How to recover costs from freight increases (and other eCommerce tips)
May 7, 2022
Freight costs have been on the rise for the last two years. In 2021, shipping costs were around 23% higher than the year before. And in 2022, major shipping companies like FedEx and UPS planned to continue the trend with the implementation of some of the steepest price increases in the last decade.
Continued disruptions throughout the global supply chain mean it will be a long time before businesses can return operations to their pre-pandemic status quo. eCommerce businesses that rely on freight shipping will continue to see increases in their costs, and prices aren’t going down anytime soon.
To get some insight into how eCommerce companies can become more resilient and mitigate the risks of these freight increases, we talked with trusted eCommerce influencer and advisor Paul Waddy. Waddy is a seasoned industry veteran with more than a decade of experience.
Hold more inventory than you think you need
Traditionally, advisors encouraged eCommerce founders to keep inventory lean. But the current condition of the supply chain means that businesses need to try new tactics. Paul Waddy explains: “The supply chain has never been more volatile, in my experience, over the last 15 years or so than it is right now.” And this uncertainty compounds the impact of rising costs, which only makes it more difficult for businesses to meet demand.
Disruptions in the supply chain could mean that a company’s anticipated one-week delivery timeframe stretches to four or even five months. These long delays increase the chance that the business will run out of inventory, which means missing opportunities for sales.
The only way to overcome this challenge, according to Waddy, is to change how businesses operate. “I’m always advocating for holding less inventory, the right amount of inventory, or just enough inventory. But I think now we have to err on the side of holding a little bit more. But obviously, that requires cash.”
This means businesses need to be strategic with how much inventory they purchase. eCommerce retailers should stock enough inventory to mitigate the risk of supply chain disruptions without compromising business operations.
Waddy’s advice to retailers: “They should absolutely factor in how much money they’ll need to sustain the business for a full 12 months and beyond.”
Combat your rising costs with financial planning
Good financial planning considers all of a business’ costs and works to find a balance in how budgets allocate funding. And the most successful businesses will create more than one plan, which allows them to bolster their growth by reacting dynamically when supply chain disruptions impact operations.
Waddy explains that, unfortunately, many businesses don’t do enough during their financial planning. “There’s a lot of businesses out there who either don’t forecast at all, don’t have a rolling 12-month budget, or deliberately plan under budget.” The problem with this is that keeping operations lean to provide a cushion of reserve capital restricts businesses from scaling.
For example, a business may set a budget and force it to work by reallocating marketing funding to purchase more inventory if sales increase. The simplicity of this planning may help eliminate some financial stress, but it stunts business growth. After all, Waddy explains, “we don’t want to rob Peter to pay Paul.” He continued, asking “how much money is being left on the table” when a business undersells future profits like this? While it does make sense that many businesses want to be risk averse, operating under budget isn’t the answer.
They’ll need to account for other expenses that will impact growth, including rising advertising and labor costs. “Operating expenses are increasing across the board. So, actually, we can’t really take the money from other departments [to purchase a large order of product], and we also really don’t want to.”
Waddy advises businesses to build a financial model to guide operations. Or, better yet, build two models. Businesses need a conservative financing model that informs how to conduct operations while reducing expenses if an unexpected change like a dip in sales impacts cash flow. They’ll also need a more flexible, stretch model, which should answer the question, “How far can I grow my business, but in a controlled fashion?”
Improve your gross margins to buffer volatility
Maximising business growth and guiding a business to its fullest potential requires more than capital. Businesses also need to know how to best spend it, which can be difficult considering the volatility of the supply chain and its impact on the market. Waddy says rising costs are “impacting gross margins in a negative way.” So, what options do businesses have to reduce this impact on their margins?
“There’s really only two ways to improve your gross margins. One is to increase your pricing,” Waddy explains. “Now, that’s usually not okay, ‘cause you’ll impact your conversion rate and so on. But the second way is to get cheaper cost of sales. And big businesses, in my opinion, really need to think about how can we get cheaper cost of sales to combat the rising freight cost.”
One legitimate strategy is negotiating discounts. Traditional payment terms dictate that businesses pay for their orders in two parts, usually in a 50/50 or 30/70 split of the total costs. The first payment is due as a deposit upon placing the order, followed by the second payment when the order is delivered. But according to Waddy, businesses have been able to negotiate these terms to reduce their total cost of goods.
Businesses can talk to suppliers and manufacturers, who Waddy says may be willing to offer a discount for a larger purchase order or an early invoice settlement. Another option is talking to shippers and negotiating a discount comparable to the freight increase in exchange for early payment. On a large order, even a 1% or 2% discount can translate to large savings.
“It’s a win-win in that scenario. If you can get that capital up front, the factory is happy with you. You are smoothing out that cash flow and getting the cheaper rates.”
Accelerate your business’ growth with revenue-based financing
According to Waddy, many eCommerce businesses have “scaled significantly” within the last decade. Many businesses have been able to bootstrap their growth. “But there does come a point where you want to go to that next level. Do you want to keep chipping away, or do you want to sort of go all in and really back yourself and try and, you know, get to that $30, $40, $50 million in revenue and beyond?”
"Do you want to keep chipping away, or do you want to sort of go all in and really back yourself and try and, you know, get to that $30, $40, $50 million in revenue and beyond?”
To scale to the next level, a business needs financing. Businesses that rely on traditional financing will likely find that they struggle to respond to the volatility of the supply chain. Instead, they need to look to alternatives like revenue-based financing, which helps businesses react quickly to supply chain disruptions and mitigate the risks of taking on debt.
Covering the cost of a large inventory order is difficult for a bootstrapped and growing business. Revenue-based financing helps eCommerce businesses overcome this challenge by providing them with access to capital. Book a call to learn more about how revenue-based financing can help your business overcome rising freight costs and accelerate growth.