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A couple of months ago, at the Ecommerce Expo in London, I stated to a group of digital professionals that the Ecommerce bubble was bursting. I received a lot of slightly confused (and concerned) looks, but I got the impression nobody really took the statement seriously. It was based on a long-standing trend I had seen within Ecommerce departments in retailers across all sectors and sizes – increasing costs and smaller margins, but no real idea of what the true financial picture of the department was within the context of the wider organisation.
Just this week, ASOS announced sales performance issues which would knock 38% off their share price, and send shockwaves through the retail sector. Up until now, digital seems to have been immune to the stresses of the high street in the UK, continuing to “grow” despite a gloomy economic outlook and reduced spending by the consumer.
So, what’s happening? Well, it’s not a simple answer, but more a case of a hundred different factors coming together to create a perfect storm for retailers online. The most significant of these, however, is something which most retailers should have seen coming for a very long time, but have generally ignored – the cost to their business of fulfilling an order placed online. A continually growing spend online by the British public does not necessarily equate to increased profits for the retailers fulfilling those orders.
When Ecommerce first began to take off, the general perception was that it was an ideal situation for many retailers. Without the need for a store, or its associated expenses, a web-based operation could run at much higher margins than bricks & mortar and could therefore offer products at a lower price, or incentivise in a multitude of other ways (free delivery, loyalty points, affiliates, etc) and still be profitable. To start with, this was a simple solution as there were limited and identifiable factors which affected an online order, and they generally scaled simply, or were fixed costs.
On top of the rapid growth of online selling came a multitude of digital start-up agencies and software providers who all promised to increase conversion, bring on loyal new customers and generate levels of demand, which seemed too good to ignore. I still speak to providers of personalisation and merchandising tools who state that uplifts of 30-40% are to be expected. As would be anticipated, senior digital professionals have jumped at the chance to capitalise on these opportunities to increase revenue to dizzying new records.
These innovations often came with a number of catches. The most significant one being that some of these “solutions” don’t even work… Many retailers are finding out the hard way that measuring and attributing revenue to particular partners is very difficult, and some 3rd parties are making the most of this. I’ve spoken to retailers (and even solution providers themselves) who confess that some “conversion boosting” solutions they’ve engaged on their sites have resulted in a reduction in their conversion rate, or reduced revenue. There are many others out there who don’t even measure the impact to see if this is the case – I shudder to think how many checkout funnels are running widgets which are, in fact, discouraging customers from completing their journey.
The second most significant factor is the additional cost of all these innovations, and how they are attributed to the final order. If the likes of ASOS or another large online retailer listed all of the costs associated with a single order placed online, I wonder if they’d still be making the same kind of margins that they think they are. Product cost, delivery and website hosting costs are all typically accounted for when analysing the profitability of a retailer’s digital channel. How many also understand the impact of search & merchandising software, credit card storage supplied by payment providers, A/B testing tools and the handling of returns? Are they really getting the “lifetime customer value” that everyone said was the Holy Grail a few years ago? What’s the long-term impact of a 5% drop in revenue online (or a 5% increase) on profitability – not on the revenue targets set by the business, but the real, tangible cash available to the business to continue trading?
Ecommerce isn’t going anywhere, but it is about to undergo a revolution. It’s no longer a simple case of being the most recognisable brand, or being able to take more orders year-on-year. We’re coming into the awkward teenage years for digital where we need to accept that adulthood is impending – as a grown-up retail channel, we are going to need to focus on costs, margins and scalable financials. We’re going to have to work like a traditional retail business.
What this means is that we’ll start seeing a shift from cutting edge, seat-of-the-pants approaches to selling, with a more considered and conservative mind set being encouraged in digital leaders. This is a massive opportunity for commercially astute Ecommerce professionals, and those who have relied on the momentum of the channel as a whole, or obfuscation through the myriad partners who could take the blame for poor performance are likely to find themselves found out.
The New Year is going to see a number of other high-profile Ecommerce giants under-performing, and for more traditional retailers, this is a huge opportunity to steal a march before reality kicks in. They are already used to a more pragmatic approach to spending and a closer analysis of the true cost to fulfil, though the scrutiny has often slipped somewhat with online sales. Any business who wants to prosper in coming years needs to start by undertaking a detailed analysis on what their true financial position is with regards to online, and whether continuing to grow a channel which may be costing more than they think is desirable.
ASOS announced sales performance issues which knocked 38% off their share price. What's causing this shockwave through the online retail sector?
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