E-commerce: Is your growth based on being lucky or being good?

1. Availability

Back in the early days of e-commerce, and also when the e-commerce market exploded due to the Coronavirus retail shut-down, it was almost enough to just be open and have products in stock to grow and be successful. We even saw small local stores creating e-commerce shops that made significant sales. However, as the competitive landscape increased, availability shifted from one’s own channel (website) to being present and available on other platforms such as marketplaces. We are seeing movement from having products in stock in your warehouse (a “king of e-commerce offering”) to a more mixed picture, where e-commerce retailers are choosing to offer products that are not in stock but are still available on the same delivery timetable as the merchandise from their warehouse. We see this development continuing as brands are “upping their game” - providing APIs and delivering competitively.

2. Pricing and Merchandising

The next level of competitiveness is pricing. Because digitalization brings transparency to everything, your prices need to be right. Have an attractive offer. You might sell an overpriced product to a customer once, but that won’t last when other e-commerce retailers have a more competitive price. This is a major factor in competition, and in lower levels of competitive intensity, your prices need to be about right from an overall perspective.

However, when competition intensifies, your prices and AdWords need to be perfectly aligned. You only win the sales button with the right price at the right time; otherwise, you are irrelevant and even your best customers will know it. Having a pricing strategy/plan, and a structured approach to trading and merchandising, is a prerequisite. This strategy is required to go from relying mainly on promotions to drive sales, to having a focus on the individual customer, ensuring the next product purchase/experience creates great NPS and loyalty. To provide this, you need to move the experience customers know from your physical shop to your website – with the right product, at the right price, in the right context, at the right time! How optimized are your key trading drivers (product sorting, site search, promotions, and the use of the home page driving traffic to the right products)?

3. Assortment

Your assortment is the next competitive level. In essence, this is about having the products that customers want. And nursing your approach to assortment is the main source for above-market level growth, and the most effective way to affect your average basket size. At low levels of competition, your assortment width is key to success. However, as competition intensifies, competition shifts towards width AND depth, and how you work with the product descriptions and details in a way that customers understand and like.

This is the reason many companies have started working with PIM systems (Product information Management systems). One common mistake, however, is that companies are simply just putting their ERP data into the PIM platform. But that will not give you a competitive edge, as data quality does not change significantly. Another aspect that is increasing in importance is whether to make your assortment available at marketplaces. This is a strategic question in itself: Can the risk of losing control be managed? And, do the short-term sales and the long-term positive brand effect for your store outweigh this risk? Moving towards making your assortment available in marketplaces, we would normally recommend focusing on products with high customer satisfaction, easy fulfilment, and low return rates.

The key to winning in this battle-zone is understanding your customers’ preferences, the costs of product onboarding, and how to find the optimum balance between the two. You should also aim to strike the right balance between assortment width and depth. Many companies increase width too much to increase growth/AOV but then face being less relevant and losing their previous “category-ownership" status. Customers may not understand why a broad range of products are introduced in the shop, and internally, the company loses track of its core assortment (product offering), driving unprofitable shopping baskets.

4. Delivery and Fulfilment

The next competitive level is a tough one, and the last of the mature levels, which indicates that it has been a competitive factor in the e-commerce industry for many years. People want their products offered conveniently and delivered fast. Their requirements change rapidly, as the biggest players establish new standards. Delivery and fulfilment are the most important factors in projecting if you’ll see the customer again, as well as if the e-commerce shop will experience profitability.

At lower levels, customers’ expectations toward fulfilment are lower; but as competition grows, multiple delivery options need to be in place, and stringent communication options across all touchpoints are needed to succeed. This will be both complex and expensive for most e-tailers, which is why the winners in recent years have been those who truly understand how to optimize their logistics setup. We foresee fulfillment will move from a slow-moving process with long platform and vendor cycles to a “system of innovation” with a lot of disruption/new methods is coming fast over the next 1-3 years. Just look at last-mile delivery and how much Coronavirus has changed perspectives here.

During the Coronavirus shutdown, Amazon saw an increase in negative customer reviews. This was not because of product disappointment, but because the shop promised an earlier delivery than could be achieved due to the pressured market. Delayed deliveries were perceived as a letdown and affected the entire customer experience. Delivery and fulfilment are also the root causes of most customer service requests seen in call centers.

5. External Visibility

In recent years, more and more companies understand the importance of SEO and SEM, and are investing heavily in those areas. This is not limited to the fact that Google and Facebook have made it extremely easy to follow shopper behavior on daily basis. However, as intensity increases, this battle-zone starts to focus on your web-quality score and performance and your visibility on all social media platforms. We have identified this as the battle-zone that most e-commercers are fighting right now. SEO screen space has been limited due to Google Shopping and Google Ads but it is still important. SEM has turned into a data game where the granularity and precision of your Google Shopping feed are key – and with automation, this becomes less of a differentiator. Finally, social media’s role as either simply a top-funnel activity or a scalable transaction generator is constantly a dilemma to review.

