How to weather the economic storm with your ecommerce business. - 24/10/2008

Much of the current economic uncertainty of late has been media driven, consumers and business alike often buy into the hype that the ‘sky is falling in’ when actually the current economy is simply redressing the balance of over indulgence and the irresponsible lending habits that have enabled people to spend above their means.

This recent clamp down on easy access credit will have an impact on consumer spending, it will encourage the thrifty to be more thrifty and the spend thrifts to think twice before making the purchase.  However despite this change in attitude it’s likely that this period of reflection is a knee jerk reaction to being told there is a problem, when actually the problem has been around for years.

It is worth considering that despite the current turmoil in the banking sector, consumers will not necessarily feel any immediate effects and the future conditions have yet to be made apparent.

The commodities that effect consumers liquidity such as fuel, utilities and food are actually coming down in price, ironically this is due in part to the reduction in demand for them because they have been prohibitively priced.

The less immediate effects on consumer liquidity will become more apparent when credit card limits are met or the banks reduce the available limits on existing credit cards, however current issues such as house price reductions are less likely to effect consumer behaviour in the current market conditions.

Whilst house prices are falling at a significant rate, it will not affect the home owner’s liquidity, just their ability to move house. Only increases in mortgage payments, or decreases in income will have any effect on their financial position.

Whilst it is likely that some markets will suffer as a result of these uncertain times, peoples needs remain the same, most retail industries have peeks and troughs of demand based on the specific market that they are in.

Market forces and consumer trends apply to every business regardless of the market in which they trade. Because of this it’s worth considering that managing a business in a hard economic climate should be no different form managing a business in a fruitful climate, the fundamentals remain the same.

A business should consider expanding in to different markets by broadening the range of products offered.  This doesn’t mean watering down the core business focus but more looking for simple synergies and different markets for the same product.

This simple diversification can have two positive impacts on a business, firstly it can adjust the seasonal trends to assist with planning, ensuring that the staffing and cash flow issues that effect businesses bound by trends is lessened and secondly it reduces the relative risk of a market in decline. By diversifying into new markets a business is able to manage market decline because a lesser percentage of profit is dependent on that markets performance.

There are a few key areas of any business that can be reviewed and adjusted to increase profitability regardless of increases in sales, this can be done by improving the operating profit through focusing on cost centres such as:

Cost of goods

Whether the cost of goods are attributed to goods that are manufactured in-house or goods bought from a wholesaler, the less you can pay for them the more gross profit you can achieve, whilst this seems obvious, many businesses use the same supplier for many years, even accepting the occasional price increase without ever thinking to shop around for a new supplier or renegotiating with their current supplier.

As with any business the higher the turnover of goods the cheaper they become, this is the case at every stage of the supply chain.  The price of goods is determined by the market conditions (i.e. not too low, or a price war may occur, not to high because or customers will go elsewhere).

When selling in bulk the prices can be reduced because often the benefit of the additional demand will outweigh the reduction in margins.

It’s not uncommon for suppliers to sell goods at cost to large customers as the improved buying power it achieves for themselves means that they can achieve a greater margin with their existing clients, or reduce the their current prices to become more competitive and encourage new business.

An example would be:

A supplier has a current customer base buying 1million bags of sprockets per year at £1 each, the raw materials unit cost is 60p;

Turnover: £1,000,000
Cost of goods: £600,000
Gross profit: £400,000

A business approaches the supplier and guarantees to buy 5 million units but will only pay 40p a bag.

The supplier contacts his suppliers and offers to increase his demand by 500% if they can reduce their price.  The best price he achieve is 39p a unit.

Despite making only making a penny per unit the new customer still yields a profit:
 
Turnover: £2,000,000
Cost of goods: £1,950,000
Gross profit: £50,000
 
However the existing clients now generate a much greater margin
Turnover: £1,000,000
Cost of goods: £390,000
Gross profit: £610,000

Relative purchasing power is when the customer generates enough demand that there is a distinct advantage to the supplier.  In this example an existing customer purchasing 1000 units would have little if any power to improve the price as his value would be 0.1% of the supplier’s gross profit and less than 0.0002% of the supplier’s turnover. So the relative purchasing power of this customer is negligible.

