Although eCommerce has not seen a considerable inflation season over the course of its history, things changed after 2020 with the pandemic outbreak. According to research, eCommerce sales increased by 43% in the first year of the pandemic. In addition, as consumers’ buying behavior changed from offline to online shopping, inflation’s impact on eCommerce business was significantly noticed.
According to research, in 2022, inflation has increased rapidly and severely. For example, in June, the inflation rate grew to 9.1 %, which is the biggest year-over-year jump after 1981. Furthermore, research by Jungle Scout has revealed that 8% of consumers have expressed that their household income is quite unstable, and 34% have said that they rely on unemployment benefits and other financial assistance. In addition, the household income of 13% of consumers decreased in the first half of 2022.
Hence, the eCommerce industry has been significantly impacted by inflation. Continue reading to know more about how inflation has impacted the eCommerce market, what challenges have been created and how businesses can cope with this situation.
What is eCommerce inflation?
The growth rate in the cost of commodities and raw materials over a specific period is known as inflation. Particularly, in eCommerce, inflation refers to the increase in prices of different elements of the eCommerce supply chain, like fulfillment, manufacturing, storage, and transportation, as well as a rise in the cost of raw materials.
In an economy where high inflation is rapidly growing, consumers become more conscious of their purchasing behavior. As a result, they spend more on essential goods and less on luxury products. This change in buying behavior directly impacts eCommerce retailers, particularly those who provide luxury products.
What are the factors that led to inflation?
There are various causes of rising inflation in the present scenario. But the major two are listed below:-
1. Supply chain disruption
We are still dealing with the consequences of the COVID-19 limitations. According to research conducted by Bloomb, products take an average of 100 days to arrive in the United States from Asia’s warehouses. In addition, significant product shortages are being brought on by the more than twofold increase in ocean freight schedule slippage. Raw resources, intermediate-produced items, and freight transportation impacted the worst backlog.
2. Imbalance in Supply and Demand
According to a McKinsey analysis, consumers in the United States now have almost $2.8 trillion more savings than they had before the outbreak, which they wanted to spend immediately.
Since pandemic limitations eliminated in-person interactions, customers switched to online shopping, increasing demand. But the restrictions on business operations made it challenging for factories and warehouses to run at full capacity. As a result, increased internet shopping drove up demand, placing significant pressure on supply.
Hence, this resulted in high prices of the goods as companies could not meet the demand. And as the prices of the products remained high, the government raised salaries to keep up with the growing expenses of goods and services. In addition to government cash injections, the rise in consumer purchasing power hastened the currency’s depreciation. As a result, costs for everything, including food and fuel, increased.
Impact of inflation on eCommerce
Inflation has badly affected eCommerce retailers in the followings ways:
1. Lowered sales for eCommerce
With the effects of the supply chain on freight rates and product availability, there are new issues and developments that the eCommerce market faces. Research suggests that American online shoppers spent $5.28 billion less in April 2022 than in March 2022. Consumers are becoming more cautious and attentive about their spending as prices rise. Therefore, although online merchants of groceries may see a pointless drop in traffic and sales, those of luxury and non-essential items risk losing money.
2. Buy Now, Pay Later option
In today’s era, a new payment method has come up: “Buy Now, Pay Later.” This has become a more flexible, transparent, and prevalent alternative to credit card payments. Research has shown that approximately 60% of online shoppers think inflation makes them more inclined to use this payment mode. Hence, this method has challenged online shoppers to offer their products on an installment payment basis. Sellers who do not want to opt for such payment methods are also forced to adopt them to survive in the market.
3. Higher product pricing
Businesses are forced to either lose profit or pass on higher manufacturing and transportation expenses to customers through higher product pricing. Many businesses, particularly publicly traded ones with fiduciary obligations to shareholders, decide to raise their prices in the firm’s interest.
Online merchants struggle to keep expenses down while other fees like delivery charges and taxes are also rising. As a result, E-commerce businesses need strategies and brainstorming ideas to determine how much discount they can give and still earn profit from the product. But this challenge makes it difficult to reduce the cost to outperform their rivals, resulting in lower profit margins for the sellers.
Must Read – Google Ads vs. Amazon Ads: Which is Better?
How can the eCommerce industry cope with inflation?
1. Strategize price increase
Price hikes may be hard, and if done poorly, they could also damage customer confidence in your business. Consider limiting your approach to certain consumers and product segments depending on product category margin performance and customer price sensitivity instead of broad product price hikes across all categories.
Changing the cost of “background” goods that won’t impact your brand’s core value proposition is crucial in this situation. This will not only help you earn profitability, but it will help you to maintain client satisfaction and your brand’s reputation.
2. Keep a close look at the competition.
When there is inflation, there may be severe rivalry. Consumer fluctuation is higher in such a scenario where customers can prefer other businesses over yours if they offer a slightly lower price with the same quality. Research suggests that most U.S. consumers cited price as their primary reason for switching products and shops in 2022. So it’s critical to regularly track your rivals’ prices and marketing tactics.
3. Offer rewards and incentives.
Increasing sales is one simple strategy for e-commerce merchants to combat inflation. To achieve that, companies should consider compelling more customers to buy the product by providing them incentives and rewards. Consumers concerned with saving money will choose the seller offering incentives like cash back or reward points when they have to choose from one of the available alternatives.
4. Managing cash flow
Running out of money is one of the key causes of business failure. Cash flow issues may rapidly get out of hand under inflationary conditions when suppliers and customers increase prices and shorten payment periods. Due to inflation, eCommerce companies need to concentrate on managing cash flow. Ecommerce businesses may level out financial peaks and troughs, ensure there are funds available to meet expenses, and be prepared to take advantage of chances to acquire supplies at competitive rates by anticipating future cash flows and planning supplementary funding streams.
5. Adopt ‘Buy Now Pay Later’ payment method
According to PayPal research, 31% of U.S. sellers who offer installment payment options for purchasing their products and services are experiencing increased sales. Furthermore, the research revealed that 80% of the customers purchase from sellers with the BNPL payment option.
So the BNPL payment method is a win-win situation for the business as well as for the consumer. Businesses should include more than one installment payment option in their checkout to give their consumers more assurance to make a purchase.
However, most experts believe that inflation will continue in the coming years. Hence, eCommerce companies will need to modify their business practices to reflect the growing costs of the larger global economy. Businesses should be aware of the challenges given above and adopt the strategies according to their business needs. Though inflation has created many challenges, sellers can take it up as an opportunity to bring about necessary changes in their business to survive the market and outperform others with proper implementation of the strategies.
Guest article written by: Sophie Hayes is an eCommerce consultant and a keen blogger. She holds eleven years of experience in SEO, eCommerce PPC, online website, marketplace store optimization, and performance management. She is currently engaged with Team4eCom in the USA. She has written articles and contributed posts to several websites. Her most-written niche includes eCommerce store setup, SEO, social media marketing, listing optimization, marketplace-specific content like Amazon Listing Optimisation Services and marketing, eBay account management and Walmart marketing.