As e-commerce accounts for an increasing percentage of a brand’s current and future growth, a paradox arises: e-commerce is often a less profitable channel than a brand’s other retail and wholesale channels. . traditional.
In the old world, where e-commerce often represented only a small percentage of a company’s sales, the need to improve the profitability of online channels was easily forgotten. But as businesses see the proportion of e-commerce sales rising sharply, the urgency has arrived.
E-commerce is no longer seen as an isolated case-it’s the future of retail. This renewed interest has prompted many management teams to ask their digital leaders: What is driving the profitability of e-commerce and how can we improve it?
I wrote a study to answer this question, entitled The Leading Drivers of Digital Shelf Earnings, 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 reveals insights based on qualitative interviews with digital commerce executives of multinational brands in health and beauty, electronics, grocery and home, whose annual business revenue exceeds $ 250 million.
Four main themes emerged from this research: the very definition of profitability, a company’s product category and price, media spending and attribution, and the brand’s relevance to Amazon.
- The definition of profitability
First, it became clear that brands don’t often speak the same language. Some companies define profitability by margin at variable costs. Others have less forgiving metrics such as net income from operations (NIFO). And then, within these companies, different departments have different profitability goals. One interviewee said, “Inside, we have salespeople who are commissioned on total sales. We have marketing and e-commerce specialists who are paid with EBIT (earnings before interest and taxes). So, as you can, think, the conversations between the two groups do not improve over time. »
The company’s strategic objectives and job combinations for the e-commerce department are also considered important factors affecting profitability.
But not all of this is in the hands of digital and e-commerce leaders-many cited successful ideas from using customer data to making product design changes that improve profitability, all the way to internal establishing a sound P&L (Profit & Loss) structure 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 major impact on the profitability of a company’s e-commerce channel, for example:
-Higher priced items with an average sale price of more than $ 200 are often more profitable in e-commerce than traditional brick-and-mortar retail channels.
-FMCG brands generally find it difficult to make money in e-commerce channels compared to brick-and-mortar retail channels. An exception is cosmetic products, which often have higher profit margins.
But again, study participants shared many success stories and insights. One interviewee said overhauling packaging design was one of its top three drivers of profitability: “Our packaging, which is mostly on store shelves, can be very expensive, especially for small item. So we have a team that is constantly working on revising the packaging. »
- Media spending and attribution
Media spending is often among the largest spending for a brand’s e-commerce channels, and consequently represents one of the most visible opportunities to increase profitability.
However, Lina Racaniello, D2C’s vice president of marketing, brand management and sales at Dorel Home and a member of the Digital Shelf Institute’s executive forum, explained that although it’s simple to attribute some ad marketing costs from lower channel in some products and market channels. , the challenge arises when there is an investment in brand media that creates product awareness in an industry and multiple points of purchase, both online and offline. “How can manufacturers or brand owners best impact this channel or product? he asked.
Study participants shared success stories of re-placing co-op fees on retail media ad spend, and the ongoing testing of ad spend base and cap on each retail media platform.
- The relationship with Amazon
Amazon is the largest source of e-commerce revenue for most brands, examining the sales relationship and restricting the terms of trade with Amazon can be one of the high-leverage activities for a brand in industry. improving its profitability.
Some interviewees pointed to the “3P” (3rd party selling) sales model on Amazon as an opportunity to recoup profitability on this channel.
What is the next step?
Much of the value of this study is that profitability data is confidential and scarce. At the same time, brand executives are highly motivated to know what the appropriate baseline is for their category, and what actions caused things to happen for their peers.
A common theme running through the report’s four main findings is the need for cross-functional collaboration within organizations and the re-arranging of incentives for an omnichannel world. In fact, 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 exacerbates the situation,” said Lina Racaniello of Dorel Home. “On the other hand, the advances we have seen in business intelligence and modeling have greatly improved the situation. Having a data culture in any organization is the best starting point for brands to first make alignment with a shared definition of metrics. »
Translated article from Forbes US-Author: Kiri Masters
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