This example is simplified but essentially the principal applies.

There are ways to increase relative purchasing power, one of the simplest ways is to increase your demand buy offering reductions for bulk purchases, this can be done through offers such as free delivery if you spend X, buy two get one free or buy one get one half price etc. whilst this can impact your margins it will increase your volume of sales.  You can also source a smaller supplier that would be prepared to negotiate to get your business.

Regardless of moving your supplier or staying put, you should always negotiate, especially if your demand is increasing. Even if it is only possible to reduce the cost of goods by a few pence a unit, it is a saving.

Overheads

Much like cost of goods, many overheads are negotiable, bank charges, credit card processing charges, utilities and even staff costs can offer opportunities for savings.

Bank charges

Whilst small businesses will struggle to negotiate rates with a bank, it is possible to review the available tariffs and even change your bank.  It’s possible to make significant savings simply by comparing your banking habits against each tariff, or even changing your habits to make the most of a specific tariff.

Utilities

Utilities can be changed simply to suit your usage habits, simple comparison websites will identify the best deals available.

Credit card processing charges

Card processing charges vary a great deal, there are processors such as PayPal that manage the whole transaction and merchant services that work with a processor such as protx.

Processors such as PayPal are not negotiable but are available regardless of the business size however transaction cost can be reduced for ecommerce websites that have high volume or high value transactions buy using merchant services.

As a rule Merchant banks do not offer processing services so using a third party is usually necessary, Processors such as protx charge a fixed monthly fee and simply manage the payment process and the merchant services dictate the rates that a business is charged however unlike PayPal, merchant rates are always negotiable.

Obtaining a merchant bank account is not always easy, some will ask for a bond.  A bond is used much like a pot of cash, as you receive the cash from your customers it spills into the pot.  When the pot is full the overflow is released to the business.

The bond is often calculated on the relative risk to the bank, they will look at the value of goods that have been paid for and not delivered, including time taken for unhappy consumers to return the goods, that way if you should go out of business or fail to deliver the goods, the bank has still got the cash to pay for any charge backs incurred for these transactions.

The main disadvantage of a bond, is that in the initial set up period could have a serious consequence on cash flow.  It also means that any interest accumulated on the bond goes to the bank, so the bond is frozen cash until you are able to release it, or change merchant accounts.

Staff costs

Many employees expect a pay rise, but often smaller businesses fear this extra cost, it can often prove more beneficial to implement profit related bonuses and other bonus schemes that can be honoured when the business know it can afford the expense.

When a business reaches financial difficulties, it is often a priority for employers to have to find the cash to pay its employees.  Being able to pay wages is always dependent on cash flow, regardless of the profitability of a business, if the cash cannot be found for a wage bill then the business will not be able to operate.

By offering pay rises you are committing the business to an unavoidable expense that have to be honoured regardless of business performance.  By offing bonuses you are only committed to honour bonuses that are agreed, so if the basis of the bonus is agreed relative to performance, you are only duty bound to pay it when that level of performance has been met, it can also be paid separately from the normal payroll offering a greater degree of flexibility on available cash.  This said an employee’s basic wage must still conform to the statutory minimum wage.

Lean processes

When evaluating operational performance every aspect of the business operations should be considered, ensuring that there are correct procedures in place to cover any and all eventualities, from complaints, to lost deliveries, to the day to day processing of orders, reorders, stock control and staffing.

Enabling a business to have intuitive workflow will not only increase productivity, but more essentially it will improve consumer confidence.

Consumers are less worried about something going wrong with their order if the business is proactive about getting it resolved.  It’s not uncommon for customers to return despite having issues with a previous transaction if they felt that the business dealt with the situation well.

Return on investment

Business can choose what if any investment would suit a business, an example of common investments would be for people, equipment, technology, machinery, training and advertising.  When making an investment a business should consider the relative return for that investment. The easiest way to quantify a return is to implements KPIs (key performance indicators).

