You’d probably be forgiven by most people for thinking that inflation only impacts bricks and mortar stores. While it appears that this used to be the case, inflation has now made its way into the world of e-commerce and, as an e-commerce business owner, you need to be aware of what that means for you.
Inflation has been a buzzword for a while now and many business owners often state it as the reason for increased prices. However, unless you fully understand what inflation means for your e-commerce business, it can be difficult to plan for it and work out ways to counteract its effects.
It’s worth thinking about inflation as it’s something that is seemingly unavoidable in the modern world. Anything related to the financial state of your business should be high on your priority list. Now it’s become apparent that e-commerce businesses are no longer safe from the effects of inflation, the best course of action seems to be knowing what to expect and making a plan of action based on what could happen if your business gets hit.
What is Inflation in E-commerce?
In basic terms, inflation is when the cost of items increase over time. Up until fairly recently, the e-commerce industry was experiencing the opposite of inflation, as prices were continually going down rather than up. This deflation phase has now come to an abrupt halt and the upward trend of inflation has come into play in quite a forceful way.
Between 2015 and 2019, online prices reduced by a little under 4% each year. That has changed now though, as of July 2021, online prices were up 3.1 percent compared to previous years. This caught some e-commerce businesses off-guard as, up until that point, they seemed to have been protected from the inflation that other businesses were having to deal with.
E-commerce business owners are now coming to terms with the fact that, if things continue as they are for an extended period of time, it will become much more difficult to offer competitive prices. If a business can’t remain competitive then there is always the risk of the business failing.
What is Causing Inflation in the E-commerce Industry?
There are actually quite a few factors that seem to be causing inflation in the e-commerce industry. While it would be much easier for businesses to adapt if it was just one reason, unfortunately, to effectively deal with e-commerce inflation, you will likely have to consider multiple factors, each one requiring different approaches to counteract.
The first factor is a disturbance in the supply and demand balance. This effectively means that, as more people are now shopping online than ever before, the suppliers of products have struggled to keep up with the demand placed on them.
Let’s take an e-commerce business that sells lamps as an example. If more people visit the website and lamp sales increase quite drastically, the business will need to order more stock from its suppliers. This adds pressure to the suppliers as they may not have been prepared for such an uptake in demand.
It would only take a few similar businesses to also place bigger orders than they usually would for the suppliers to get overwhelmed and run out of materials or have insufficient staffing to cover the orders. As the lamps then become harder to get hold of (more rare), their value increases and the price of each one goes up.
Another factor that seems to be playing a big role in e-commerce inflation is the cost of sea freight. Around 90% of all traded goods are transported by sea so an increase in the cost of shipping goods from suppliers to businesses can quickly increase prices.
One of the reasons for the increase in sea freight costs is the lack of availability of containers. While this may seem like an odd occurrence, it only takes a few ships to get delayed or to get caught up in a port somewhere for containers to become more sought-after. At this point, the price of each container goes up resulting in price increases throughout the supply chain.
What Effect Does E-commerce Inflation Have on Online Stores?
One of the main effects e-commerce inflation can have on online stores is that the cost of running one will keep increasing. If we think of the e-commerce lamp business again – each lamp the business buys from its supplier might cost $5. The lamp business then sells each lamp to customers for $10 so they make $5 on each sale not taking into account shipping costs and other expenses.
If the supplier of the lamps increases their prices to $7 per lamp, the e-commerce business is then only making $3 per sale without shipping and expenses taken into account. This can quickly add up to some fairly big issues for the business owner as the financial state of the business might not be strong enough to deal with increases like this.
Another seemingly unexpected effect that e-commerce inflation could have is that it could potentially cause consumers to reduce their online shopping habits and instead, return to bricks-and-mortar stores. It wasn’t long ago that seemed like an unfeasible outcome but, if e-commerce inflation continues, there could be big changes in consumer habits.
What Can Online Businesses Do About E-commerce Inflation?
Now you’re more aware of the effects of inflation on your e-commerce business, you might now be thinking about ways you can minimize the impact they have. There are actually a few things you can do which might help your business continue to succeed during this period of inflation.
The first thing you can do is raise your prices to offset the additional costs incurred by your business. This seems like an obvious thing to do if the cost of buying stock increases, then the price you ultimately sell your products for will have to go up too. The issue with this is that customers might be used to paying a lower price for the products they buy from you so they go elsewhere if your business no longer seems competitive. In this case, you can either take on the additional costs yourself and reduce the amount of profit you make on each sale, or you can put your prices up and hope that your customers understand why you are doing so.
One thing to keep in mind with raising prices is that, if you are using similar suppliers to your competitors, the chances are they will have to raise their prices too. If that happens, you could still be very competitive and the price increase might not impact your business as much as you initially thought.
If you’re in a position to do so, you might also consider holding more stock than you need. This can be useful if supplier issues cause an increase in prices or longer delivery times. If you have some emergency stock of popular items, your business could be in a very powerful position. As your competitors run out of stock, your backup supply can keep you running while you await the next delivery from your suppliers.
Another option to consider is to see if there are suppliers more local to your business. While this may incur a greater cost per unit bought, it can save a huge amount of money on shipping as well as reducing waiting times for delivery of your stock. Working with local suppliers also gives you much more control over the entire ordering process which can have very positive effects on your business.
