times. Making some sacrifices and in some ways tightening the belt should help overcome the negative effects of the recession. It is important that the business sustains itself so that it can survive another day.
Despite all this gloomy talk, the recession is ending. Surviving a recession should put you in a better position to thrive in a better economic environment. On the other hand, e-commerce penetration continues to grow globally. It is expected that customers will continue to prefer to buy goods online.
If the trend holds, opportunities in your market, niche or location may emerge despite challenging times. A recession can even provide a chance for tremendous growth. Preparing well in advance can put you in the best position to take advantage of such opportunities to prosper.