In short, you need to utilize these standardized processes and platforms, and also focus on creating a differentiating message. We expect that this space will become more and more crowded, while competition will intensify significantly over the next couple of years.

6. Omnichannel Experiences

The next competitive level is particularly relevant for those companies that have stores or physical businesses in addition to their e-commerce platform. Here, omnichannel is the hot buzzword of the battle-zone. It typically begins with a need for an app, where the company can interact with their customers on their own terms and outside the screaming and crowded marketplace. As competition intensifies, many different consultants will try to nail “true omnichannel” – however, omnichannel is a Nirvana that no company has reached (or will ever reach), though they all strive for it. In reality, connecting the physical and digital experiences, stocks, merchandise prices, promotions, marketing efforts, etc. is complex and extremely expensive. The key learning for us in recent years has been to focus more on what companies can do well instead of investing a lot of money in initiatives that neither the business nor the customer will ever use. But hey, you are more omni after the investment.

As you can surmise, we have seen our fair share of overpromising omnichannel deck slides and marketing materials. What we do like about omnichannel is looking at it as another data point and factor in the customer experience, then finding the value for businesses and customers. Omnichannel is much more than all the features that companies want to build – it is a way to serve your customers well, regardless of where and when you serve them. A good place to start is trying to understand the true value of each channel and how/where they generate value for each other or together. Despite our cynical view on omnichannel, we do see it as an intense battle-zone - both now and in the coming years.

7. Great Customer Experiences

As the competitive factors become more advanced, some e-commercers start to realize that the next step, besides what already has been mentioned, is to create great customer experiences. We all know or remember the few great experiences that we actually talk about with friends and family. Here, we are not just talking about a good check-out flow with strong conversion rates; we are talking about unique and dedicated customer experiences that differentiate the company from its competitors.

Besides finding the select few experiences fitting your offering and doubling down to make a great experience for your customers, access to data is a must to deliver this experience. However, due to privacy concerns and regulatory laws, the loss of third-party cookies has led to challenges when trying to track and understand buyer behavior online. Savvy e-commercers use this information to personalize the experience or to create the optimal experience for customers when they meet your brand. The first step for everyone is to take control of their first-party data and use those insights to make the right decisions for their business, delivering on the all-important customer experience.

We call this area an advanced battle-zone because building truly great customer experiences requires several things: great people, great data, and a flexible system landscape that can serve as a great digital experience. This requires that you separate your system landscape because you have hit the glass ceiling of growth within standard platforms such as Shopify, Salesforce, SAP, etc. Great customer experiences are your first step towards customer loyalty and highly satisfied customers (NPS).

8. Customer Lifetime Value

The next competitive level is also quite advanced because here, companies are competing on Customer Lifetime Value (CLV). But competing on CLV requires that you know your customers across all the different touchpoints you are using. Nowadays, most companies have identified that they need a Customer Data Platform (CDP) for collecting all the data they can get from the different touchpoints. However, most companies we have met have no idea of why they need it and how to generate value from it.

Recently, the Danish association for E-tailers (FDIH) launched its first half 2021 results, and they show that the staggering number of 70% of all e-commerce purchases are through a webshop that the customer has used before. Therefore, all companies in intense competition need to understand their customers’ frequency, engagement, recency, and monetary value.

This requires advanced skills and systems to help companies navigate through the jungle of marketing automation tools that claim they can do this automatically– because they really cannot. First and foremost, it starts with identifying which customer journeys and/or moments of intent that you need a CDP to improve. Or maybe, start somewhat smaller by just determining which products generate the most profitable orders in an identified timespan, making it much easier to start and generate valuable data. Start by serving your customers with the absolute best experiences and products, because the higher they evaluate the next experience they have, the more likely is it that you’ll see them again, hence higher CLV. Unfortunately, we see companies tend to propose products and experiences with high margins but lower customer satisfaction scores, which will erode  CLV. So, start small  – simply by promoting your best experiences/products.

9. Business Revenue, Cost, and Process Optimization

The next level of competitive battle-zone is internally focused, and some might argue that it should be lower on the list. However, most E-tailers can thrive in their market and still be sloppy on business costs and processes - mainly because money is cheap in the market and e-commerce shop valuations are sky-high.

We do see the most advanced retailers starting to be very cautious about creating profitability from lowering costs and investments in systems and processes. One example is the fact that many shops don’t understand the cost of a customer request in customer service. We know from large companies that efficient customer service organizations use roughly €8 per customer request as a benchmark. The best companies know and understand the cash contribution from each order coming in daily. They track all cost components in their P&L at the unit/basket level and have a clear view of where costs should be heading to turn it into a competitive advantage.

As headwind increases, companies need to start working on their cost and process effectiveness. As a clear consequence, we see the frontrunners starting to focus on POAS instead of ROAS, which requires a full and transparent view of P&L and customer feedback to buy AdWords and create profitable and extraordinary customer experiences.