The eCommerce world is continuing its massive growth phase, but that comes with increased competition and the need to cut eCommerce costs.
In the U.S. alone, eCommerce sales were up 7.7% in the first quarter of 2021 to reach $215 billion. That estimate, however, requires some adjustments for seasonal variation. While that’s a positive trend, major players and platforms like Shopify note increased competition and consumer uncertainty. Staying competitive means shifting budgets toward the customer experience, creating a need for eCommerce cost savings in other areas.
To help, this post will look at five fundamental ways you can reduce common expenses and overruns:
1. Renegotiating rates and agreements
2. Optimizing your inventory management
3. Reviewing packaging materials and shipping
4. Buying straight from the source
5. Outsourcing when it makes sense
As we get started, note that these elements all involve relationships with business partners and customers. Remember to treat everyone well so that you have room to adapt without burning any bridges.
Renegotiate with partners
Modern sales and supply chains are complex, even when your eCommerce business focuses on a single area or audience for sales. Typically, multiple companies are involved at each step. So, there’s more to monitor, but also more companies to approach and try to identify eCommerce cost savings.
If you’re new to this type of negotiation, start with areas tied directly to sales volume growth. That’ll often mean conversations with credit card and payment processing companies. Their fees are often flexible, and many will offer better rates as your transaction volumes increase. Payment processors also have multiple expenses to reduce.
You won’t always be able to secure a drop in your standard rate, but remember that fees around assessment, mark-up, and elsewhere are open for negotiation. Processing companies, your bank, and even your eCommerce or sales platform may have fees you can get lowered.
Sales increases can also lead to inventory cost reductions. For example, if you’re ordering more products or placing orders more often, approach your supplier about reducing per-unit costs
Consider offering partners a potential benefit as well. Paying someone early or having recurring orders pre-set may help you cut costs. Sometimes, you can reduce monthly prices by agreeing to longer contracts. There are multiple ways for you to be a better partner, and that often controls costs long-term.
Optimize your inventory levels
Inventory is a major investment for eCommerce companies and might be your most significant capital expenditure. So, spending inappropriately is a significant risk. However, optimizing your inventory spend and control can turn threats into opportunities to save.
At a basic level, eCommerce companies want to match inventory levels to recent sales data. You should be able to fill expected orders and have safety stock in the event of a sales surge. Looking across your historical sales data for the year before can help you prepare for your busy or slow seasons.
Drop or increase stock levels in resupply orders just before these changes. That’ll help you reduce capital tied up in inventory before sales slow, making it easier to keep the lights on throughout the year. This data can also identify slow-moving or obsolete inventory that ends up costing more to store than you’ll recoup on a sale.
Some eCommerce platforms come with basic inventory and sales tracking tools. Start there and expand to a new platform when you need more robust reporting. Always review inventory with sales information. Then, check with suppliers to determine the time from you placing an order to getting that stock. This lead time will help you know how far in advance to make quantity changes to restock orders. It’s part of a holistic approach to eCommerce costs and potential savings.
Reconfigure order packaging and shipping
ECommerce costs around shipping depend on the size and weight of products in an order. Carriers have different charges based on both dimensional (DIM) weight and physical weight. You get to pay whichever is higher. You can better predict these costs by using DIM weight calculators on specific or average orders.
If you’re facing more DIM-based charges, you may be able to reduce the size of the box you use to shrink costs.
In general, using boxes and filler chosen to fit your products offers better protection in transit. Most companies focus on controlling shipping costs and reducing carrier charges. However, there can also be opportunities to optimize boxes or materials based on those charges to reduce other related expenses.
Are your goods fragile? Paying DIM weight rates means you have the flexibility to use better-protecting filler even if heavier. That can lead to less damage in transit and save you by reducing returns or replacements. Review your packing materials like bubble wrap to see if you can protect products more affordably.
Changing packaging can also help you reach new audiences without a dramatic increase in marketing expenses. Going green with filler like biodegradable peanuts or shredded cardboard makes you more appealing to eco-conscious customers. In many cases, you can make shredded cardboard from damaged boxes you already have on hand. Instead of a waste product, it’s a reusable solution that’ll reduce some expenses.
Buy more directly from manufacturers
ECommerce businesses use a wide range of products in their operations, but they may be paying a premium. From your warehouse to your main office, there are potential eCommerce cost savings in this category.
Buying from a wholesaler will come with a slight mark-up compared to purchases direct from a manufacturer. A local wholesaler may have a higher product cost, but you could be paying more to import that freight from a low-cost seller. Compare total landed costs to see if an existing “deal” is providing real savings.
Another common area to overpay is for packaging and order materials as you begin. Many small eCommerce stores will buy tape, bubble wrap, and packing paper from local retailers. That comes with a mark-up. Companies may be able to avoid that price hike by creating a relationship with a materials wholesaler. Start with your box supplier and see if they’re cheaper in general or can offer a discount on specific minimum order values.
Get creative with how you think about supplies for your fulfillment. There can be opportunities to save where you don’t expect. Smaller manufacturers, like label-maker Smith Corona, may offer lower rates on repeat purchases like labels as well as equipment such as thermal printers. Any product you use in bulk is a potential place to save by creating relationships with manufacturers and wholesalers.
Outsource your fulfillment
Fulfillment can be a difficult eCommerce area to control. It comes with many high costs, and poor habits can drastically impact profitability. There are also potential savings you may miss out on because of your size. Outsourcing can help reduce what you pay for fulfillment by streamlining operations.
For eCommerce companies that need a larger location or team, outsourcing can minimize that investment. A third-party logistics provider (3PL) may reduce your spend around all the things it takes to run a warehouse. The 3PL handles all hiring, management, and development of warehouse staff. They’ll own all equipment and space, including maintenance, utilities, and more. You generally pay a fee based on how much inventory they hold and a per-order rate, which encompasses only a portion of those operational costs.
3PLs also have higher shipping volumes than most eCommerce companies. This allows them to negotiate better rates with carriers. When a fulfillment company focuses on products like yours, they’re more likely to negotiate for the best rates that would apply to your goods instead of trying to negotiate for flat discounts that would apply to shipments of any size. That can mean you get a better flat-rate cost or the carrier or better DIM weight math that lowers your costs.
And 3PLs also offer guarantees around order fulfillment. That makes it easier to recoup costs associated with incorrect orders or damaged inventory. These companies tend to hold more substantial insurance policies, giving you better protection against loss.
It’s always a good idea to speak with multiple 3PLs to compare rates, service guarantees, and customer reviews. Consider A/B testing 3PLs for different channels if they offer service trials.
Keep price and value in mind
There’s a big focus on eCommerce cost savings for 2021 because of how tumultuous recent years were. While it’s tempting to slash costs and budgets first, don’t forget to look at the value of what you offer. Slowing down shipping times can decrease costs but can increase cart abandonment. A plain box may be cheaper than custom ones, but the switch may lead customers to view you less as a high-quality product.
Weigh cost-saving decisions based on all potential business impacts. Do your research and engage from the customer’s perspective. Often there are many opportunities to save that don’t impact the customer experience or expectation, but you might need to hunt to find what works best for you.
Jake Rheude is the Director of Marketing for Red Stag Fulfillment, an eCommerce fulfillment warehouse that was born out of eCommerce. He has years of experience in eCommerce and business development. In his free time, Jake enjoys reading about business and sharing his own experience with others.