SUPPLY CHAIN MANAGEMENT   |   4 minute read

What is the ghost economy and why is it costing $1.75 trillion annually?

One element of eCommerce business that’s rarely spoken about but should be a key concern for almost everyone operating in the digital retail market, is the ghost economy – yet many won’t have heard of the term.

Boo! The ghost economy is costing you $1.75 trillion

Learn how to bust if by mastering inventory management today.

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The ghost economy is the largely hidden cost associated with out-of-stock, overstock, returns, and order issues that cost businesses a significant chunk of their revenue annually. It’s related to the reverse supply chain – that is, what it takes to get a used product from a customer and either dispose of it or reuse it. These costs are rarely measured, and as a result, are all too often swallowed up in the cost of doing business.

What most small to medium eCommerce retailers don’t realize is that there may be another way to measure cost. But first, let’s understand the issue.

What is the ghost economy costing your business?

According to statistics published by Business Wire, you could be losing the equivalent of 11.7% of sales every year to the ghost economy without even noticing that it’s gone. Why? Because it’s largely invisible, yet you and other eCommerce businesses around the globe are being swindled out of $1.75 trillion a year:

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RELATED: How to calculate inventory turnover

What are reverse logistics?

Embedded in the ghost economy is the issue of reverse logistics. The term reverse logistics refers to the actions required to return merchandise from a customer to your store, ready for sale again. Many retailers treat this as individual transactions that are disjointed and uncontrollable, yet there are ways to streamline and optimize this process.

What does the ghost economy impact?

The ghost economy negatively impacts your inventory turnover ratio, increases your inventory carrying costs and reverse logistics costs, and severely reduces your profit margins.ebook25-blog_5

It may be easy to think that the costs related to the ghost economy are simply the price of doing business in an eCommerce landscape, but they’re not. Here are some of the issues caused by the ghost economy and their solutions:

Overstocks - This is when a sale is made, in which the business incurs a loss, usually as a result of poor inventory management.

Solution - Demand forecasting and smart stock management is a difficult art to perfect, but the savings created by good systems justify the costs. Luckily, TradeGecko's inventory and order management system can help make managing stock a breeze by combining all your sales channels, locations and currencies so that every product, order and customer can be managed in one place.

Stock-outs - When a customer wishes to purchase something, but due to it not being in stock, has to leave without buying.

Solution - This is an issue of effective inventory management. While it may seem like a significant investment to implement a smart inventory management system, it’s worth it when you weigh up the cost of getting someone to the point of conversion, only for that cost to go to waste as a result of a disappointed customer. Better demand forecasting means no wasted marketing and admin costs.

Preventable returns - When a customer returns an item due to an error (either on their part or the retailer’s), faulty merchandise, or an issue like inconsistent sizing in clothes.

Solution - Because this issue has many possible causes, it requires multiple approaches to solve. These range from better quality control on suppliers’ stock, or providing more information in product descriptions so that customers can make the right choice of size.

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