By Samir El-Sabini, Co-founder and CEO at Juni
To look to the future, we sometimes need to explore the past. During the last big recession, the ecommerce businesses that were most successful were those that cut costs through improving operational efficiency. In fact, according to McKinsey the top fifth of retailers increased their vital cash reserves during the last recession by 18%. With the UK recession currently running at 9.3% and on track to potentially hit 10% by the end of the year, it is important that ecommerce businesses start building up their cash reserves too.
Ensuring you hold cash and become as capital efficient as possible is done in a number of ways, namely:
· Reducing costs incurred across your supply chain
· Increasing the amount of revenue you receive per customer
· Accessing alternative streams of revenue through financing
Let’s look at each of these in more detail.
Focus on selling your most profitable products
The two largest expenses an ecommerce business faces are usually the cost of goods and marketing. Therefore, the easiest way to improve your finances is to consolidate all costs and revenues to work out which products are most profitable and act accordingly. This analysis should present several options, you can either increase marketing spend on your highest-grossing products, perhaps purchasing more ads or stock. Alternatively, you can cut back on less profitable products by holding less stock, or cutting the ad spend, or adopt a combination of the two. Either way, gathering a full picture of your company’s finances will be key to deciding which approach is best and where the most effort should be directed.
Similarly, make sure you are getting a good ROAS (return on ad spend) across your marketing. Surviving and growing during a downturn is all about balance, so, you need to have a clear understanding of all your key KPIs like ROAS, ROI, CAC, LTV, and gross margin. Whilst it can be challenging to work out which marketing channels are generating the best return, improving attribution can provide valuable intel to ensure you are only spending money in the right places.
Engage your existing community
Retaining customers is always far cheaper than acquiring new ones. A bird in the hand as it were. You’ll need to work hard, therefore, to ensure you remain engaged and foster your brand community. For example, one survey found that for over 50% of customers, feeling part of a brand-community is important in securing their loyalty. As well as ensuring that you know what motivates your customers, create incentives such as a referral scheme or free delivery for orders over a specified amount to get them to spend more each time. Remember, that the easiest way to increase revenue is to sell more to less and building out post-purchase funnels will be vital to maximising your customers’ lifetime value and ensuring the cash continues to roll.
How to access revenue faster
The quickest way to access cash from your sales is through financing. As well as the solutions above, many ecommerce businesses will fundraise to navigate the downturn. The challenge here however is choosing the most suitable option.
∙ Private Equity – For successful businesses looking to expand, private equity investors tend to see a downturn as an opportunity to invest at a lower cost. This may make it easier to secure investment, albeit a smaller amount. Organisations wanting to proceed with this option will need a detailed business plan that maps further growth alongside past performance and an exit plan.
∙ Venture Capital – If your business is rapidly growing, has already been through a seed round and is looking to continue scaling, VC could be a good choice of funding. Here, efficiency will be a focus so try to show strong sales efficiency, solid unit economics and how you plan to grow in a capital efficient way.
∙ Business term loan- Alternatively, if equity financing isn’t an option, businesses can pursue a debt-based strategy. Business term loans are an easier option for less established ecommerce companies, offering lower interest rates than other sources of finance. When used wisely, they can set organisations up for expedited growth and can be a useful tool during a recession. To secure the financing however, you’ll need to ensure you’re meeting your lender’s eligibility criteria, and demonstrate a clear company outlook for the repayment period.
Supercharging business growth
Whilst some of this may take a while to implement, many of these steps are quick wins and can help you build your working capital – and therefore resilience – whilst you navigate the current recession. Either way, make sure you continually measure, analyse, and optimise all your business processes to help supercharge your business growth.