What happens when inflation doesn’t go away?
Here’s what E-Commerce entrepreneurs need to know about rising prices.
If you flip through the pages of the Wall Street Journal this week you’ll likely find one word splashed across the page more than any other. You’ll find it all across the internet as well. It’s hardly been a topic of stories, much less headlines, in literally decades. But this year the word sent everyone scrambling for their economics textbooks.
Inflation is all anyone can talk about. In the US, it’s hovering at a 40-year high. Eurozone inflation surged in August for a 9th straight month of record highs. Inflation has become so prescient that the New York Times created a handy tool to measure your own. While trying to understand inflation can seem like a mind-bending task, it’s pretty much impossible not to feel right now in some form. Prices are soaring for everything from groceries to fuel, with some categories prices rising more than others. As a result, the implication of inflation on society is nuanced. Rising prices are especially putting e-commerce sellers in a bind as inflation looks likely to be a staple well into 2023. We spoke with our brand experts to answer your questions about inflation and created this guide to help you navigate the weeks and months ahead.
What is inflation?
Put simply, inflation is the rate of rising prices for goods or services across the entire economy. Because of inflation consumers gradually have less purchasing power over time. Key word here is gradual. Remember your grandparents telling you that a coke cost a nickel back in their day?
“Inflation is the boss of our lives,” says Thomas Braunfels, a M&A acquisitions manager at Mantaro Brands. However, it’s important to realize that inflation isn’t necessarily always a bad thing. As we mentioned, inflation technically means that a dollar today is worth more than a dollar tomorrow. That, in turn, acts as an incentive for people to go out and spend their money and invest in stocks and businesses, rather than keep their funds tucked away in a bank account. Having some inflation helps economies innovate and grow. In a healthy economy, annual inflation is typically in the range of 2 percentage points.
“But on the other hand, too much inflation absolutely destroys growth,” Thomas adds. It erodes purchasing power faster than wages can keep up. It contributes to economic inequality because people with low incomes traditionally feel the brunt of rising prices.
But what causes inflation?
You might have heard of CPI, which is the most common term for measuring inflation. In the US, CPI inflation rose 8.3 percent in August year over year, which is as high as has been seen in decades. The number has come down recently, but it’s still above 7% year-over-year.
We are seeing that spike in inflation today because of a crisis, or rather a series of crises.
First, the pandemic limited the supply of goods and services by causing factories and entire cities to shut down and quarantine. Then consumers, who built up large savings due to time in lockdown and as a result of relief sent by some governments, rushed to spend. Global sales soared for e-commerce especially.
But what happens when there is more demand than supply? Prices rise, and they have been getting out of control.
And just when supply chains looked to be on the mend, another crisis, Russia’s invasion of Ukraine, further constrained the flow of goods and entrenched inflation, especially in Europe.
Will high inflation last?
As much of the world puts the pandemic in the rearview, why is inflation still at a record high? After all, due to vaccines and easing of restrictions, people are returning to offices, restaurants, and traveling again. That’s a mystery that some of the world’s leading economists are still puzzling over, as inflation really does appear to be sticking around. Often economists say that inflation has a compounding effect on itself, rising prices lead to rising wages which lead to more rising prices.
Look at economies in Africa and Latin America where inflation has remained entrenched for decades.
The fear of the so-called “inflationary spiral” in the US and in Europe is causing policymakers a great deal of heartache at the moment. Some say that the only way to control prices might be to trigger a recession through monetary policy. Have you noticed stocks tanking? That’s what investors are afraid of too, that central banks taking the fight to inflation by raising interest rates might lead to a real recession. We’re taking on that tale in another story.
“The first key for small online brands facing inflation is to favor products in their portfolio with low price elasticity.”
How does inflation impact E-Commerce?
“The thing about inflation right now is that it’s market-wide and will affect everything,” says Thomas. Rising costs of materials, supplies, and labor will erode margins. Businesses are often left with no choice but to raise prices for their products. As a result consumers reduce or drastically change their spending behaviors.
Sellers therefore find themselves in a bind. Even mighty Amazon is not immune to rising costs. In April for the first time in its history, Amazon levied a 5% fuel and inflation surcharge for fulfillment services. This had to do with supply chain costs increasing and Amazon redistributing its cost to sellers.
Rising prices for goods sold online are impacting the way consumers shop in big ways. Consumers are cutting back on nonessential products, buying in bulk to stock up before further price increases, and even reverting back to in-store shopping. The ways in which households are spending their budgets are changing to reflect the times, such as spending more on essentials like groceries.
There is a case to be made that economy wide inflation impairs e-commerce businesses more than brick-and-mortar businesses, too. The ease of searching thousands of different listings at the click of a button encourages consumers to shop aggressively for bargains, and incentivizes sellers to cut prices or provide more discounts to compete. Declining pricing power for sellers makes it harder for digital brands to offset rising costs.
How can Amazon sellers navigate inflation?
“The first key for small online brands facing inflation is to favor products in their portfolio with low price elasticity,” says Rishabh Verma, a Brand Manager at Mantaro Brands. This could mean goods that are considered essential because people will still need those items regardless of price.
But if you’re afraid that e-commerce sales on Amazon will crater as prices spiral out of control, don’t forget how essential Amazon has become for the household. Even as household wallets were squeezed by inflation, Amazon shoppers went out and bought over 300 million items on Prime Day this year, up from 250 million in 2021. It was the biggest Prime Day in Amazon’s history.
“While Amazon doesn’t reveal its sales data, it’s a safe assumption that shoppers reached for necessities over indulgences,” says Rishabh.
If you’re thinking about launching new products, consider categories like Pets, Beauty, and Baby. These categories invoke strong emotional connections. You love your dog, yourself and your baby so you have a higher willingness to pay, even when cash is tight.
Another way to think about this as a seller is that you want to invoke that emotional connection a customer has with your brand. Some sellers are shipping products with gummy bears and sweet treats inside their packaging. “This surprises and delights the customer and quite literally leaves a great taste behind,” says Thomas. It’s all about building up the intangible we call “brand equity.”
And having strong brand equity takes far more than slapping a name on the packaging. The more consumers view your product as indispensable, the more likely they are to include it in their basket of goods even when prices overall are rising.
Bold entrepreneurs understand that any crisis is an opportunity. E-commerce business owners ultimately need to stay nimble and even take risks when faced with soaring prices in the months and year ahead. But focusing on building brand equity will always go a long way towards making your business inflation-proof.
Learn even more about inflation with these excellent explainers:
McKinsey | What is Inflation?
New York Times | What is Your Rate of Inflation?
The Wall Street Journal | Beating Inflation is Easy Online - Except for Sellers
Axios | How e-commerce enables inflation