A few inconvenient truths about e-commerce
It’s easy to feel like e-commerce is eating the world. It’s not.
While there can be no question of e-commerce’s continued growing importance and its often disruptive nature–particularly in categories like books and music–I’m both amused and amazed at the lack of perspective many in the industry often seem to have. So here are what I believe to be a few important, albeit at times inconvenient, truths.
Physical retail will continue to dominate. Estimates vary, but brick & mortar retail still accounts for over 90% of all sales. While e-commerce will continue to grow, physical stores will be different but not dead.
Pure-play retail is dying. Scott lays this out better than I can, but once you back Amazon out of the equation, it’s becoming ever more obvious that aside from (perhaps) a few niche exceptions, e-commerce only business models are unsustainable owing primarily to uneconomic customer acquisition costs and overly expensive logistics.
A great deal of e-commerce growth is channel shift among traditional brands. Overall growth of e-commerce will be greater than 10% for the foreseeable future, but much of this comes from major retail brands (e.g. Macy’s, Nordstrom, Walmart) transferring business from their physical stores to their improving digital channels.
Much of e-commerce remains unprofitable and economically unsustainable. Let’s remember that Amazon has never consistently demonstrated an ability to make money outside of its web service business. Let’s remember that virtually none of the massively funded pure-plays has ever turned a profit. Let’s remember that traditional brands are spending mightily to improve their omni-channel capabilities while being lucky to achieve flat overall sales. Let’s remember that many retailers experience such high returns and supply chain costs that a large percentage of e-commerce transactions are profit proof. Let’s remember that just about every omni-channel retailer has had to cut prices and offer free-shipping to try to keep pace with upstart competitors who are subsidized by often irrational investment.
Of course even while accepting these truths, many brands find themselves in a real bind. As long as investors are willing to irrationally fund certain companies, consumers are the big beneficiaries and traditionally funded brands are either forced to respond to remain competitive or get pummeled in the markets by not playing the game, however self-destructive.
The good news is that reality is slowly creeping into the market. Some bubbles have burst–witness the recent deflation of the once ridiculously hyped flash-sales market. Perhaps even today’s hammering of Amazon’s stock suggests investors’ patience is beginning to wane. But it’s difficult to predict and count on the vicissitudes of either the public or venture capital markets. But there are a few things to do right now.
First, don’t blindly pursue all things omni-channel. With consumer demands and expectations changing no brand can possibly remain idle. But a disciplined approach to investing is essential. Conducting a friction audit is a great way to uncover and to prioritize the areas of leverage and greatest near-term ROI.
Second, understand marginal unit economics. Averages aren’t very helpful, yet many companies rely on them for decision-making all the time. At any kind of basic scale, e-commerce is mostly a variable cost business. Brick and mortar is mostly a fixed cost one. If you don’t understand the differences–and the interplay–you’re going to do something dumb. Don’t be that guy or gal.
Lastly, go deep on the customer insight and customer profitability analysis. It’s one thing to have a few unprofitable transactions within a mix of purchases for a customer that has overall great lifetime value. It’s another to have your customer portfolio laden with high cost-to-serve, low margin, low average transaction value customers who return stuff all the time. Do the math. Don’t chase your tail. Rinse and repeat.
Originally published at stevenpdennis.com on January 29, 2016.