Key takeaways
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Merchants and consumers feel the weight of inflation
Profit margins are getting thinner as prices rise and shoppers cut back on spending
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Adapting to economic uncertainty is the only sure strategy
Brands are responding with strategic pricing, timely discounts, new income streams, and cutting overhead costs
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Customer loyalty is a win-win
Businesses are building trust that can outlast a by investing in retention
Buyers are spending less, and less often
The aftershock of the pandemic, further lockdowns in some parts of the world, and the devastation of the Russia-Ukraine war all continue to bottleneck supply chains. The price of commodities, food and fuel especially, has surged. And now borrowing costs for companies and consumers are on the rise as central banks hike up interest rates, contributing to the highest inflation in 40 years.
The World Trade Organization (WTO) estimated a merchandise trade volume growth of 3.5% in 2022—down from the previous forecast of 4.7%. The WTO expects trade volume growth to drop to 1.0% in 2023, and the economic uncertainty and higher prices are causing buyers to spend less. Over 40% of shoppers switched to lower priced, private-label brands at grocery stores in 2022. According to a survey of global Shopify Plus merchants, 35% have seen shrinking average cart sizes, and 50% are seeing less site traffic and lower conversion rates.
All values are in U.S. dollars
Cash flow is particularly constrained for the 73% of brands that plan to rely on external investors in 2023.* Investors are raising their ROI thresholds, which will be tough to meet when higher costs are already negatively impacting many brands, including over 90% of Shopify Plus businesses. More than one-quarter of businesses expect weaker economic sentiment to make raising capital in 2023 more challenging.* But the top concern for 33% of brands when it comes to raising funds are interest rates, which have increased along with commodity prices.* Investors predict central banks around the world will raise rates to almost 4% in 2023, double the rate from just two years earlier.
Strong brands are serving customers while fighting inflation
Most ecommerce businesses were prepared for sales to level off during the post-pandemic hangover, but the further descent of the economy in 2022 caught many brands off guard. Over 70% of businesses around the world are preparing for a potential recession in 2023.* They're adjusting their approaches to pricing, evolving operations, and shifting growth strategies to remain competitive.
Megan Sanchez, chief brand officer of Nature’s Select Pet Food, says, “We do our best not to pass cost increases down to our customers, but in 2021 we had two price increases on our core products, which is very out of the ordinary for us. We decided to write something that would explain why that's happening, with the cost of goods, fuel, trucking, and transportation.”
Other brands are slashing prices as a short-term way to boost sales. Although quick and deep cost cuts are tempting, brands should strike a balance between reducing immediate financial damage and investing in the future. The biggest key to flourishing beyond mere survival is investing in one brand asset: customer loyalty.
Loyal customers are worth far more than short-term sales. In fact, a 2021 study estimated that loyalty increases a customer's worth by 22 times. It costs less to sell to loyal customers because they're more likely to buy, with the probability of a sale jumping from 5–20% for a new customer to 60–70% for a returning one.
Strong customer relationships also make price increases more tenable. Almost 40% of loyal customers will buy the brand's product even if cheaper options exist, and 60% of customers tell others about brands they're loyal to.
Here's how brands are keeping the cash flowing while amping up customer loyalty.
K. Sudhir Professor of Private Enterprise, Management, and Marketing, Yale UniversityWhat research has shown is companies that have continued to establish and retain relationships with customers have flourished post-recession.
How to boost cash flow and customer satisfaction simultaneously in 2023
1. Price strategically
Some brands are changing product prices weekly, if not daily, to keep ahead of inflation. More than eight out of 10 businesses surveyed have increased or plan to increase product prices because of inflation.* Because nearly 90% of shoppers will pay more for a product from trusted brands, strong brands can raise prices with less risk of customer churn.
Other brands are doing the opposite to stand out—by freezing prices. Old Navy infused empathy into its back-to-school marketing with the "Price ON-Lock" campaign. The apparel brand initially promised to lock in prices for kids' clothes to ease the burden of back-to-school spending, then soon extended it to all denim.
