How to Navigate Inflation and Recession in Q4
As is becoming normal since 2020, everything looks different heading into this year’s busy retail season. This year we’re facing record inflation and likely recession. 2022 has not been a stellar year for many in the eCommerce space when compared to the past year or two. Understand that comparing this year to periods where the world was operating in a pandemic lockdown isn’t necessarily a viable comparison. So don’t be too hard on yourself if things aren’t as strong as before. However, don’t bury your head in the sand either, because now is the time to actively manage the new and different challenges of a retracting economy. Let’s dive into some strategies for how you can make the most of these current challenges and possibly even grow profitably in Q4.
As many of you know, I’m all about profits and managing your cash. So it’s no surprise that when we talk about inflation, we’re going to be talking about how to ensure that we have plenty of cash to weather these periods of increased costs.
Let’s look at the top of the P&L statement and consider your revenue. Do you have your pricing dialed in, is there room for you to raise prices? A recent study I read indicated that 85% of the retailers in the study had experienced price increases from their suppliers, but only 71% had increased prices for their customers. The pricing landscape is different right now, so be sure you’re testing prices in this new environment.
Also, are all your products performing? Do you have products that are not moving quickly? Then don’t just reorder without considering the implications of losing access to that cash while that product sits in a warehouse. Your cash is best served when it buys inventory that will generate more cash for you quickly, especially during times of inflation.
Understand that not all products generate the same profits. Make sure you’re investing your cash in products that are producing a gross margin around 30% or more.
When you look at the gross margin of a product, take it one step further and also evaluate the costs of advertising for that product. We’re seeing advertising rates increase for our clients and the revenue does not always grow at the same or greater rate as the ad spend.
To do a quick evaluation of how your advertising dollars are working for you, divide your total revenue by your total advertising spend month by month for a few months. This is called your media efficiency ratio. Compare each month’s results. Can you observe a trend?
It’s easy to overspend on advertising when all your margin (profits and cash) leaves your business and goes to ads. Advertising today is not a set it and forget it, one size fits all scenario. You need to customize your advertising by product considering your margins and your inventory stock and ability to replenish. Advertising is a lever, like the accelerator on your car. You will be adjusting the gas based on your surroundings.
Finally on the revenue side, take a look at your ability to offer subscriptions. I know it’s customary to think that you’re in the product business, but I recently read that the automotive industry is considering making some features, like heated seats, etc., available on a subscription basis. The ability to use the feature is based on you paying the subscription for the month. Perhaps you are already using Sirius XM on your car radio, which is a subscription.
As they say, the future is now! Repeat business from the same customer is certainly appealing as you don’t have to incur the cost of acquiring the customer over again. Are subscriptions an option for you?
Let’s also consider the Expense section of our P&L statement. Can you find ways to improve your Cost of Goods Sold? What options do you have to improve the costs from your suppliers? Are there options to keep more of your cash on hand? Is it best to buy more product to secure better pricing or is your situation improved by negotiating a lower minimum order quantity and keeping access to cash?
As for your operating expenses, the days of cheap money are gone for now, so my first suggestion is to take a look at your debt. If you have any high interest credit cards that carry balances, look for ways to get that balance on a lower interest rate loan. Interest can erode your net profit margins quickly!
Pay particular attention to all your recurring costs right now and ways to reduce them. Of course, do the usual exercise of reviewing your last three months of expenses and consider what you can cut or reduce. This is a best practice each quarter no matter the state of the economy, and it’s easily done, even if you don’t have an accounting system.
Simply look at your bank statements and credit card statements. Then follow through and cancel the subscriptions. Execution of this step is critical, and it’s sad to say I’ve had clients do all the hard work of the analysis and not pull the trigger.
Here are a few other things to consider for reducing costs.
-Are your shipments as full as possible?
-Can you take some of the prepping back in-house?
-Are you getting the best deals on freight?
-Is your advertising dialed in and in sync with your inventory? It makes no sense to promote sales and spend advertising dollars for a product that you are close to running out of stock.
-Can you use gift cards or points to buy supplies?
Recessions are a time when many companies struggle and yet others seem to thrive. The key to this is staying focused and making all decisions with the goal of preserving your cash. Those that are focused on Profit First are already in a position to weather the storm because they have a cash reserve in their Profit Account. If you are not using Profit First in your business currently, consider starting now because the system itself provides the right focus for these times of inflation.
If you’re ready to start Profit First, or just need help keeping an eCommerce business afloat in this economy, the bookskeep team has what you need! Reach out today!