How to reduce ecommerce costs without sacrificing your future
Let’s not pull punches, right now D2C fashion is tough.
Everything costs more, fewer people are buying and managing your finances has never been more complicated.
The natural inclination is to start cutting spend and tightening budgets, and for a lot of brands this will be the correct course of action.
But it needs to be done sensibly, in the right areas and in a way that will allow you to bounce back with strength when the time is right.
With clients I often draw parallels to the practice of weight cutting in sports, of which I’m frequently an unenthusiastic participant.
For the unaware, it’s better to a be a big competitor in a small weight class. Athletes, and particularly fighters, will intentionally manipulate their weight to squeeze into a lower class to gain an advantage. Then between the weigh in and the event they’ll drink and eat their way back up to their ‘actual’ weight.
However, if they
Conversely, if they don’t lose enough weight, they won’t make it to the actual fight at all.
Applying this principle to ecommerce, you need to find the happy medium between:
Making enough cost reductions to keep the business operating and sustainable.
Maintaining activity that is going to contribute to your medium and long term growth.
The absolute worst trap you can fall into is making savage cuts that cripple any chance your brand has to grow in the future, only to have to repeat the process in 12 - 18 months because your core business has entered a shrinking spiral.
What follows is the general framework I work through with clients and how it works in practice with fashion brands.
Step 1 - Release cash
Remember that wall of dead stock you have in the warehouse?
Yeah, the one you were going to deal with last year.
The best time to solve that problem was 6 months ago, but the next best time is now.
Don’t worry about damaging your brand or perceived value. Brands are built and devalued over the long term, another sale event isn’t going to dramatically change that trajectory right now and you need the cash to sustain yourself.
In order of preference, here’s your main options.
Run a multistep sale event where markdown ramps up dependent on sell through rate. Don’t be afraid to start off more aggressive than you usually would for a sale, your finances probably require a sense of urgency.
Brick & Mortar discounters. Namely TK Maxx and other similar stores. Again, don’t worry about brand perception, we can fix brand in the future as long as you’re still trading.
Online discounters. A viable option if you absolutely must. But remember, they’ll be flooding Google Shopping with this marked down and you’ll need to directly compete with it in the coming months.
Give stuff away. Either as a free gift on another purchase, or to delight your best customers. The stuff just needs to be gone. If nobody will buy it at 70 - 80% off it’s not worth anything. And if you’re running a 3PL, you’ll be saving on storage and pick face costs.
Key Takeaway
Aggression is a requirement when liquidating stock with financial woes. Fashion brands which are consistently starved of free cash flow (FCF) tend to work themselves into a cycle of decline.
A decent warchest to fund your fight against this cycle will make the following steps a lot easier.
#2 - Reset your goals
From experience, the financial difficulties many fashion brands are facing are being made worse by chasing a revenue goal which is largely arbitrary.
Whilst bumper revenue is of course nice to see on monthly reports, it’s all for nothing if it comes at the expense of sustained profitability.
For this reason, I advocate for all brands to start using contribution margin as their primary financial measure of success.
This is good practice in general, but is absolutely vital when you’re tightening your belt.
Remember, revenue doesn’t pay your bills if it rises like for like with your variable costs.
Focusing the entire team on contribution margin puts attention onto maximising the amount of cash you have to pay your fixed costs.
Be warned, this can be a difficult thing to achieve in practice. It requires a big culture shift and also some operational updates such as reporting.
But I promise you, it’s worth it.
Step #3 - Review Your Fixed Costs
When I lay out the next step with clients it’s met with surprise in some circumstances.
Typically speaking, it’s easier to cut variable marketing spend than it is to look at fixed costs. But I find tackling the fixed costs gives you a much clearer idea of how deep you need to adjust your variables, resulting in a better outcome overall.
Every brand will be different, but here’s the usual suspects that tend to have a savings opportunity attached to them.
App and tech fees
There’s almost always money to be saved by reviewing your recurring app fees. I’m routinely amazed by how much is spent on apps that nobody actually has a login for anymore, so start by looking through your Shopify bill.
And don’t forget to review tiered plans on the apps you are using regularly to check if you could be on a cheaper plan.