Some brands are changing product prices weekly, if not daily, to keep ahead of inflation. More than eight out of 10 businesses surveyed have increased or plan to increase product prices because of inflation.* Because nearly 90% of shoppers will pay more for a product from trusted brands, strong brands can raise prices with less risk of customer churn.
Other brands are doing the opposite to stand out—by freezing prices. Old Navy infused empathy into its back-to-school marketing with the "Price ON-Lock" campaign. The apparel brand initially promised to lock in prices for kids' clothes to ease the burden of back-to-school spending, then soon extended it to all denim.
The United Kingdom's leading health and beauty retailer Boots also froze prices on 1,500 of its own brand’s beauty products in response to customers' budget concerns. In August and October 2022, French grocery chain Carrefour and Loblaw Companies Limited in Canada made a commitment to freeze prices on its private-label products to help customers make it through inflation. The move sends positive signals to existing customers and attracts new ones.
Price freezes are a longer term investment in customer loyalty, but not every brand is in a position to absorb the cost of inflation on behalf of customers. In fact, 81% of businesses surveyed already have price increases as part of their inflation-response strategy. But if there's one area brands should avoid the price hike, it's shipping.* Free shipping options, including local pickup or delivery, lead shoppers to order more often, buy more expensive items, and up their average order value.
The case for free shipping
People order more
People order about 2.5 items with free shipping, compared to less than 2 items with paid shipping
People spend more
People spend over $3 more on the median average item with free shipping than with paid shipping*
People buy more
People buy over $22 more on the median order with free shipping than with paid shipping*
*These results are likely related to conditional free shipping by online stores (e.g. “orders $x or more ship free”)
Sourced from Internal Shopify Checkout Data between 5/14/21 and 7/7/22
2. Discount to promote loyalty and spending
It's still cheaper to drive sales with existing customers than to acquire new ones. Brands can reward loyal customers by offering exclusive discounts to encourage them to spend more.
Discounting products via product bundles or time-sensitive sales can be marketed as personalized recommendations to help hard-to-move products move fast.
Pay-now-buy-later promotions are another win-win for brands and customers. Store credit or coupons with a product or gift card purchase encourage higher average order values and better cash flow. The GapCash program capitalizes on limited timeframes by giving customers coupons to spend in specific "GapCash" periods.
Adapting a similar model with even a small discount is a simple way to give customers a price break and businesses a quick cash injection.
It's still cheaper to drive sales with existing customers than to acquire new ones. Brands can reward loyal customers by offering exclusive discounts to encourage them to spend more.
Discounting products via product bundles or time-sensitive sales can be marketed as personalized recommendations to help hard-to-move products move fast.
Pay-now-buy-later promotions are another win-win for brands and customers. Store credit or coupons with a product or gift card purchase encourage higher average order values and better cash flow. The GapCash program capitalizes on limited timeframes by giving customers coupons to spend in specific "GapCash" periods.
Adapting a similar model with even a small discount is a simple way to give customers a price break and businesses a quick cash injection.
Paul Rogers Co-founder and Managing Director, VervauntA lot of our clients are re-forecasting a lower rate of growth. Quite a few of our clients were allocating budget to testing. Some of that has been put on hold as businesses focus on driving higher customer lifetime value or repeat purchases.
3. Add subscriptions or memberships
Online subscription services and auto-refills on products are becoming more popular in the face of economic instability. They offer customers better terms and more value, and the recurring monthly revenue appeals to external investors.
Margo Hays Managing Director for Digital Strategy, TSG Consumer PartnersRight now, as an investment firm we focus on businesses that are recession-proof, companies with revenue through subscriptions or memberships that are serving the customer’s need to make their lives easier.
Amid inflation, direct-to-consumer brands are marketing their subscription plans as a money-saving play, particularly among pet and food brands. Some brands are even promising to lock in subscription rates for life to get shoppers to sign up.
