As e-commerce accounts for an increasing percentage of a brand’s current and future growth, a paradox has emerged: e-commerce is often a less profitable channel than a brand’s other retail and wholesale channels.
In the old world, where e-commerce often accounted for a small percentage of a company’s sales, the need to improve the profitability of online channels was easily overlooked. But as companies see the proportion of e-commerce sales increasing dramatically, the urgency has arrived.
E-commerce is no longer seen as an isolated case – it is the future of retail. This renewed interest has led many management teams to ask their digital leaders: what is driving e-commerce profitability and how can we improve it?
I wrote a study to answer this question, titled Key drivers of profitability on the digital shelf, with contributions from Molly Schonthal, founder of the Digital Shelf Executive Forum, Chris Perry, co-founder of FirstMovr, and Peter Crosby, executive director of the Digital Shelf Institute. The study presents insights based on qualitative interviews with digital commerce executives from multinational health and beauty, electronics, grocery and home brands whose annual business revenue exceeds $250 million.
Four key themes emerged from this research: the definition of profitability itself, a company’s product category and price, media spend and attribution, and the brand’s relationship with Amazon.
- The definition of profitability
First, it became clear that brands do not always speak the same language. Some companies define profitability by the margin of variable costs. Others have less forgiving metrics such as net income from operations (NIFO). And so, within these companies, different departments have different profitability goals. One interviewee noted, “Internally, we have salespeople who are commissioned on gross sales. We have marketing and e-commerce experts who are paid based on EBIT (earnings before interest and tax). So, as you can imagine, conversations between the two groups don’t improve over time. »
The company’s strategic objectives and the inclusion of vacancies for the e-commerce department are also seen as important factors affecting profitability.
But it’s not all in the hands of digital and e-commerce leaders – many cited successful ideas ranging from using customer data to make product design changes that improve profitability, to internally promoting a harmonized P&L framework. (Profits and Losses) that will adapt to the new world in which they operate.
- Product category and price
Some aspects of a business are relatively fixed, such as product category, price, and supply chain. These “immutable” factors have a significant impact on the profitability of a company’s e-commerce channel, for example:
– Higher priced items with an average selling price of over $200 can often be more profitable in e-commerce than traditional brick-and-mortar retail channels.
– FMCG brands typically struggle to be profitable in e-commerce channels compared to physical retail channels. An exception is beauty products, which tend to have a higher profit margin.
But again, study participants shared many success stories and insights. One interviewee said that reviewing the packaging design was one of the top three drivers of profitability: “Our packaging, which is mostly on store shelves, can get quite expensive, especially for small items. So we have a team that works constantly in reviewing the packaging. »
- Media spend and attribution
Media spend is often among the biggest spend for a brand’s e-commerce channels, and as such represents one of the most visible opportunities to increase profitability.
However, Lina Racaniello, VP Marketing, Brand Management and D2C Sales at Dorel Home and Executive Forum Member at the Digital Shelf Institute, explains that while it is simple to attribute some lower channel marketing ad spend to certain products and market channels, the challenge arises when there is investment in branded media that creates product recognition across the industry and at multiple points of purchase, both online and offline. “How can manufacturers or brand owners best affect this channel or product? she asks.
Study participants shared success stories of reallocating cooperative fees to retail media ad spend and the ongoing testing of ad spend bases and limits across each retail media platform.
- The relationship with the Amazon
With Amazon being the biggest source of e-commerce revenue for most brands, reviewing the sales relationship and tightening the terms of trade with Amazon can be one of the high leverage activities for an industry brand.
Some respondents pointed to the “3P” (3rd party seller) sales model on Amazon as an opportunity to recover the profitability of this channel.
What is the next step ?
Much of the value of this study is that profitability data is confidential and difficult to obtain. At the same time, brand executives are highly motivated to know what an appropriate baseline is for their category and what actions made things happen for their peers.
A common theme across the report’s four key findings is the need for cross-functional collaboration within organizations and the realignment of incentives for an omnichannel world. The truth is, we may already have all the data we need to start making these changes.
“On the one hand, the amount of data generated on different media platforms that don’t necessarily ‘talk’ to each other only makes the situation worse,” says Lina Racaniello of Dorel Home. “On the other hand, the advances we’ve seen in business intelligence and modeling have significantly improved the situation. Having a data culture in any organization is the best starting point for brands to first create alignment on a shared definition of metrics. »
Translated article from Forbes US – Author: Kiri Masters
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