In Part 2 of this blog post we took on the Brexit-shaped elephant in the room and addressed the B-word title of the series. We concluded by surmising that for all sellers – both those who are active beyond the UK borders and those who aren’t – 2020 could well be a year of consolidation. In this post we look at how sellers can work on their business, rather than in their business, so that they can make well-informed decisions for steady, sustainable growth.
Sellers’ experiences so far, no more than consumers’ experiences, will force them to take a long, hard and cold look at their business and its underlying performance. Sellers will look at their costs bases, their profitability and their cash flow, with a view to optimising them all. They won’t necessarily hunker down, but they will be extra focused on margin and reducing the elapsed time between money out and money in.
Watching costs like a hawk
On the cost side, sellers will examine all areas of their business to drive further efficiencies. Where can I get those products more cheaply? How much is it costing me to hold stock over time? What are my various cost categories and how can I eliminate or at least reduce them? What other business models like drop-shipping allow me to broaden my offerings while reducing cost and risk from my current operations? What third party systems that help me run my business can I consolidate into fewer systems? What parts of the process can I automate, instead of doing them manually? How can I cost effectively drive down returns and refunds? Buyers are only going to become more demanding. Sellers, in turn, will expect their system and platform providers to do more for them, and share more of the burden, or they will look elsewhere.
Sellers on marketplaces are used to paying double digit percentage fees for selling their products. This is a significant contributor to the cost equation. In 2020, successful sellers will need to weigh carefully the cost of attracting shoppers to their proprietary websites against the higher selling costs and lower margin on the world’s giant, high-traffic marketplaces. Moreover, they’ll need to fully evaluate the economics of sponsored listings on those marketplaces and figure out where they have the margin to buy shoppers’ attention there.
Profitability down to a product level
It’s not enough to look at last quarter’s or last year’s figures from the accountant to decide how profitable the business is. In 2020 sellers will become more proactive in terms of analysing the profitability of each SKU, modelling the costs from goods in through to shipping and after sales service. Sellers will get more granular on profitability at a product level before items are sold, so that they can do something about it in advance to protect profits. The alternative of waiting until the ‘how did we do?’ moment is no alternative, because then you can’t do anything about it.
The temptation to lower prices to shift the product is a dangerous one, even though you’re getting money back on your investment, especially if you don’t know the underlying profitability. Sellers will focus on profitability to avoid falling foul of busy fool syndrome: “I lose a pound on every sale but I make it up in volume.”
Reducing the cash conversion cycle
Where sales are vanity and profit is sanity, for most sellers cash-flow is reality. A strong cash position gives you options, a weak one can threaten your ability to trade. A key metric for sellers is how long it takes for the money they shell out for products to come back in the form of consumer purchases. In 2020, we feel that sellers will look at negotiating better buying terms and use more technology tools to help them move their products more quickly. After all, there are very few businesses like Amazon who have turned the cycle on its head, taking payment for products sold well before they have to reimburse you, the seller.
In 2020 sellers will arrive at a better understanding of the cost per day or week of each item of stock sitting in their warehouse. Analysing how fast all of their items are individually selling allows them to better forecast how long stock will sit before shipment. This helps them with reorder quantities, lead times and frequencies, all of which feed directly into cash flow.
Understanding ecommerce performance
So what will enable sellers to focus on these 3 financial areas? Accurate, meaningful and accessible information on their business is the answer; after all, if you can’t measure your business, you can’t manage it.
Sellers will ask themselves these questions: does the data exist? Can I get at it easily or do I have to do more work to get at it? What does the data tell me? Then, what should I do? Many medium-to-large multi-marketplace sellers are already running their business with the help of a platform which manages inventory and stock, the marketplaces and channels themselves, and orders and shipping. Sitting on top of the platform, scrutinising the activities, storing the information, and surfacing it in easy-to-comprehend ways should be a powerful reporting and analysis engine.
The best reporting engines allow you to build a comprehensive picture of how much cost is tied up in stock at any point in time, and how long your stock has been on the warehouse floor. They will also provide templates for you to model the various cost elements of every product, so that you know the inherent profitability of each item as a sold entity and what wiggle room you have on price discounting. Finally, they should also allow you to build in lead times for re-ordering every product, which, taken with the speed with which the items are moving allow you better plan your inventory order cycles and cash flow.
If they don’t currently have this level of reporting visibility right now, in 2020 many businesses will look to acquire it.
If you’d like to discuss your plans for 2020, or to pose questions about how the Volo Origin platform can help you address the issues floated in this post, please do drop us a note.