Tech giant Samsung has reported its lowest quarterly profit in eight years this week an indicator to the weakened global economy to hit PC…
Like any industry, eCommerce is just beginning to mature, so what are the next opportunities for disruption?
The barriers to entry are no longer technology or software
Most retailers now understand that a multi-channel approach is the minimum required, and have a technology stack, where some will be better than others. Most smaller businesses will outsource this cost, most medium businesses will have in-house teams, and the very large will have a combination of in-house, outsourced and agency teams all working on their eCommerce proposition.
The emphasis on constant adaptation will increase as the competition heats up, so stagnant websites will mean decreasing customer loyalty. The barrier may no longer be technology itself, but it will become speed and agility.
The barrier to sustainability is profitable user acquisition and product margin
Since there are plenty of options for starting an eCommerce store today (yet most still do it poorly), the challenge is really how to acquire customers at a cost which is sustainable. Many online players rely on a Lifetime Value approach, where they model out the profit generated after the first acquisition of the customer and bet on that making them profitable.
That works in some market segments, but it may also be offset by high return rates. This approach doesn’t work for all segments, especially with larger ticket items or where the purchase is more considered. So the challenge becomes how to acquire a customer profitably on the first order.
As the internet has allowed anyone to open up their stall, it’s actually quite easy to sell something. But what that also means is that margin becomes tighter and tighter the further away you go from from the factory floor. Margin control comes from having effective integration of frontend and backend systems which provides the business with the right data at the right time. The winners understand how to gather the data and act on the information it provides. The losers will do this ineffectively or too slowly.
Massive consumer choice has created a customer service monster
Simply put, the massive distribution the internet offers also enables the consumer to make choices they might not otherwise have made on the High Street. For example:
Mary is looking for a Little Black Dress. All of the websites she’s browsing offer 30 Day Hassle-Free Returns with Next Day Delivery, and they all run promotions every week. On Monday she picks a LBD from one retailer and has it delivered by Wednesday, but by Friday she’s changed her mind because another retailer has a great offer on similar dress at a cheaper price, so she returns the first LBD and keeps the second. If you speak to most online shoe and apparel retailers, this happens between 20% and 40% of the time.
Contrast this to 10 years ago, and Mary would probably think twice about going back to the High Street to do an exchange because of the effort involved and having less ready information on alternative dresses. I don’t have the numbers on High Street vs eCommerce return rates so I could be wrong, but because of the additional friction and time required to do this, I’m going for a lower number than above.
The take home here is that the internet provides massive instant choice for the customer, but for the business it also creates an ‘arms race’ between similar products. This buying behaviour makes it incredibly difficult to make margin on every order, so the route to profit here is either massive loyalty (repeat purchases which effectively offset this behaviour), figuring out ways to discourage this behaviour without losing the customer, or being profitable on each and every order.
Scale no longer requires a massive catalogue
In the beginning, most players sought to offer the customer the same experience as they would find in the department store or catalogue, and many still do. This means huge amounts of data, with large teams to manage both data and supply chain to get the order to the customer.
However the ecommerce market has now grown to a size where it’s possible to scale a business with a tighter, more focused proposition, without the data, supply chain and team required before.
Opportunities for growth are no longer just the home market either, as the market for goods online as increased in almost all markets.
Investors today are less willing to fund top line growth for growth alone
Today, the eCommerce exit market once top line growth is achieved is far less patient of businesses that are loss making. So whilst top line growth is relatively easy to generate if you can spend limitless money to acquire customers, it’s a totally different game to generate a Gross Profit, so this is no longer the easy exit route it once was. This places more emphasis on all the points above!
Where to from here?
For the consumer the line between online and offline will blur completely
The consumer in 2020 will expect to shop online, on their mobile, on the High Street, and to have delivery at their convenience. They won’t recognise the difference between an online or offline brand, and they will make decisions based on the opinion of the crowd rather than the marketing of the retailer.
If you flip that around, both traditional and online retailers will have their work cut out, with big challenges ahead for both models. My view is that although eCommerce started out as a technology challenge in the early days, it’s going to become an operational and margin challenge for everyone.
Margins online are going to get tighter, and will require own products which are defensible
Consider this scenario: John lives in a small town with a large retail park just two miles away. Ten years ago, his choice was to shop at the corner shop, the retail park, or to drive the 30 miles to the next town and its retail park. His price sensitivity was effectively localised to the effort he would put into bargain hunting. Now, John can shop from the comfort of his own sofa, searching, browsing and comparing whatever he wants to as well as having almost everything delivered to him at his convenience. His price sensitivity is now nationalised.
The result of the above is that traditional brands and manufacturers will realise that they can and should go direct to the consumer
In the next 5 to 7 years we’re going to see the brands which have generated customer loyalty through great consumer products use the internet to go direct to the customer.
However, their challenges will be effective customer acquisition and then distribution to the consumer (which is a different problem to distribution to the traditional department store). This will affect the High Street department store ecosystem because these stores will find more and more people taking brand led purchases online. Both online and offline will have to figure out increased customer loyalty over and above convenience, and the department store will have to focus their real estate portfolios on locations which offer a cluster effect and/or convenience.
After this, we’ll see the larger manufacturers follow the example of some of the technology manufacturers (like Samsung, Asus, Lenovo or Huawei did in bringing their own products to market after seeing success from manufacturing parts, and building up enough cash to do so), but in this process they will also have to invest in technology, team and brand building.
The end result of all of the above is that the small independant will get squeezed further and further off the High Street, until all that is left is massive specialisation and/or distress purchases.
Image: Calsidyrose via Flickr.