Key performance indicators are indicators that can be set during or at the end of a process to evaluate the performance of an application, process or individual at any given point. They could be as simple as a promotional code on an advertisement.

Using an advertisement as and example; (For simplification of this example, the sales from this advert where exclusively made to new business and not existing clients)

Customers using a promotional code from a specific advertisement has to be as a direct result of that advertisement, therefore that advertisement is quantifiable and consequently the return can be measured.

If the advertisement cost £100 and gross profit (value of sales less the cost of goods and the cost of the initial advert) was £500 then the return on that investment would be 500%.

If this example now considers existing customers taking advantage of the promotional code, the return is less quantifiable and whilst the advert may have yielded a £500 return it would be difficult to establish whether these existing customers would have made the purchase without the discount.  Should this be the case then the investment could have yielded an overall loss because the revenue generated from these customers would have been more than the reduced price that they actually paid.

Another investment that is often overlooked as being an investment is employees.  Much like placing an advert, employees must yield a return on the investment that the business has made in them.  Whilst many employees are not directly linked to sales and often viewed as a cost, all employees must add value to a business.

By implementing performance related KPIs it is possible to evaluate the performance of the employee, this is especially useful if there is more than one employee doing a directly comparable job.

Many employee performance KPIs are completed by the employee, these forms of KPI are not only susceptible to false accounting but also can create inefficiencies in the work flow and can be counter productive.

It is difficult to identify specific KPIs without first understanding the business, but often KPIs are implemented, without intention of them being a performance indicator, examples would be rotas, sales target records, mileage logs, phone bills and statistical programs such as google analytics.

More intentional KPIs are customer surveys, telephone queuing records, complaint records, refunds, appraisals and call logs.  It can often be difficult to identify valuable KPIs and calculate ROI (return on investment).

Appraisals

Employee appraisals are a great tool for building stronger relationships with employees, either six monthly or annual appraisals offer an opportunity to understand the needs of the employee.  Appraisals are a business tool, with the intention of understanding what the business can do to get a greater return from that employee.

Employees tend to be motivated by the businesses interest in both their development and them as an individual.  Where possible, frequent team meetings should also be promoted, ensuring that a healthy flow of communication exists throughout the organisation.

Operational efficiency

Building a strong business is as much about good housekeeping as it is about increasing sales.  The key point to running a business is that in order to move forward a business needs to look inwards and backwards, it needs to review it’s operational efficiency and it’s historic tends in order to speculate about the future.

Ensuring a business operates in structured manner, creating intuitive and systematic workflow models supported by policies and procedures to cover eventualities and basic operations.

By having a streamlined organisation, it is easier to identify weakness and strengths of an organisation, and reduce surplus.  It is also an advantage to promote ownership of responsibility amongst the workforce, ensuring employees are aware of their responsibilities.

Sales

Online consumers often differ from those that choose to buy on the high street.  Whilst their priorities manifest themselves in different ways, the core decision making attributes are fundamentally the same.

If a consumer walks into 4 high street shops and compares the price of an identical item the decision process of making the actual purchase is based on the criteria of the consumer.  For example consider the following scenarios:

• Price
• Logistics of getting the goods home, or distance from the closest parking space.
• The availability of the product (is it in stock)
• A market stall sells the product, but unsure that it will work or,
• No previous knowledge of the shop, unfamiliar with the way the company operates if there was a problem.
• Previously negative experience such as unhelpful shop staff.
• The consumer found the shops layout confusing,
• Accountability, high street shops are more tangible, they actually exist and can be visited in person by the consumer.

It could also be the case that a shops poor location and advertising prevented the customer from knowing that a shop that would tick every box even existed.

Another major element that is taken for granted is that most high street shoppers are less fearful of fraud.  In the main goods are paid for and taken away there and then unlike paying for goods in the hope that they turn up.

There is also a physical building that has been there for years that they can come back to should there be a problem.  This is not the case with ecommerce businesses that are not supported by a high street presence.

These considerations and priorities still operate with an online business, like for like products don’t always boil down to price and whilst it is a significant factor there are often considerations that the a consumer will priorities over cost, even in a tough economic climate.