Membership-driven, gated digital communities are also on the rise. A major draw is the feeling of exclusivity found in online communities, including front-of-the-line access to products and events. In fact, members-only benefits are so attractive to customers that athletic apparel brand Lululemon expects 80% of its customers to sign up for membership within the next five years.
Lululemon aims to create the most immersive fitness marketplace in the industry with its Lululemon Studio membership. The brand has a free tier to its loyalty program, which already includes perks that go beyond transactions: easier returns, early access to product drops, and virtual community events. But the paid membership takes the experience to another level.
Members get unlimited access to livestreamed coaching sessions with world-class instructors, invitations to experiential store classes, plus extra discounts at stores and partner studios. Although revenue from the connected-fitness element of the program shrank after the pandemic, chief executive Calvin McDonald says Lululemon Studio has helped draw new customers and fuel brand loyalty.
4. Reduce overhead costs
Brands are also using the economic downturn as an opportunity to trim inefficiencies and processes that don't serve their brand mission. More brands will reduce fixed overhead costs, allowing them to operate lighter even after the recession ends.
McKinsey reports that the competition for warehouse and fulfillment labor has made automation in warehousing a necessity for sustainable growth. The global workflow automation market will have an estimated compound annual growth rate of 23.4% from 2022 to 2030, reaching $78.8 million by the end of the decade. Set-it-and-forget-it workflows based on relevant triggers, conditions, and actions simplify processes, reduce the risk of human error, and free up resources.
Merchant spotlight
How Fable triples year-over-year sales with funding through Shopify Capital
Fable launched in 2019 and quickly gained traction, regularly selling out of their aesthetic housewares with every restock. But like many other young brands, restocking inventory was a challenge for Fable.
CEO and co-founder Jon Parenteau says new companies get supplier contracts that cause a big capital constraint. Most brands rely on venture capital to launch and scale their companies: 73% of the 900 businesses surveyed said they plan to secure outside funding in order to grow.* But this can be a time-consuming task.
For Fable, Shopify Capital was the solution. Shopify Capital provides businesses access to funding in the form of cash advances or loans, often available in as little as a few days, if approved.
With more money to use upfront, Fable could get more inventory from their sustainable factory partners in Portugal and Japan, further strengthening their relationship with suppliers. And over time, consistent sales and product restocking helped ease negotiations with those suppliers. In just one year, they doubled stock and tripled sales.
Although Fable had lots of options for funding, they chose Shopify Capital for its fixed cost, even with inflation. And using Shopify Capital didn’t come with any conditions about how they had to spend the money on their business. This year, the company utilized another round of funding and is planning on investing it in their U.K. expansion efforts.
“Without Shopify Capital, we’d probably move a lot slower,” says Parenteau. “Extra investment allows a business to move really quickly and seize on opportunities when they appear."
Results may vary for every merchant.
All loans through Shopify Capital in the US are provided by WebBank.
Tina Luu Co-founder and CTO, FableIt could be six months of full-time work trying to wrangle venture capitalists. It takes up a lot of time. Shopify Capital is easy; it’s a no-brainer. It frees up time to do more important things than dedicating two people to building models and reaching out to investors or debt lenders.
How Shopify can help
Get flexible business funding to unlock your adaptability
Shopify Capital lets you spend wherever you see fit for your business so you can stay autonomous. Skip writing business plans, pitches, and lengthy paperwork. Instead, invest that time where it’s needed most.
A predictable and fixed cost of funding through Shopify Capital can insulate you from the variability of rates and compounding interest—and remove some ambiguity from your investment planning.
Are you a Shopify merchant? Check your eligibility for Shopify Capital
Offer “buy now, pay later”
Buy now, pay later grew immensely in 2022, with more brands offering buy-now-pay-later options both in person and online. In fact, buy-now-pay-later spending was up a whopping 438% when compared to 2019 levels.[^3] Offering consumers the flexibility to pay for a purchase over time can make or break a sale—especially when consumers are watching their spending more closely than ever.
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Commerce Trends 2023p. 13, Overview