Official thinking is that the economy will likely experience a recession in mid-2023. So, how can you protect your eCommerce business with a recession looming?
The National Bureau of Economic Research defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.” Another common definition is “two consecutive quarters of negative gross domestic product (GDP).”
This article will show you how to review eCommerce performance and implement recession-proof strategies to help you survive and thrive during challenging times.
The impact of recession on eCommerce businesses
The past year saw a steep rise in inflation, with higher prices on everything from fuel to food. This has already led to a drop in consumer spending, as shoppers find they have less disposable income.
It also means higher costs for warehouse operations and shipping, while your suppliers and manufacturers will have increased their prices. B2B customers may be slower to make payments, and you’ve now got less cash in the coffers to see you through the looming recession.
Declines in consumer demand, employment, and economic output characterize a recession. During this time, spending will slow even further as consumers try to save money and focus on buying essential products rather than luxuries, potentially leaving you with a glut of unsold inventory.
When your business is tightening its belt, the marketing budget is often an early casualty. But without spending on ads, you won’t reach as many people. That translates into less traffic to your website and a smaller group of potential customers to convert—and a further drop in sales.
Factors affecting eCommerce performance during a recession
Consumer behavior changes
In a recession, shoppers typically look for cheaper options and bargains, and their perceptions of value-for-money will change. They may still browse your website but fail to make a purchase—or abandon their cart if the shipping fees or taxes are higher than expected.
Consumers will focus on brands they know and trust rather than buying from an unknown business. 82% of shoppers who said they’re spending less still buy from their favorite brands. They want to support companies that have always provided a good experience.
It’s up to you to adjust to customers’ changing needs. When people align their spending with their values and priorities, it’s more important than ever to know your audience well and keep track of behavioral changes.
eCommerce enjoyed a huge boom during the pandemic, but the market is no longer growing exponentially. It’s true that people have gotten used to doing most of their spending online, and that’s not likely to change. But growth has slowed—and in a recession, they’ll spend even less.
In a time of economic uncertainty, making informed decisions is harder. Should you keep spending on inventory to avoid stockouts or carry less stock to avoid being left with unsold goods? Should you cut the marketing budget or continue advertising to attract more customers?
Pricing is also a minefield during a recession. Customers want lower prices, but you’d prefer to raise them to maintain revenue. You don’t want to damage your reputation by going too far in either direction.
Competitor landscape changes
eCommerce is already highly competitive and a recession can make it even more so. Countless companies operate in the same market, trying hard to maintain sales. Plus, during the pandemic growth we mentioned earlier, eCommerce witnessed several new players and investments, making the market more crowded.
It’s always important to conduct an analysis to gain a competitive advantage, but should you copy their strategies? For instance, they might drop their prices to attract customers. But if you do likewise, you risk a price war—and when the recession ends, you could upset customers with a sudden return to pre-recession prices.
Government policies and regulations
The Federal Reserve has a dual mandate from Congress to maintain price stability in the US economy. It started hiking interest rates in March 2022 in an attempt to combat rising inflation. But some suggest that continued increases will actually tip the economy into recession.
In an official recession, the Fed is likely to cut interest rates to encourage borrowing and allow consumers to make more purchases on credit. This has a knock-on effect throughout the economy. The Fed may also try quantitative easing (QE), which is the direct purchase of assets to inject more money into the economy.
The government may introduce fiscal policies to help fight a recession, such as lowering taxes and increasing federal spending. Deregulation is sometimes used to stimulate economic activity by reducing restrictions on new businesses entering the market and increasing competition.
How to thrive in the midst of a recession
Review business successes and failures
When times are tight, you need to make sure that you’re maximizing every cent spent on your business. That means reviewing your performance and identifying ways to improve. Your business systems will give you the data you need, from Customer Relationship Management (CRM) tools to Enterprise Resource Planning (ERP) software.
