Think back to the most recent experience you had shopping online and you’ll likely have seen inflation in action.
Prices have gone up on virtually everything, which has been a pattern since last year. In fact, the Adobe Digital Economy Index found that e-commerce prices as of July 2021 were up 3.1% year-over-year. Conversely, before the pandemic, prices were declining at a rate of 3.9% YoY from 2015 to 2019.
More recently, the U.S. Bureau of Labor Statistics reported last month that the national inflation rate in April was up 8.3% over the previous 12 months. This was only a small drop-down from 8.5% reported in March (a 41-year high).
What does this mean for your online business? Understanding the effects of inflation on e-commerce should allow you to make more strategic decisions for your business moving forward such as knowing how much to charge customers for shipping and how to shape your overall pricing strategy.
What is Inflation In E-commerce?
To put it plainly, inflation is the rate of increase in the price of goods and raw materials over the course of a given period. E-commerce inflation, in particular, refers to the increased prices in different parts of the e-commerce supply chain. This applies to the increased cost of raw materials, production, storage, fulfillment, and shipping.
What Caused E-commerce Inflation To Rise?
The overarching reason for the rise in inflation is due to the disruption the Covid-19 pandemic had on the global supply chain. The lockdowns put in place meant manufacturing facilities, warehouses, and businesses across the world were all closed down. Safety concerns during this period created a notable gap in the manpower needed to move supplies and produce goods.
At the same time, those lockdowns and safety measures incentivized stronger online adoption, which caused a situation where demand outweighed supply. Anytime that happens, prices rise.
Fewer Cargo Ships
Digging a little deeper into why there’s been such diminished supply, we can first point to the limited number of cargo containers available. During the early part of the pandemic, those containers were used for shipping items such as masks, hand sanitizers, and other cleaning supplies to countries all over the world. But, many of these cargo containers were left in counties that didn’t need them, creating ports full of abandoned, empty containers that were no longer part of the regular rotation of containers transporting goods to major markets like the U.S. and Europe.
Sea Port Blockage
Beyond the containers themselves, getting goods and raw materials off these transport ships and into trucks posed an additional logistical problem. The lack of portmen meant it would take longer to unload ships and the increased demand for products meant more ships at the port, which further compounded the issue.
On top of this, many in the trucking industry left their jobs during the pandemic for a number of reasons such as low pay, working a dangerous amount of hours, and having no benefits, to say the least. With fewer licensed truckers available to transport goods from seaports to warehouses, businesses were slower to replenish inventory.
There are more factors that contributed to the supply chain disruption, but ultimately, it’s been harder and more expensive to operate an e-commerce business than it was 18 months ago.
How Are E-commerce Businesses Affected by Inflation
With prices rising on all fronts for both consumers and businesses, there is ample concern about the negative effects it could have on certain e-commerce retailers.
According to JungleScout’s Q1 2022 Consumer Trends Report, which surveyed 1,000 consumers, 72% of respondents claimed they are spending less money or cutting out on “fun” or “impulse” purchases. On top of that, 34% of consumers are spending less online and 47% choose to shop at their favorite brand because of its affordability.
These consumer responses line up with recent data published by Salesforce Commerce Cloud, which showed online order volume in the month of February 2022 declined 11% when compared to February of the previous year. When looking at those same timeframes, prices for consumers went up 11.2%.
Higher prices mean consumers are more conscientious of the products they buy. In times of high inflation, consumers typically spend less on luxury items and more on essential goods. This could directly affect e-commerce retailers that specialize in high-end products.
However, even with inflation on the rise and spending going down, online retailers still saw average revenue growth of 6% year-over-year. There are several ways in which these businesses have been able to combat inflation.
Ways to Combat E-commerce Inflation
While there is no one answer for all online retailers, there are a few different ways in which you can still make a profit despite the rising cost of operations.
Raise The Price Of Your Products
This may sound simple, but it can be a bit more nuanced depending on what you’re selling. If your brand specializes in affordability, it can be harder to justify raising your prices without running the risk of customer churn. However, the alternate all but guarantees you’ll see your profit margins shrink.
On top of that, if you’re the only business in your space that doesn’t raise prices it could mean customers flock to your store and buy all your inventory faster than you can replenish it. This opens an opportunity for your competitors to sell with an increased profit margin while you’ll be stuck without inventory.
What will most likely happen is that your competitors will raise prices and you’ll be forced to do the same. Instead of competing on price alone, focus on positioning your brand as a leader in other ways to attract customers. Consider creating loyalty programs and discounts for those customers so that you can still compete on price but only after repeat business from customers buying at higher prices.
You can also craft shipping pricing models to incentivize customers to make purchases as well.
Order in Bulk to Keep a Safety Stock
With so many products and raw materials suffering from shortages, you’ll want to be sure that your business doesn’t run into a situation in which you run out of inventory and have to wait an extended period of time to restock.
In other words, if you’re in a position to buy extra inventory and keep a safety stock you should strongly consider it.
Depending on your manufacturer or the warehouse you store inventory, you may be able to negotiate a discount on those items. That cost savings could go back to the customer, allowing you to sell at a cheaper price without having to worry about selling out too fast.
The additional stock also gives you more selling power in the event your competitors run out of inventory before you do.
Find Domestic Low-Cost Suppliers
In recent years, importing products or goods from other countries has been cheaper than sourcing those same products or goods domestically. But, with issues at major seaports in the US, along with rising costs of labor in the countries of origin and fuel costs increasing the price of transportation, it may be worth looking into finding a domestic supplier to supplement existing partnerships.
By working with a low-cost domestic supplier you’ll be able to restock quicker, spend less on transportation of goods, and possibly command greater control over the production process of your items as well.
Working with domestic suppliers can also be used as a brand play to attract more U.S.-based customers interested in supporting products “made in America”.
Current Outlook Of U.S. Inflation
Currently, economic experts struggle to see the light at the end of the tunnel. Some believe that U.S. inflation will last longer than the pandemic, and could be here for the foreseeable future.
The federal government is taking action to stave off the rising inflation by increasing interest rates among other strategies. Its target is to reach a 2% inflation rate YoY. Former Vice President of the Federal Reserve Bank and Economist, Robert Triest, remains optimistic that the U.S. can reach this goal stating “the economy is starting from a position of strength” and noting that the current unemployment rate has remained steady at 3.6%.
However, most economists agree that inflation will have an effect on the economy for at least the near future. With that in mind, e-commerce businesses will need to adjust their operations to match the rising prices of the greater global economy.