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Retail

Building New Paths to E-Commerce Profitability

Thierry Elmalem
Thierry Elmalem

Summary

  • Master the basics: Use data to reduce acquisition costs and increase average basket size through targeted messaging and personalized experiences
  • Create additional revenue streams: Become a marketplace or create advertising opportunities for partners
  • Offer an attractive membership program: Build brand loyalty with perks customers value
  • Reduce fulfillment cost: Consider new models and data/AI to lower cost of fulfillment and manage inventory
  • Optimize IT costs and agility: Reprioritize to focus on profitability and customer satisfaction

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Historically, e-commerce has been loss-making due to excess cost of free shipping, order preparation and last-mile delivery. Retailers have responded to consumer demand and made investments to establish working e-commerce models, aiming to achieve profitability over time.

But uncertain times have served as a wake-up call for retailers. Now, e-commerce is not just an ancillary service – it’s a critical channel. By 2023, e-commerce is expected to make up 22 percent of total retail sales worldwide, netting $6.5 trillion in sales by 2022 in the U.S. alone. In Europe, online grocery surpassed 10 percent market penetration just this year, due to a sudden spike in demand prompted by the COVID-19 pandemic.

Now, we’re taking a look at how data, technology and operations can maximize revenue, optimize fulfillment and provide better experiences for consumers whose shopping habits have changed in the wake of retail’s “new normal.”

Master the Basics

To start, it’s important for retailers to get back to the basics. According to Invesp, customer acquisition costs businesses five times as much as retaining current customers. With consumers shifting spending habits amid the pandemic, retailers need to focus on building longstanding relationships.

Thierry Elmalem, senior managing director, EMEA, Publicis Sapient, says retailers should examine existing e-commerce and data capabilitiesin two areas:

(Re)-acquiring customers

Retailers typically invest heavily in pay-per-click (PPC) to generate site traffic. With a customer data platform (CDP), retailers can unite customer data across digital channels. Artificial intelligence (AI) and machine learning is used to process data in near real-time to attract the right customers with the right level of spend.

Increasing basket size and margins

AI rapidly identifies shopping patterns in existing first-party data to optimize sales and create personalized offers that drive loyalty. By understanding preference, retailers can improve complementary product recommendations, with personalized reminders notifying customers about “forgotten” items or deals.

Reducing churn 

We see retailers investing in online experience, but then fall short on the post-purchase experience. Retailers can fix churn by creating better customer experiences across the entire shopping journey.

  • Typical Impact: +5-10% average basket, 1.0-0.5% improvement in commercial margin, 20% savings on acquisition costs 
  • Time to Market: 3-6 months 
  • Feasibility: High

Create Additional Revenue Streams

Even after mastering the basics, e-commerce still structurally loses money. Retailers should consider ways to create additional revenue in accordance with their brand promise and values.

Make the marketplace a go-to destination

Online marketplaces serve as a convenient channel for consumers, letting people shop without having to bounce between retail sites. Success of online marketplaces is no more apparent than with Amazon, which, according to Forrester, represents 60+ percent of its retail revenue.

Elmalem says retailers should view marketplaces as more than just e-commerce, but as a way to “enrich your offer and become a destination, since people will find everything they need from you or from well-curated third-party sellers.”

For example, Shopify helped Walmart connect select Shopify sellers to the Walmart Marketplace. This partnership gives Walmart customers greater product selection, as well as new commission opportunities for the business from an expanded network of third-party sellers.

“From an economic point of view, retailers can receive a cut of often 15 to 20 percent of what people are selling on your platform and that makes a significant contribution to the bottom line,” Elmalem said.

  • Typical Impact: 15-20% revenue added
  • Time to Market: 3-6 months
  • Feasibility: Medium

 

Generate advertising revenue

With a deep understanding of customer data, enterprise retailers can generate new revenue through targeted advertising for third-party partners or outside vendors.

Amazon has succeeded in this area, netting $14 billion of advertising revenue in 2019 – three times what it used to be in 2017 and representing 11 percent of additional income in online store. In grocery, online retailer Ocado’s supplier income was more than 4 percent of its revenues in 2019.

“In the same way that suppliers are spending (or used to be spending) money with retailers to get placement on shelves, they are increasingly willing to buy space online and specifically, data on specific customer profiles they want to target,”

  • Typical Impact :5% of additional sales in advertising income
  • Time to Market: 6-24 months
  • Feasibility: Medium

 

Offer an attractive membership program

According to Publicis Sapient data, 55 percent of people tried a new retailer and 74 percent purchased a product from a brand they hadn’t purchased from previously throughout the pandemic.

With consumers willing to try new things, loyalty programs need a reboot. With a membership model, consumers pay an upfront cost for access to things like free delivery or premium content, “so when you start the year, you know that a lot of your fixed costs are going to be covered. This has worked very well for retailers like Costco in physical retail and for Amazon Prime in the e-commerce space,” Elmalem says, noting Amazon Prime generated $19 billion of income in 2019, with Prime members spending 2.3 times more on average than a non-member.

Though membership programs can benefit retailers and consumers, retailers must consider how to make the option attractive to shoppers by offering products and services people feel are valuable.

“In the past, people were primarily looking for value through savings,” Elmalem said. “Now, people value time and convenience and they are ready to pay for convenience.”

  • Typical Impact: Membership income and impact on loyality
  • Time to Market: 3-6 months
  • Feasibility: High
"In the past, people were primarily looking for value through savings, now people value time and convenience and they are ready to pay for convenience."

Reduce Fulfillment Costs

The largest cost item in any e-commerce P&L is fulfilment. Retailers are experimenting with different fulfillment models (fully manual, hybrid, micro-fulfillment, click-and-collect, etc.) to increase efficiencies. Many retailers are collaborating with services like Instacart, Deliveroo or Uber Eats as a low-cost, rapidly scalable solution to optimize delivery and add capacity.

In addition to choosing the right operational model, retailers have to master inventory and forecasting with data and AI. Traditional replenishment models focus on historical sales, preventing retail supply chains from responding fast enough to deploy inventory in times of crisis. New models can capture a broader set of inputs and use machine learning to sense demand earlier, enabling creative ways to meet customer needs.

  • Typical Impact: 20% savings on total cost of order
  • Time to Market: 18-24 months
  • Feasibility: Complex

Optimize IT Costs and Agility

Digital IT costs are an important part of any e-commerce strategy. It’s important to review IT operations with a profitability lens and make sure they work to provide visible benefits to customers to drive higher returns from their investments.

Having an organization equipped to move quickly is also critical to ensuring success. To build talent at scale and reduce costs, some retailers are leveraging offshore teams to hire and maintain ongoing operational infrastructure, resulting in savings of 20-30 percent.

 “Whether it's frontend or the backend systems, you need a team able to develop and to improve your customer experience on an ongoing basis,” Elmalem said. “It's not a one-off – you need to evolve your platform, improve the experience and provide new services. It is never ending.”

  • Typical Impact:20-30% cost savings
  • Time to Market: 3 months 
  • Feasibility: Medium

 

"Whether it's frontend or the backend systems, you need a team able to develop and to improve your customer experience on an ongoing basis. It's not a one-off – you need to evolve your platform, improve the experience and provide new services. It is never ending."

Solutions

How Retailers Can Capitalize

Thierry Elmalem
Thierry Elmalem
Senior Managing Director, Management Consulting, EMEA