What is ERP? Think of it as an all-encompassing platform that offers you real-time insights into your business. It connects various data points across the company, from accounting to inventory management. When reviewing your business, it’s a reliable way to identify areas for improvement, helping you make cost-effective decisions to implement during a recession and in the future.
Points to consider when analyzing your business’ successes include:
- What are your current successes?
- Which products always sell well?
- Which sales and marketing channels work best?
- Consider your repeat customers—what are you doing right?
Once you have the answers, you can invest in areas that you know will generate revenue.
You also need to look at your failures and figure out how to fix them. Did you experience stockouts? Did customers complain about late delivery? A customer-first approach is vital for eCommerce during a recession, so ask for feedback and use it wisely. You can also benchmark your performance against competitors.
Diversify revenue streams
It’s best not to keep all your eggs in one basket when the economic outlook is uncertain. Diversifying your revenue streams is an excellent way of protecting your eCommerce business—but that doesn’t have to mean expanding your product offering (as we’ll explore in the next section).
Instead, you could add extra sales channels, attracting a wider audience for the same products. Social media is a valuable (and largely free) method of promotion. You can even branch into social commerce and enable customers to buy directly from Facebook or Instagram.
You might start selling subscription boxes (which ensure regular payments and predictable cash flow), work with influencers or affiliates, or form partnerships with other businesses to encourage cross-promotion. A customer loyalty program can also generate more revenue.
Focus on core products/services
Instead of launching new product lines, concentrate on what you already do well. Identify the products or services that bring consistent revenue and good customer reviews, and double down on them. These are your recession-proof products.
Maintaining the quality of your core offering is essential, so don’t cut corners on production or packaging for these products. You could also make improvements by adding an extra feature or two while saving money by dropping products or services that don’t perform as well.
Focus on the value of the core offering. Does the product beat the competition on quality or durability? Does it have more functionality? You need to communicate this to your customers. Instead of cutting prices, try offering perks like extended return windows, guarantees, or loyalty points.
Cut costs without compromising quality or service
When customers have less to spend, they want to make their dollars go further, which means choosing quality products and services that represent value for money. But how do you square that with your need to keep costs down?
One method is to boost productivity so that you can achieve more with fewer resources. Optimize your warehouse layout and ensure inventory is stored correctly to avoid breakages or spoilage.
Use technology to streamline processes, reduce expenses, and make smart decisions based on real-time data—this is one of the key benefits of cloud ERP system and other cloud-based tools.
If you order inventory more often and in smaller batches, you’re protected if demand changes or one shipment is delayed. This may also mean you can reduce overheads with a smaller warehouse, especially if you implement the JIT inventory method or use dropshipping for some items.
Finally, review your spending with suppliers and shipping carriers to see if you can renegotiate deals. You could also reduce shipping costs by using more economical packaging.
Strengthen online presence
If you haven’t already, establish a presence on all the major social media sites. You don’t have to use paid ads unless you want to, but you can build brand awareness. That way, you’ll be top-of-mind when the recession’s over and customers start spending again.
Even if most people are just browsing right now, it’s vital to provide a good experience on your eCommerce website. Carry out an audit to ensure your site is performing well in terms of page load speed and easy navigation, and it’s optimized for SEO. After all, a sleek website is no use if people can’t find it.
A strong website also means eliminating friction from the checkout process, with flexible payment and shipping options and pre-filled forms. Provide detailed product descriptions, transparent returns policies, and social proof that shows customers they can trust you.
Recessions are generally bad news for businesses, but there are plenty of ways to lessen the effects.
Make sure you’re prepared by maximizing efficiency and reducing costs wherever possible—without compromising quality. Stay agile by keeping track of changing customer needs and preferences. Double down on your core offering, focus on demonstrating value and trust, and maintain brand awareness so that customers know where to come when normality resumes.
It won’t be easy, but use this guide to manage your eCommerce business in a recession. With the right mindset and approach, you can weather the storm and emerge stronger than ever!