Profitability has become one of the most important priorities for brands for eCommerce in 2024.
In our 2024, Digital, Marketing & eComm in Focus study it was revealed that profitability shot up to the 3rd biggest priority for brands when it comes to eCommerce, up from 8th position in the 2023 study. This insight has been echoed across the market in many earnings reports and conferences. As brands - particularly those operating within discretionary spend categories - grapple with customers reigning in spend and bottom lines are experiencing erosion as a result of higher wages and input costs, the profitability of many eCommerce channels is coming under increasing scrutiny.
However, the profitability challenge for eCommerce is not just an issue for today, as eCommerce has grown over time and will increasingly do so, brands are challenged by the cost to serve and the ability to make the numbers work.
Three key levers to squeeze the eCommerce profitability lemon
For many brands growing and scaling eCommerce, there isn’t a playbook that enables them to deliver profitability as many brands are tackling the challenge for the first time. To drive profitability, brands need to consider and leverage a series of levers and adopt the right mix of strategies to address the profitability challenge.
What are leading brands doing to lean into the challenge?
1. Driving customer retention
In a recent podcast by Mi3, Carla Penn outlined the sheer growth in cost to acquire customers over a 4 year period as a result of ballooning media costs, during her time running several eCommerce sites. In the interview, she stated, “Ad platforms became increasingly more expensive. We saw the cost to advertise – cost per acquisition – double between 2019 and 2023. It used to cost anywhere between $20 and $25 to acquire a customer. We were pushing $40 to $50 to acquire a customer by the time we sold out.
Here lies the problem for many brands operating in the eCommerce market. As eCommerce has grown, so too has the competitiveness of digital advertising as brands pour investment to continue to feed topline sales results and drive customer acquisition. Many brands are single point sensitive meaning they are reliant on these channels to drive their growth. As the CPA rises, brands see margins erode, or worse, they are breaking even or losing on the sale as a result of high acquisition costs, unless they are able to convert that acquired customer to regular shopper.
→ How to tackle it?
Not all acquisition is created equal – we need to identify the profile of customers who are most likely to repeat purchases and deliver value over time to better inform and drive acquisition investment and activities.
We need to become masters at converting beyond the first sale, which means we need to think about key drivers of repeat purchase and loyalty. To do this, it requires thinking across a range of levers including eComm features and experiences that entice the user to buy again, the role of loyalty programs to drive preference, activities to nurture the customer through the lifecycle and much more.
2. Product pricing, selection & promotion
When it comes to products, not all are created equal. Selection and assortment can make or break eCommerce profitability, and often this can be hidden by assessing performance based on a total basket of goods. Whilst some products may be low margin and are key to driving bigger AOV (average order value) and sale of higher margin products online, others may be eroding margin and profitability and understanding the difference is important.
As the cost of doing business online is growing, from increased fulfilment costs to the cost to acquire, brands need to think differently about how to drive growth in AOV online to make the economics of eCommerce work.
→ How to tackle it?
1. Understanding the cost to serve at a product level can allow brands to think differently about their online range and assortment. In some categories, heavier items draw higher costs to ship, and the cost to acquire customers for certain products vs others will differ. Knowing the cost to serve at a product level helps us to optimise our range and offering to lift profitability. However this is just one strategic input, we still need to consider this in the context of how our range best serves our customers, which means we still might retain less profitable products because;
a. They support and reinforce our brand proposition
b. They deliver convenience for the customer as it provides a one-stop shop
c. Certain items that are less profitable are key to acquiring bigger baskets
2. There are more eCommerce channels to activate than ever before – from marketplaces to quick commerce, to social commerce and more, and managing these are also driving up the cost of eCommerce. Brands need to consider their range and assortment across different channels as the cost to serve will differ demonstrably. We at Arktic Fox talk a lot about Product : Platform fit. This challenges brands to consider what the right products and propositions are to leverage in each relevant commerce environment that will enable greater reach and profitable sales growth. In certain environments like quick commerce, developing bespoke solutions to customer problems i.e. a meal solution, as opposed to selling individual SKUs, raises the AOV and delivers on a need of the audience.
3. Getting creative with range expansion; Leading retailers are now adopting marketplace models as a way to expand range, grow audiences and retain them within their ecosystem without having to physically manage stock. Leaders like Woolworths have integrated their marketplace with their core Woolworths platform, allowing consumers to service more of their needs through a one-stop shop. The marketplace solution also enables Woolies to bypass the existing structure within their core business to quickly and rapidly range new items as they trend without needing to free up physical floor and warehouse space – creating a new level of agility for their business in market.
3. Stock management, fulfilment & returns optimisation
As consumers increasingly seek out convenience and instant gratification, brands are facing increasing pressure to keep costs low, whilst fulfilling in-line with consumer expectations. Many brands now offer free delivery, as consumers are now accustomed to getting it, as well as free returns – all of which dramatically effect profitability. Knowing the cost to serve across all delivery and fulfilment channels is key to optimising fulfilment and returns to drive profitability, as it allows us to make choices about how to optimise our fulfilment strategy. So too is understanding the true cost to service returns and the impact on profitability – with the cost of processing returns, markdowns due to damage, and shipping and handling fees all adding significant costs.
→ So, what are some of the tactics at our disposal?
Start low and raise shipping costs over time - It is not uncommon within eCommerce to adopt strategies where the customer is offered attractive delivery propositions to drive stickiness and repeat purchases. Once the base is built, the offering is evolved to be put on a more sustainable footing. Woolworths is a prime example of this. Woolworths began marketing their delivery subscription with a $50 order minimum, once they attracted enough consumers and had embedded loyalty they lifted the spend threshold to $75 and started to charge for bags. This is a great example of fulfilment optimisation.
Offering the more cost-effective shipping option as default – If brands have a good handle on the cost to serve across their fulfilment methods, brands can begin to surface the most cost-effective fulfilment services as part of their core eComm UX experience.
Investing in click & collect – for most brands outside of grocery, click & collect creates a great alternative to fulfil without the hefty expense of delivery, but the uptake is dependent on the speed and convenience of the experience. To do so, communication needs to be second to none, ensuring consumers know when they can pick up and that the order is ready when they arrive. The collection process should be seamless when the customer arrives in store – if customers have to line up and wait, it undermines the value of the service. Finally, make it easy for the customer to identify themselves and provide proof of purchase.
Optimising packaging: Packaging plays a big role in determining the cost to ship. For retailers and brands producing their own products, ensuring packaging is conducive to lower ship rates is paramount, as is partnering with suppliers to minimise the shipping cost of their products.
Reducing returns rate – Return rates differ demonstrably by category. 2024 US data shows clothing by far drives the highest levels of return, followed up by shoes, accessories, and food and beverage. Key to optimising and reducing returns is understanding the drivers of returns which include product quality and expectation issues, ease of returns (the more generous often the higher the returns rate), incorrect orders and more. At a basic level, ensuring the customer knows what they are buying through comprehensive and detailed product information and content (e.g images and videos) can allow the customer to better understand they are getting what they paid for – reducing return rates.
Optimising stock to minimise OOS – Loss opportunities from OOS are often hidden from the business. However, it is even more costly when brands are investing advertising and marketing dollars in promoting OOS products. Not only does it lead to poor experience, it results in increased wastage and further erodes profitability. To maximise sell-through and minimise wastage, brands need to consider how to align their marketing and advertising efforts with stock and fulfilment.
Arktic Fox is partnering with an array of brands to build and define a strong digital shelf strategy.
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