The knock-on effect of the oil crisis on the dollar and other currencies is having serious implications for businesses around the world. In a number of countries national currencies have suddenly crashed in value. Value for money has become a scarce and expensive commodity as customers will now have to pay more than they did in the past to get standard value.
As a result there is going to be an amplified predisposition of customers to reduce their spending, manifested in the form of spending less frequently or in consumers making a conscious effort not to spend.
The implication for businesses is going to be reduced revenue resulting in a probable drop in profit. This is especially true for ecommerce businesses in Africa.
As a result of the developing nature of Ecommerce in Africa, some key components that are acute to Ecommerce success are still provided by foreign vendors. For instance, online marketing campaigns (which are critical to ecommerce success) are billed in dollars and other foreign currencies. Most e-commerce outfits in Nigeria place their ads on foreign based media. Examples include ads on Google, Facebook, Criteo and other online channels, given the slide in national currencies already referred to in the opening paragraph, an advert that cost $ 100 in Nov 2014 is more expensive in local currency in Jan 2015 at the same $100 price.
So how do e-commerce businesses in Nigeria manage this increase in cost as a result of the dollar hike and probable drop in profit brought about by the amplified need to reduce spend on the customer side?
Using Michael Porter’s five forces model as a guide, we can investigative the effect of the dollar rise on Porter’s market apparatuses in an attempt to figure out what it means for the retailer and consumer and thus answer this question raised.
Suppliers: The current economic situation as a result of the dollar hike creates an illusion that the bargaining power of the supplier has been increased. Unfortunately the problems with illusions are that they appear real and sometimes inspire real actions and outcomes. Customers who now want to spend less, (especially now that the price of everything is inflated) do not have many options in terms of price variety.
This mirage increase in the bargaining power of suppliers does not result in any optimistic change for businesses, particularly in the ecommerce market in Nigeria, where most online stores sell products that the consumer can go a couple of months without purchasing (Fashion products, electronics, travel etc. fall into this category)
Regrettably businesses (wholesaler and retailer) cannot themselves remove the illusion of the increased bargaining power of the supplier without impacting negatively on their revenue, but they can reduce the effect of the illusion.
The way forward here for ecommerce stores is to either purchase from local suppliers (reducing the effect of currency conversion) or sign LTA’s (long term agreements) that allow their supplier give them some form of leeway on pricing with the view that the retailer will continue doing business with the particular supplier for a specified time duration. The LTA’s should be flexible and responsive to changes in the economic conditions, so that both parties can opt out when necessary without any losses incurred.
By buying locally or signing LTA, Retailers can reduce or maintain their spend and this will help keep prices constant for their customer, thus ensuring the business can remain profitable
New entrants: The current economic situation has raised the entry points for new businesses. It is always reasonably expensive to start a business and it is expensive to run a successful business, starting and running a business now would require a lot of capital commitment for minimal returns for the foreseeable future.
This is actually advantageous for already existing businesses as there a sense of forced commitment on the consumer to already existing e commerce stores, these stores however have to create value proposition that will keep the consumers happy during these tough times
Buyers: If maintaining or increasing revenue is the objective in these difficult times then the buyer has to be given the enough rope to be able to pull comfortably with minimal restraint from the supplier side. Initiatives like credit and other flexible payment options can go a long way to ensuring that your customers can still make payments for products and services. Of course these initiatives have some degree of risk associated with them, particularly the credit option, so before businesses decide to dive into implementation an effective and sustainable strategy has to be set up to mitigate risk.
On the retailer side, giving your most valuable customers a credit and flexible payment options is not such a bad idea as it helps build customer loyalty, improves word of mouth marketing and if the payment options are set up correctly the retailer can actually make money on interests (assuming you are giving your customers a monthly plan payment option).
The phrase buy now pay later sums it all up.
Substitute products: Customers want to avoid spending because they believe these products no longer represent value for money (or are expensive in layman speak). How about introducing less priced products or customizing your existing product base to cater to these current times, that way you can maintain a steady flow of revenue while you diversify your product base (which is a good thing). The trick here is to develop must-have product/packages with great value proposition that are affordable within the current economic climate.
Competition: within the confines of Commerce, competition between sellers is always great regardless of the times as it brings out the best for customers and it can significantly improve a business productivity and efficiency. Competition should play a major part in determining how clever and tactical businesses will apply themselves as they attempt to survive the economic siege
Growth is one of the characteristics of living things; we learn that at elementary school. Businesses are run by people who are living things, so I guess growth is also a characteristic of a business. The question here is in which direction your business will grow.
The current economic state of affairs presents an obstacle for businesses to grow, it also provides an opportunity for business to grow, and it all depends on how the business owner sees it and what the business decides to do. Adapt or die.
The article suggests some ideas on how businesses, particularly E commerce stores can cope and improve within the constraints of the dollar rise.