The e-commerce supply chain is a complex multi-step process, with each stage being as important as the next. From the production of the raw materials and the manufacturing of finished goods, through to transportation, storage costs and delivery to the end-user, getting the goods to their final customer can be a surprisingly lengthy and extremely involved task.
Unfortunately, one of the downsides of such a lengthy supply chain means that when costs are rising, this can mean every part of the chain can cost more to navigate. With so many steps, this means more potential opportunity for increased costs.
Being able to adapt your business model to be able to thrive during these challenging economic times is vital for the long-term viability of an e-commerce business.
Here are some ways to help your e-commerce business navigate these rising costs:
Pass on the costs to customers
While it may seem a simple solution to pass these increases onto customers, it’s not always that easy for companies to raise their prices without threatening the ongoing viability of the business. If you’re operating within a discretionary market in particular, customers will often have a limit as to what they’re prepared to pay for your product before they decide to go without. Even though your costs to supply the product have risen, this doesn’t mean that consumers are happy to pay the increased price. While increasing prices comes with a risk – that of potentially losing customers – there are also huge risks in failing to increase prices. Absorbing all of the increases yourself is a tactic that can see margins become wafer thin, something which can easily see previously successful businesses finding themselves unable to turn a profit in such a challenging and competitive marketplace.
Negotiate with suppliers
If you can’t pass the costs fully onto customers, you may need to target the other end of the supply chain in order to bring your business back to a place of profitability. Just as your customers have a limit as to what they’re willing to pay for your product, remember that you’re a valuable customer of your suppliers too and therefore you do hold negotiating power. While your supplier may be reluctant to give you an automatic discount on your purchases, you may be able to shave something off your costs if you’re willing to commit to purchasing more, sign yourself into a contract, or offer more favourable payment terms. If your supplier is unwilling to negotiate, don’t be afraid to shop around and see if you can source the product cheaper; if it is a challenging marketplace for you, the chances are your suppliers are feeling the pinch too and will be just as reluctant to lose a valuable and reliable customer as you are.
Reduce unnecessary costs
Increasing the efficiency of your business model can help to highlight unproductive areas and allow funds to be diverted to more profitable areas of your operations. This may involve reducing your product offering or changing your shipping and returns policy. This is also a great time to take a fresh look at your current processes and procedures; investing in automation or an improved order fulfilment process for example, could allow you to scale your output far beyond what you’re currently capable of producing. Increased volume of sales may allow you to lower your profit margins while minimising the impact on your overall bottom line.
Consider cash flow funding
Caution should be taken if you foresee your current supply chain problems continuing for the long-term without having a plan in place to overcome these. Overburdening an already highly leveraged business with additional debt is only going to make a bad situation worse; however, as a temporary measure, while you work on repricing your products and cutting supply chain costs, injecting new capital can help your business bridge a temporary cash flow problem during this transitionary period.
Communication is key
Don’t wait until the last minute before springing a price hike on your customers; let them know in advance that changes are going to have to be made and explain the reasons behind this. If customers can see your decision is motivated by necessity rather than greed, they’re much more likely to be sympathetic to your approach.
Remain professional and sympathetic
When dealing with suppliers, remain cordial and open to negotiation; remember, both parties are likely to be in a similar position when it comes to wanting to retain customers while also having to deal with rising operating costs. While they may be open to reducing costs, the level to which you may wish this to be done may simply not be feasible depending on the financial and operational position of the supplier in question.
In reality, you may find the solution is a combination of all or some of the above options. While you may be able to increase your prices, passing on the full cost to customers may not be possible without being able to shave something off your supplier costs too. Meeting halfway is likely to be an easier pill to swallow by customers and suppliers alike rather than expecting them to bear the full brunt of your increases.
While these are certainly challenging times, keeping a close eye on your supply chain and acting quickly to remove any unnecessary costs or knowing when to consider implementing a price hike, could help your business better weather the storm.
Chris Bristow is a business debt expert at Real Business Rescue, company rescue, restructuring and liquidation specialists with a wealth of experience in supporting company directors in financial difficulty.
