With inflation rates reaching unprecedented levels globally, the e-commerce boom over the past few years is beginning to cool down.
In the United States, the inflation rate reached a record high of 9.06% in 2022. While the rate has settled to 4.93% in April 2023, inflation continues to put a tremendous strain on consumers’ wallets. With the price of products ranging from essentials to luxury goods on the rise, global consumers are spending less. In turn, sellers on Amazon and other e-commerce marketplaces are also feeling the pinch.
High inflation rates will continue to pressure businesses worldwide, and e-commerce is no exception. According to The Economist, 2022 saw a decades-high inflation rate of 9% globally.
In addition to consumers, inflation has hit e-commerce sellers even harder with the overall cost of doing business on Amazon increasing drastically. Just one example of increased overhead was seen last April when Amazon added a 5% fuel and inflation surcharge for sellers.
As inflation rates climb, so do the costs of shipping, fulfilment, labour, sales, and marketing. With inflation having an adverse impact on the bottom line of e-commerce businesses, paying strict attention to profit margins is critical to success in the ultra-competitive space.
Common tactics for improving profit margins
According to sellerapp.com, the average Amazon seller sees roughly 15 to 20% profit margins. While every e-commerce business is different, with some sellers in specific categories seeing significantly higher profit margins than others, there are some common tactics sellers on Amazon can employ to reduce their expenses and improve their margins:
· Calculate the break-even point: Using a simple formula, you can calculate the break-even point of an e-commerce business. This formula determines the sales your business needs to make to cover expenses and start making a profit. It is crucial to calculate the break-even point to update your business plan and set sales targets.
· Restock inventory: Running out of inventory of your best-selling items is a common mistake that can hurt profit margins. When products go out of stock, sellers must inefficiently start from the beginning of the product launch cycle all over again. Sellers should be forecasting demand accurately to ensure they can capitalise on consumer demand.
· Expanding your Product Line: By adding complementary products to your current portfolio, e-commerce brands can provide better opportunities to sell products in bundles and increase per-sale margins.
· Mapping out a pricing strategy: Adjusting your pricing strategy is one of the best ways to boost your profit margins as an Amazon seller. Setting products at a price that is acceptable to consumers in the market ensures a business stays profitable. Successful Amazon sellers employ value-based pricing and competitive pricing strategies to scale their business.
Profit margins and the grey market
As covered extensively in previous GreyScout blogs, grey markets – referring to activities in which branded products are sold through unauthorised distribution channels – have long been a thorn in the side of e-commerce businesses. Staying on top of grey market activities that impact your products is critical to maintaining healthy profit margins.
Grey market sellers are unscrupulous and often engage in practices which are non-compliant with a brand’s commercial compliance policy such as parallel importing to undercut the MSRP (Manufacturer’s Suggested Retail Price), damaging a brand’s reputation in the marketplace, and the perceived retail value of its products.
Legitimate businesses when challenged by grey market products which are counterfeits or infringe a brand’s commercial policy can have a domino effect on a brand’s eCommerce P&L (profit and loss), margins, customer experience and more.
The Bottom Line
With inflation putting the squeeze on both business owners and consumers alike, budget lines across the map are as tight as ever. It is now essential that as an e-commerce business, profit margins are maintained with great diligence. E-commerce business owners have enough to worry about when it comes to reducing direct expenses and increasing average order value. The last thing they need to worry about is a grey market seller stealing customers through nefarious means, selling counterfeit products and infringing on the commercial compliance policies of a brand.
By utilising brand protection software like GreyScout, e-commerce businesses can monitor, identity, and quickly act to defend against scammers, counterfeiters, and grey market resellers so they can focus on executing an effective strategy to remain a profitable business in the face of unprecedented economic adversity.
