Today consumers are tightening their purse strings and spending less money online. According to a recent report online sales fell by a record 10.5 per cent in 2022, compared to 2021. Looking closer at December, sales fell by a sharper 12 per cent YoY – the lowest decline since March. There’s no doubt that these statistics reflect a decline in consumer confidence – a direct result of the cost-of-living crisis.
After riding the wave of success during Covid, businesses that heavily rely on eCommerce sales are now witnessing a drop in revenue and profits. This places many in a difficult position to quickly adapt to a drastic change in consumer behaviour. So how can this industry navigate the economic downturn and save themselves from financial difficulties? The answer lies in accurate forecasting.
To successfully withstand economic downturns, businesses must be able to forecast accurately. By following a framework that involves utilising the right data, online retailers can paint an accurate picture of their cash position, tap into real-time reporting to understand the cause and effect of financial decisions. All of this allows them to mitigate forecast profitability and mitigate such challenges and make informed decisions going forward.
The most effective forecasting framework consists of the following five components:
- Identifying early warning signs
- Tapping into the right metrics
- Understanding cause and effect
- Ensuring efficient ad spend
- Making informed decisions on fundraising and investment
1. Identifying the early warning signs and responding quickly:
eCommerce businesses can use leading and lagging indicators to make informed business decisions.
When things are going well, data from past decisions or performances to help plan future moves or investments. This can help improve sales conversion rates or average order value (AOV), improve user experience (UX) and increase average profit per customer (APPC).
Throughout recessionary periods, it is important to focus on leading indicators. These indicators can help businesses act proactively and give key insights to potential future events, rather than just the current reality.
2. Tapping into the right metrics:
Businesses will need to focus on the metrics as part of their transition to utilising leading indicators. There are seven metrics to monitor that will offer the most useful information and here’s why they are important:
- Free cash flow (FCF) – A surging FCF indicates increased earnings and a potentially longer runway but is also a valued indication of success for investors.
- Cash runway – Having a clear idea of how long a runway has left provides a reliable indicator of how much money is needed to be raised or saved and the timeline for that.
- Sales-per-employee – Boosting sales with a stable or shrinking workforce shows efficiency, and a strong sales-per-employee ratio can result in far higher valuations.
- Return rate – Returns are often costly – both in a monetary and time sense – and unhappy customers are less likely to return. A high return rate is often a clear sign of wider problems within the business, such as product quality, packaging quality and product listing page (PLP) accuracy.
- Customer lifetime value (CLTV) – CLTV provides key insights. A declining CLTV can be a sign of a number of issues, but it can also be common amid an economic downturn due to tightened budgets. A high CLTV, on the other hand, provides a good indication of popular products and helps eCommerce businesses to amend their approach depending on their target market and sales goals for particular products.
- Contribution margin – Keeping a close eye on contribution margins can help to make better, more informed decisions on where retailers can cut – or increase – costs to be more efficient and see greater returns.
- Customer Acquisition Cost (CAC) Payback Period – Particularly during an economic downturn, it’s vital that any money spent has an efficient return period. This will help to grow or steady cash reserves.
3. Understanding cause and effect:
During times of economic uncertainty, macro pressures can greatly impact eCommerce businesses. This is why having a clear understanding of push and pull factors across customer behaviours is vital. For instance, looking at real-time reports and analysing customer spending behaviour in response to pricing, promotions or even free shipping can help online retailers better plan and mitigate any macro issues they encounter.
Having sufficient knowledge of cause and effect allows eCommerce businesses to focus on the more profitable elements of their operations. In turn, this can help them make informed decisions about their overall business strategy.
4. Ensuring efficient ad spend:
During times of economic difficulties, knowing where to spend money is just as crucial as knowing where not to spend it.
Evaluating the effectiveness of advertising campaigns through monitoring return on ad spend (ROAS) allows retailers to assess the success of its current marketing efforts. Focus on gross margin, adjusted ROAS and determine how much gross margin is generated in comparison to every £ spent. From here, eCommerce companies can set clear objectives for the return they want to see, and any campaign that falls short of that target can be abandoned and replanned.
5. Making informed decisions on fundraising and investment:
During an economic downturn, fundraising and investment will differ from business to business. It’s important to calculate the return on investment for any new funds before committing to them, as this will help determine its value.
Once eCommerce businesses have a clear understanding on upcoming expenditure and the time and level of ROI, they can begin to look into the right funding line for them.
Using real-time reporting to mitigate economic downturn
This framework enables eCommerce businesses and retailers to effectively utilise real-time reporting.
This insight makes it easier for businesses to have complete visibility over their business operations, allowing them to forecast accurately and make informed decisions based on past and predicted behaviours. At a time of economic instability, planning and forecasting is crucial to ensure business prosperity.