Decoding E-Commerce: Strategies for Profitability, Customer Retention, and Business Succes

E-COMMERCE ZIPPED

E-commerce involves making big decisions behind the scenes. Growing your customer base can be challenging in the first few years, but building a profitable business over time is even more challenging. Many E-commerce players around the world have had to shut down despite having a large customer base because of profitability issues. In the past, it was tempting like a new shopping mall arrived in town yet offering many options at your fingertips but as more players entered the market, competition increased, and companies had to compete with each other through promotions, experiences, and more, which ultimately resulted in higher costs and demanding customers. The key to success in E-commerce is how companies use their time: In time while some companies focused on marketing, commerce/ unit economics or technology, others invested in acquisitions. We are now seeing companies specializing in unit economics & technology merging with platforms that have a large customer base, creating giants that other players must deal with. But what if you are still trying to find your path in this challenging industry?

PROFITABILITY

Typically, a healthy profit margin for E-commerce businesses in 2023 falls between 10% to 20% where net profit margin is a measure of how much of a company’s sales revenue it keeps as a profit after subtracting all its costs. Though this numbers vary along with the size, market and industry: Amazon net profit margin as of December 31, 2023 is 5.29%. When we talk about profitability, the first thing that comes to mind is the cost or margins. Simple math tells us that plus and minus equals zero. However, the level of plus and minus has a lot to do with how smart our decisions are. At the end of the day, we all want our costs to be low and margins to be high. Every player wants to have it all.

When it comes to operations, there is a great amount of autonomy and transformation available and required to build a successful business. Although there has been a lot of innovation happening in the last 10 years, operational costs do not change overnight: Seeds get planted and grow over time. Balancing your growth along with additional headcounts for sure is not sustainable and costly than investing on autonomy. With so much technological advancement in this era, almost everything is doable and can be achieved in less time. However, Humans might be the slowest factor to adopt new changes. Psychologically, almost all the gears of transformation have resistance to change, likely due to the reality of devaluation or simply struggle to adapt. That being said, it doesn’t mean that you shouldn’t invest in operational innovation & excellence but practically, it might take longer than you expect to see the results. At this point, you need to rethink your strategy and find a way that can create a faster uplift.

Marketing can be a significant cost for businesses as well. However, e-commerce marketing is often more cost-effective than traditional marketing. Traditional marketing may require a significant investment in physical materials and media space. In contrast, digital marketing strategies such as SEO, email marketing, and social media campaigns generally require lower upfront costs. Moreover, they provide measurable results and can precisely target potential customers, resulting in a higher return on investment. In addition to traditional marketing, an effective e-commerce marketing campaign employs various competitive strategies to promote products or services. Some of the different types of e-commerce marketing are Content Marketing, Email Marketing, Social Media Marketing, Search Engine Optimization (SEO), Paid Advertising, and Influencer Marketing.

Next stop comes to mind is Margins. Margins can vary depending on the market or sector you are in. In some sectors, you may find many vendors who are willing to use unit economics with an assurance of sell-through. However, this rule applies only where the functional value of the assortment is higher than the psychological value in which brand loyalty is low. In the luxury market, margins are typically tight, brand equity is highly valued, brand image is king, and sales channels are queen, leaving little room for unit economics. In contrast to other sectors, you will not find many vendors eager to sell more at a lower price in the luxury industry.

This is because luxury is all about EXCLUSIVITY — it’s not fashionable when everyone has it.

Therefore, to grow your business profitably, you need to carefully consider your finances. Do you have enough investment to enjoy higher margins by purchasing assortments, or will you pursue concessions — also known as a marketplace — and accept lower margins? Or maybe you will do both or even build your own private label? Ultimately, you need to decide what strategy will work best for you. Maybe you will set it up front, maybe you will experiment and learn.

OWN OR OPERATE

E-commerce offers numerous advantages over brick-and-mortar stores. You have infinite space to display your products at a gradual tech cost. However, higher technology costs are necessary to provide a smooth user experience and to implement profitable strategies especially if you are entering to many region with their own challenge. Gradually lower costs applies to pure marketplace dropship players who do not have inventory or warehouse costs. While that may seem tempting, it is not as straightforward as it seems.

In today’s competitive market, customers expect instant gratification, especially after the COVID-19 pandemic. With so many sectors offering fast delivery, customers have a higher appetite for quick service. It’s essential to keep in mind that fulfillment decisions are highly associated with customer experience and loyalty.

In E-commerce, a positive post-purchase experience is crucial for customer loyalty. It can make all the difference between a customer buying again or not from an online store.

If you don’t have a warehouse facility, you might lose customers to other players who do. That decision surely depends on market conditions and customer expectations. You also need to decide whether you want to outsource your post-purchase experience or brand it as your own. We also have been noticing players expert on logistics creating new brands to manage their own and other E-commerce players logistic operation’s. At the core, it’s important to ensure that after-sales including delivery is fast, personalized, clear, and available in the same channels as the purchase.

REPEAT CUSTOMERS

Businesses often put a lot of emphasis on marketing and sales, but they tend to neglect optimizing the post-purchase experience.

It’s important to realize that making a sale is just the beginning, especially if you want your customers to become repeat customers. Neglecting this aspect can as well be costly since the average customer acquisition cost has increased from $9 in 2013 to $29 in 2022, which is a 222% increase that continues to grow. It is important to keep in mind that a single negative experience after a customer’s first purchase with your business may result in losing them as a customer. On the other hand if positive, a customer becomes increasingly more likely to buy from you again as their number of purchase increases:

After one purchase, a customer has a 27% chance of returning to your store and if you can get that customer to come back and make a second and third purchase they have a 49% and 62% chance of making another purchase. On top, repeat customers generally spend more than new customers too — A research done by Bain & Company found that apparel shoppers spend 67% more per purchase after shopping with a company for 30 months or more and only 5% increase in customer retention produces more than a 25% increase in profit.