These key decision making factors can be summarised as follows;

• Price
• Delivery
• Trust
• Reputation
• Retention /Customer services/ accountability
• Availability
• Visibility
• Intuitiveness/usability

By addressing these needs an ecommerce business will maximise a websites conversion rate:

Price

Directly comparable products should be priced competitively (price is not always the deciding factor but because of nature of distance selling, it is far more important than that of high street shopping)

Delivery

The variety of choices offered with a delivery will allow the customer greater flexibility in when and where they can receive the goods, this includes good communication about the delivery schedule.

Trust

Whilst this is nothing more than smoke and mirrors, websites have to look professional and trustworthy, there is absolutely no real relation behind the appearance of a website and it’s legitimacy, however many online consumers are dubious about using poorly designed websites.

Reputation

Many online consumers will read testimonials to establish a company’s reputation.  It is illegal to add false testimonials to a website, so in the main they can be a good guide to establishing previous customer’s experiences.

 

Retention

Retention is arguably the most important factor in any business.  The cost of getting new customers is significantly higher than retaining current customers.  By ensuring that an ecommerce website is supported by an informed and helpful call team, the customer will be assured that there is some accountability.

Unlike conventional high street shops, ecommerce website have the distinct advantage of being able to recognise every customer without having to introduce any form of loyalty card, which is the only way returning customers can be identified on the high street.
This said loyalty schemes are available through online shops however it can often over complicate the transaction process. If implementing loyalty schemes or discount codes the application should not impede on the shopping process.

The disadvantages of these schemes are often that the management and implementation of the rewards can be difficult to process.  Consider that if there are savings that can be made shouldn’t those saving be offered to new business in the first place as ecommerce is far more price sensitive than high street pricing.

Availability

Keeping up to date stock control is vital, by monitoring demand and knowing the turnaround times for your stock replenishment will allow you to hold a minimum stock level without running out.

Larger organisations use a JIT (just in time) model that allows them to restock products every time they are sold, however smaller businesses are likely to incur heavy distribution costs with this method, so by calculating your expected usage it is possible to get the best ratio of stock against cost.

Visibility

One the hardest tasks to achieve as an online shop is gaining visibility in the market place. But unlike high street shops money cannot always buy the best location.

Ultimately if potential customers cannot find a website then the business will not be able to sustain itself.

With a high street shop you’re restricted to looking for a static location with the best possibility of the highest volume of footfall of prospective customers weighed up against your ability to pay more than your competitors to have a shop.  Essentially a static position that will yield the best possible return on your investment.

The web comparable is PPC (pay per click) advertising, PPC advertising is where the right location can be found, but at a cost.  PPC is principally paying to advertise a website on search engines or another website that would be of interest to a targeted market.

If the PPC advert was on a search engine, the advert could be targeted for a specific word or phase and when that word or phase has been typed in, the advert will appear.  Usually many different businesses will pay to appear for the same search term, the highest amount paid yields the highest position on the page.

Equally adverts can be placed on other websites which is likely to be topic related to the specific target market.  These advert can be as PPC or by the number of impressions (the number of times the advert is shown).

Good generic search engine ranking positions (SERPs) is often the holy grail and there are many schools of thought on how best to achieve the best visibility but its worth considering that whilst many strive to be number one on google, online competition is exponentially more competitive than high street competition.

Whilst search engine optimisation (SEO) is imperative for any online business, often having realistic goals and achievements can ensure that a business can achieve worthwhile results from the search engines. More specifically focusing on a specific smaller market sector is likely to yield a far greater return, than trying to be number one in the world.

Intuitiveness / usability

Ensuring a website is intuitive will prevent abandoned carts.  Shoppers usually abandon carts for the following reasons:

• They are asked to many questions
• they do not understand how to proceed
• the delivery charges are to high
• there is information or costs that were not previously disclosed
• the process is too complicated
• the process is too long
• they are not happy with the security of the website
• elements or functions of the website don’t work

Making an online purchase should be a simple process. The user should not need to be told what to do it should be obvious and simple.

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