Klaviyo is a big culprit here due to poorly maintained lists, so give it a clean. It will help your deliverability stats and your monthly outgoings.
Agency fees
Fashion brands waste a lot of money on unnecessary agency fees. When times are tough it’s more important than ever to truly assess their performance. Are they genuinely adding value, or are they just riding on the coattails of your brand growth?
This is going to be controversial. But 99% of fashion brands don’t need an SEO agency on monthly retainer.
If you’re sending newsletters using inhouse staff, you probably don’t need a CRM agency fiddling around with low impact flows to fill their monthly hours either.
Paid media is generally something you’ll need to maintain, alongside your dev team. Transitioning away from these partners tends to bring more risks and headaches than the savings are worth, but there’s always exceptions
Staff
It should go without saying, but your team should be the last area you look to make savings. Not only is it a really shitty experience to go through for all parties, it will kill team morale and seriously reduce your capabilities in the future.
If you’ve been a little lax on hiring and you have some non-performers on the team, then that’s a different story, but generally speaking you should do everything you can to avoid disrupting a well performing team.
Key Takeaway
Once you’ve been through this exercise you’ll have a solid idea of what Contribution Margin you’ll need to generate to cover your costs.
This makes the process of optimising your variable costs much easier
Step #4 - Adjust Variable Spends
Now we’re into the final stretch.
The steps leading up to this have given us some cash in the bank and a clear idea of how much Contribution Margin we need to make each month.
Sounds simple, but it will probably take you a few months to find your goldilocks position.
Cost of Goods
Most fashion brands have their hands tied in the short to medium term on product costs given how far in advance orders are booked into manufacturers.
However, you should take the option to tighten up your future buys.
If you haven’t already, get a sell through and profitability report pulled together which outlines how much each SKU is contributing to your profit.
Cull minimally contributing lines and colourways altogether if you need to and come out with a leaner product book. This also has the benefit of reducing the resource needed to shoot product photography, create content and manage on your site.
Marketing spend
Here’s the tough one. Your marketing and advertising spend.
The standard line from marketers is that cutting back on spend during tough times is the worst thing you can do.
They’re wrong.
But don’t blame them too much, most are far too removed from the financials that they don’t know any better.
Most brands I audit tend to be heavily overindexed into direct response paid media and have a chronic underinvestment in brand building activity.
My first recommendation is not to make this problem worse by culling anything that can’t be directly attributed to a sale. This is just going to speed up your spiral of diminishing profitability.
Secondly, trim your direct response paid media (typically Google and Meta) monthly spend by 10 - 20% depending on how long your warchest from step #1 can maintain you.
Monitor how this change affects your contribution margin and then repeat as necessary until you reach an optimal level. This may take a few months to get right, but it’s the least risky option.
You can also look at your brand activity for savings, but most businesses don’t have a robust way to actually quantify its effectiveness which makes knowing what to cull next to impossible.
Fulfilment & Returns
With fashion brands logistical variable costs can be a real killer.
As a first step, if you’re offering free returns then stop. As in, stop reading this article, go to your site and make it so that customers pay the return shipping. With return rates regularly running at 20%+ for clothing the practice isn’t sustainable in multiple ways.
Next up, look at your delivery charges and the threshold you’ve set for free delivery. Many brands simply imitate others when setting this figure and don’t really know if it’s helping drive incremental AOV or not.
Calculate the impact on contribution margin at a variety of different thresholds and then choose something that isn’t going to kill you (I’ve seen this hit as high as 20% in some categories!).
Finally, those using Global E, look at your international fulfilment subsidies vs the markup percentages you’ve set. There’s some particularly painful territories which need significant markups to breakeven (looking at you Norway).
Wrapping it together?
Feeling a little tired after reading all that? Don’t worry, it’s natural.
Nobody gets into this business looking forward to the day they have make these types of decisions. Regardless, we have to do it so there’s days in the future when we can get back to the fun stuff.
Remember, everything should be pointed towards increasing your Contribution Margin. Revenue isn’t important, and right now is a vanity you simply can’t afford.
And remember, if you need more help than this article can give, get in touch.