Although acquisition is an essential first step in the customer journey, prioritizing it may not be the most effective way to increase revenue. A research conducted with a sample size of over 1.1 billion shoppers and 250 thousand e-commerce brands has revealed some critical findings:

A significant proportion of an e-commerce store’s revenue comes from a small percentage of it’s customers.

Specifically, 41% of an e-commerce store’s revenue is generated by only 8% of its customers, and the top 5% of customers contribute to 35% of the revenue. These top 5% of customers are typically loyal, repeat customers who are highly profitable for the business. Benchmarks for customer retention vary from company to company, but for most E-commerce businesses, 25–30% of their customers are returning customers. Alex Schultz, VP of Growth at Facebook, also supports this metric and suggests that having 20–30% of customers returning every month and making a purchase from your store is a good sign for your business.

Repeat Purchase Rate is one of the most important retention metrics to track. It refers to the percentage of your current customer base that has made at least a second purchase within a year. Tracking this metric is useful because returning customers are more likely to make a purchase than new customers. According to Forbes, businesses have a 60% to 70% chance of selling to an existing customer, while for a new prospect, it’s only 5% to 20%. These numbers clearly indicate that prioritizing existing customers is crucial for achieving profitable growth.

The irony of profit is that it is closely linked to investment, which in turn depends on your financial situation. If you have sufficient funds, you can invest in and own a variety of assortment, run a warehouse, invest in innovation & technology, and hopefully keep up with rapidly changing customer demands to delight your customers. If you lack the necessary funds, you can operate as a marketplace, either using dropshipping or outsourcing warehouse operations to multichannel distribution centers for post-sale optimization. However, regardless of the option you choose, higher growth and net revenue will still depend on how successfully you manage your business 360 degrees.

INDICATORS & CATALYSTS OF SUCCESS

E-commerce conversion rate is a crucial indicator of your business’s success. However, it’s important to note that a higher rate isn’t always better.

It only indicates success when your session or user count is also increasing along with your conversion rate and not to the expense of deluting your profits. Although the concept is easy to understand, improving your E-commerce conversion rate can be challenging. The term “E-commerce conversion rate” refers to the rate of orders placed on your store. This metric may be called something else depending on the data source you’re using. Google Analytics uses the term “E-commerce conversion rate,” which has become the most common name. Others may refer to it as the “transaction rate” or “order rate,” but they all mean the same thing. To calculate the E-commerce conversion rate, you need to measure the number of orders and sessions (or users) in a specific period. Some prefer to use users instead of sessions because sessions can be manipulated. The E-commerce conversion rate essentially measures how many customer visits result in a purchase, whether the customer is new or returning is helpful in determining customer lifetime value and profitability.

The ultimate goal in commerce is to link supply and demand.

Whether it’s an offline or online store, the aim is to entice customers to purchase an assortment when they walk in. Among many factors, assortment might be the most customer-dependent decision as customer’s primary intention is to fulfill a physical or psychological need/want as they walk in. More often than not, the process is quite similar to brick and mortar stores: customers walk in, browse, and if they are interested, they delve into the details of an assortment. They search for their size, check the fit and if their interest is piqued and it turns into a demand or urge, they act on it and make the purchase.

One thing that hasn’t changed much is customer’s cognitive buying process.

Shorter spans exist with the availability of dependent factors. Saving payment method is very important for conversion rate optimization, it paves the way for recurring payments. Notebly, findings show that credit card availability and credit card use is important triggers for impulse buying on fashion especially for customers with hedonic motivations. Saving card information makes the first purchase easy, and subsequent purchases even easier. Therefore it shouldn’t be suprise seeing many player making intense effort to persue saving credit cards on customer accounts. Last but not the least, it’s worth considering whether each customer has the same probability of making a purchase to begin with. For instance, suppose I am size 40. Even though I have the same level of interest and purchasing power, can I buy an assortment if size 40 is out of stock? Or, if I’m French and there is no French size conversion available to find my body fit? Customers might not convert even if they intend to, which doesn’t get reflected in CR metrics.

AGILITY

In a broader sense, conversion occurs when a customer takes an action on your store that you want them to take. Each step of the customer’s cognitive buying process can determine where you fail, what needs fixing, and the frequency & amount of lost opportunity. Unfortunately, an uncaught lost opportunity have a snowball effect, particularly if it’s due to stock out. Depending on the level of urgency, price sensitivity, and brand loyalty, there is a high chance that your customer will either buy something else or buy from somewhere else. However, there is a silver lining — if the assortment is low in supply or scarce (especially in the luxury market), the faster you can supply it, the higher the chance you have of gaining a lost purchase. This is the reasoning behind back in stock notifications. Therefore, it is essential to monitor the demand and create mechanisms to ensure that you get the full potential of sales, especially when dealing with seasonal assortments where you have limited time to meet supply and demand.

Although you may check your sales every day, relying solely on sales as an indicator of demand can be misleading.

Fast-selling products that go out of stock quickly may seem short on sales as the time pass, making it harder to forecast demand. Indeed, you might find your overnight sold-out assortment ranking lower in a week. One advantage of an online store compared to a brick and mortar store is that you have many tools to track, measure, and remove any obstacles along the customer’s buying process on time to understand, adjust, and enjoy the full potential of your assortment and purchasing power of your customers which costs much less than other bits.