GUEST COMMENT How can ecommerce businesses navigate the economic downturn?

As we enter an economic downturn across Europe, with both individual and business budgets tightening, ecommerce and multi-channel businesses are set to be impacted. These businesses are likely to see a downturn in sales and profit, as a result of minimised spending. 

Following the ecommerce boom throughout the pandemic, we’re seeing the rise of ecommerce traffic drastically slowing down. According to Semrush, in 2020, YoY ecommerce traffic growth was at 23%, but in 2022, that figure was only at 9%. This speaks to a continued lull in online shopping and is evidenced by consumer confidence with levels of disposable income falling to -55% in Q2 of last year.

To navigate this challenging period effectively, it’s crucial for ecommerce businesses to have real-time visibility over operations and the impact on their balance sheet. This insight is vital for accurate forecasting. Data plays a key role in this, as it allows ecommerce businesses to understand where – or where not – to spend their money.

Creating accurate forecasts is no easy feat. However, by following a framework and having clear insight to their data, retailers can access the valuable insights they need to accurately forecast. This framework involves having the access to the right metrics to give a full picture of cash position, and then tapping into real-time reporting to understand the cause and effect of financial decisions. 

Creating an effect forecasting framework 

The framework for accurate forecasting comprises five components: 

1. Identifying early warnings signs
2. Tapping into the right metrics
3. Understanding cause and effect
4. Ensuring efficient ad spend
5. Making informed decisions on fundraising and investment 

Let’s explore these five components and how ecommerce businesses can use them to effectively mitigate economic downturn:

Identifying the early warning signs and responding quickly

Throughout periods of economic stability and growth, ecommerce businesses can make informed decisions on both leading and lagging indicators. A leading indicator is one that looks forward towards future outcomes and events, and looks to make predictions, whereas a lagging indicator evaluates previous activity to see whether the intended result was achieved. 

When things are going fine, companies are able to plan routes forward using data about past decisions or performance, to perhaps increase sales conversion rate or average order value (AOV), or improve UX to increase average profit per customer (APPC). In this scenario, leading indicators provide a useful guide for planning the next move or where to invest, using past decisions and performance, which are based on stable, predictable periods. 

However, throughout recessionary periods, leading indicators must be the primary focus. These insights provide the headroom to act proactively, and give key insights to potential future events, rather than just the current reality. 

To tap into these metrics and effectively use them to their advantage, ecommerce businesses need access to data and the ability to report in real-time. Without this quick insight, understanding lagging indicators will be challenging, but grasping leading indicators will be near impossible. 

Tapping into the right metrics

Shifting focus towards leading indicators requires ecommerce businesses to tap into the metrics which tell them the most valuable information. The most important metrics to monitor will vary from business to business, however, here are seven metrics to consider keeping an eye on and 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. 

A key factor in creating accurate and insightful forecasts is choosing the right metrics to tap into. It’s crucial that ecommerce businesses focus on the right metrics, based on their overall business and sales goals. 

Understanding cause and effect

During times of economic uncertainty, macro pressures and changes can have a significant impact on ecommerce businesses. As such, having a clear understanding of cause and effect of micro, internal actions can help organisations to better manage and mitigate any macro issues they encounter. 

Internal actions to monitor could include analysing customer spending behaviour in response to pricing changes or promotions. Then, retailers can use that insight when planning a response around macro issues. For example, ahead of a heatwave, ecommerce businesses can adjust prices or apply promotions for summer products.

With a greater understanding of cause and effect, ecommerce business can then focus on unit economics. Unit economics provide a clear picture of the profitability of a business, and help retailers to focus on the elements and tactics that are working well for them and result in the greatest profitability. 

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. 

Simple tactics such as utilising pre-payments to reduce capex over time can be a useful tactic for boosting cash reserves in the long run.

Another useful tool for efficiency gains includes evaluating the effectiveness of advertising campaigns through monitoring return on ad spend (ROAS). This can help retailers to understand where to invest – or indeed, where not to invest – when advertising, rather than cutting ad spend altogether. 

Focus on gross-margin adjusted ROAS, and determine how much gross margin is generated in comparison to every dollar spent. Ecommerce businesses can then put specific goals in place around the return they are looking to see, and any campaign which generates less than that goal can be cut. 

ROAS is a useful tool amid other KPIs, and provides a good indication that money is being spent effectively. 

Making informed decisions on fundraising and investment

Fundraising and investment will differ throughout an economic downturn. The right type of funding will vary from business to business, but it’s important to understand ROI across spend before accepting a new funding line. 

Whether it’s around talent, inventory or advertising spend, each investment takes a different time to see a result, so understanding the how behind the what of a new expenditure is crucial. 

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

Building out these frameworks will enable ecommerce businesses and retailers to utilise real-time reporting. This insight is a valuable tool for allowing businesses to accurately plan and forecast, to make the right decisions around navigating the economic downturn, based on existing and predicted future behaviours.

Samir El-Sabini is co-founder and CEO of Juni