Talks of a possible global recession coming in the next months have been abounding lately. Even if it’s not yet certain, the threat of a downturn is something that e-commerce business owners should prepare for.
In a recession, prices can soar. Supply chains can be disrupted. Customers will be buying less. How these would specifically affect your business can vary depending on the nature and niche your business operates.
The 2008 recession should serve as a warning to entrepreneurs. Small businesses struggled during this period, with many ending up shuttering their doors. As such, it’s important to strategize for sustainability in a harsher business environment.
Here are five ways to sustain an e-commerce business during a recession.
1. Prepare Cash Reserves
Having ready cash on hand provides the agility and flexibility to spend or invest when needed. But not all startups come with a stout war chest. Typically, this is where funding can come in.
“Funding isn’t just a hurdle at the start of an e-commerce business plan. Once your shop 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 funding firm 8fig.
A recession can compound this need. For instance, inventory and fulfillment costs typically rise during a downturn. Having extra cash can help absorb these price bumps readily.
The most straightforward way to shield a business against this is by saving to build up capital. Instead of spending profits on non-essentials, think about investing the money back into the business. Another idea is to sell some assets like machinery or equipment that may not be critical to operations at the moment. You can always repurchase them after things bounce back. Liquidate while you can.
Lastly, if external financing from investors or funding firms is available, consider those as long as you’re clear with the terms.
2. Adapt to Customers’ Needs
The pandemic emphasized how quickly businesses should adapt to the changes in customers’ buying behaviors and preferences. The lockdowns hit brick-and-mortar businesses hard. While many businesses failed to adjust, the ones that survived were the ones that were able to pivot quickly. Some changes were even quick to implement. For example, offering delivery services and curbside pickup options and accommodating digital payments.
“[T]he most adaptable marketers don’t do different things; they do things differently. In particular, they listen differently and they plan differently,” says Cassandra Nordlund, Director, Advisory, Gartner.
The same need for adaptability is true for e-commerce businesses. Put on your marketer’s hat and keep a close ear to what your customers are saying. Reach out and talk to them. Create a survey of what they would likely do or buy should the downturn happen. This should help to plan ahead.
For instance, a recession may compel customers to become more price-conscious. If you’re in retail, you can tweak your catalog to feature and stock up on more budget items than luxury ones.
3. Become Lean and Mean in Operations
Aside from raising capital, you can also improve your finances by managing cash flow more carefully. Wasteful spending will chew away at your margins and capital.
It’s critical to streamline and optimize operations before the crunch hits. Review your business costs and see which areas you can trim. Some common sources of wasteful spending are uncontrolled use of office supplies, unnecessary technology (equipment and subscriptions), and unproductive workers. When making cuts, focus on these costs.
Keep in mind, however, that while you may be tempted to restrict spending entirely, this may become counterproductive. For instance, you may try to do away with some of the digital tools and subscriptions that you use to manage operational tasks. But if cutting them will seriously impact efficiency, it may be a bad idea to do so. Dive into the details to see how each line item benefits you before deciding whether to cut or retain it.
Remember that not all spending is bad. Opportunities may also arise even during turbulent times. Sudden market demand might make offering a new product or service profitable. If such changes do come up, consider taking the calculated risk. This is where having cash reserves also comes in handy.
4. Explore Ways To Deliver Added Value
Even with preparation, many e-commerce firms will likely still feel the brunt of a recession. A drop in sales can and should be expected as customers also tighten their purse strings.
When this happens, a common knee-jerk reaction for businesses is to compromise on price by offering discounts and price-cut promotions to boost sales. However, be mindful that slashing prices can hurt margins and financial flexibility.
Warren Buffet once said about pricing, “If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.”
Instead of slashing prices, consider other ways to offer value. Offer extended return windows or guarantees, free shipping, or loyalty points, and communicate these perks well to customers to justify your price.
But if you really need to attract the price-conscious, offer bundles rather than discounting per item. This way, you can promote your other products and services or move stagnant inventory while avoiding across-the-board price cuts.
5. Pivot the Business
Pivoting, or changing the direction of your business, can be a painful decision for entrepreneurs. But if things are looking grim, it may be a life-saving decision for your business.
For instance, many e-commerce entrepreneurs have made a killing using the drop-shipping business model. Drop shippers can keep operational costs down typically by not handling inventory and logistics. During a recession, however, this might not hold true.
Without having a direct handle on stock, any supply chain disruption can easily stump drop shippers who are forced to reassure customers when, in reality, they are at the mercy of their suppliers.
Foreign exchange rates can seriously impact the cost of goods. Transportation also will likely be affected. Both typically result in erratic prices and lengthy fulfillment times. Drop shippers would have very little control over these circumstances and could end up with dissatisfied customers.
Anticipating these changes, such businesses can reconsider their model and shift to one that will be more capable of delivering value to customers. Drop shippers can move toward more conventional retail e-commerce where the business acquires, stores, and handles stock. This action may require more capital — and work — but provides control and minimizes uncertainties involved in the drop-shipping model.
From Sustenance to Success
Building business resilience is critical during tough times. Making some sacrifices and tightening the belt in some respects should help weather the negative effects of a recession. What’s important is for a business to sustain itself so that it can live to fight another day.
Despite all this gloomy talk, recessions do end. Surviving a recession should put you in a better position to prosper in a better economic environment. Also, on the upside, e-commerce penetration is still seen to continue its rise globally. Shoppers are expected to continue preferring buying goods online.
Should the trend hold, opportunities in your market, niche, or locality can emerge despite the challenging times. A recession may even provide a chance for tremendous growth. Preparing well in advance can put you in a prime position to jump on such opportunities to thrive.