How to recover costs from freight increases (and other eCommerce tips)

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?”