How e-commerce companies can brave the new retail environment

Entrench with your best customers to grow while building an organic brand through community & word of mouth

Image Credits: the_burtons/ Getty Images

This post originally appeared in TechCrunch.

E-commerce companies were once viewed as nearly invincible, with soaring growth and record profits. But of late, they’re braving a new market shaped by three major trends: stunted e-commerce growth, the impact of the latest iOS privacy updates on social media customer acquisition strategies (leading to higher costs) and macroeconomic uncertainty.

While these factors are largely out of retailer’s control, we’re seeing top companies emerge that have adapted by entrenching with existing customers and building organic brand strength. Below, we’ll dig deeper into the key trends and their impact on the e-commerce world along with several tactics companies can take now to continue to thrive in this new period of retail market challenge.

The new retail challenge: global e-commerce growth below expectations while iOS updates debilitate targeted social ads — leading to higher acquisition costs

First, e-commerce growth as a percentage of total worldwide sales has not continued to persist as strongly as expected post-pandemic. Statista reports that e-commerce stood at 12.9 percent of total US retail sales in Q4 of 2021 — down from 13.6 percent in the previous year. It’s likely that a few quarters of growth was pulled forward and is now reverting back to the original course, albeit still elevated.

At the same time, customer acquisition costs have risen due to recent iOS updates as Apple continues to ramp up privacy features. Devices running the new OS have limited third parties’ tracking capabilities that platforms like Facebook (or Instagram) depend on. No longer having access to the level of broad audience targeting and optimization capabilities previously available, brands are seeing a drop in performance and higher total acquisition costs, leading to many shifting spend away from these platforms.

Finally, there’s a new third threat rapidly approaching and clouding the e-commerce landscape: macroeconomic uncertainty with a potential drop in discretionary spending. This is already evident in the lackluster earnings from major retailers such as Target and Walmart — where we’re seeing the mix of non-discretionary revenue accelerate due to inflation while discretionary related item sales slow down.

Renewed focus: Entrench & build with your best customers

What can be done to combat these threats? There are two primary courses of action e-commerce companies should set their focus on to navigate the new retail challenge. The first is to entrench — getting existing customers to stay longer and spend more. The second is to build a stronger brand — reducing reliance on social to organically drive better customer acquisition and conversion rates.

Entrench existing customers: The most immediate step is to reduce churn and increase average order value (AOV). This helps brands protect conversion and hit forecasts while balancing profitable acquisitions as conversions drop due to larger industry changes (e.g., increasing acquisition costs and supply chain issues).

Entrenching is all about the ability to get customers to return time and time again — long after the first purchase. While fintech continues to be a key tool, such as built-in commerce features like buy now, pay later (BNPL), these amenities have become table stakes. Now, the priority is to keep customers on the platform. Some successful programs include:

• Subscribe and save: subscriptions are all the rage, but to be effective, companies need to build product subscriptions with high-utility, frequency and access + exclusivity for customers to enjoy. Brands like True Botanicals and Prose Hair treat subscriptions like a membership program leading to stronger retention.
• Invest in loyalty: loyalty point systems are back in vogue, but it takes time (usually a year) and investment. A few examples of platforms to build customer loyalty programs include Loyaltylion and Yotpo. Sephora’s Very Important Beauty Insider (VIB) and Target’s Red Circle program have great participation, allowing them to understand their customer activity.
• Refer a friend: referrals are a good option to reward and grow customers via word of mouth. Some of the leading platforms developing referral programs include Friendbuy and Swell. Cash App and Robinhood are examples of refer a friend programs that drove improved first time user conversion.
• Refurbish and Resell: Companies can differentiate by reselling their own secondhand goods, taking back control of their brand over marketplaces. An emerging player developing the infrastructure layer for this is Reflaunt. Hemster is another tool that can help refurbish returned inventory and enable it to be resold directly or via third parties.
• Focus on customer experience: Where is my product? That’s the number one question customers have. If a package is missing, consumers expect the brand to make things right. Tools such as Malomo (tracking), Route (logistics support), Clyde (warranties), Loop (convert returns to exchanges), are increasingly important.

Outside of programs, it’s critical for brands to be data-driven as conversions and retention are number games. From attribution to customer journey, metric tracking and KPIs are more important than ever. There are many dedicated, specialized tools like Unsupervised* for finding out why key metrics like conversions are up, down, or flat, Tresl and Triple Whale for analytics, Elevar for data tagging, Alloy for data integrations, and EnquireLabs for consumer behavior.

Build stronger brands and reduce reliance on social: Companies need to rethink what brands mean to consumers today, and in the future, to determine how to best drive organic strength. There is strong emphasis on building a community for customers to rally behind in order to drive positive affinity going forward.

With paid social programs losing its edge, tomorrow’s winners will no longer rely on social media advertising alone to build a defensible brand. Outside of building a community with your organic voice, there are emerging marketplace channels like Walmart, eBay, Target, Amazon that you can sell your product without hurting your brand. While other social channels including Snapchat, Tiktok, etc. are still early, it will help consumers find your product in areas where they spend their time. However, while many big brands were able to quickly diversify from Facebook after performance dropped, small brands still need to follow suit.

Looking inward, here are a few effective tactics to help retailers build organic strength:

• Build a community and increase word of mouth: stay top-of-mind with community-building through private Facebook or Reddit groups or active customer engagement via social channels. Invest in affiliate marketing with influencers. Consider email and SMS journeys as an inexpensive, high-ROI option to keep engagement and conversion high. Some of the most powerful brands have millions of user generated content, organic mentions, dedicated forums built by fans, etc.
• Build websites that convert: optimize websites to drive higher average AOVs. A few best practices include: gift with purchase campaigns, free shipping, mini cart progress bars, behavioral sciences, pushing higher AOV sets, best-in-class creatives and videos, rating and reviews. Tools like Vizit and nFinite enable brands to create more engaging product visuals to drive sales.
• Invest in your story and stick to it: inspire audiences, find a niche and differentiate against competitors by speaking out about the consumer pain point. Some good examples include Chime*, the no fee bank; and WHOOP, the wearable fitness coach. Both brands have consistent brand messaging and powerful creatives across all channels that drive the story home for the audience, allowing them to upsell additional products to their customers and own a greater share of wallet.
• Be mobile: Build an app or great website that is mobile-first and lightning-fast. No-code platforms like Bryj.ai* are helping close the app gap. Look into emerging platforms for social commerce such as live-streaming via Instagram, consultative selling in the form of entertaining product reviews using platforms such as Popshop Live and Shopshops. Also, next gen interactive voice response (IVR) allows for your team to assist in closing a complex sale or AI based voice assistants like AI Rudder* can work 24/7 without fail to serve customers.

Despite challenges, there’s optimism for e-commerce

Growth spurred by customer acquisition will be tough for most brands in 2022. E-commerce companies that are hitting plans are top performers. For the majority, paid social will continue to be an increasingly expensive battle for incremental gains. Diversifying customer acquisition channels and efforts to grow organically will take time, but the investment is worth it in the long run to build an enduring brand.

But there’s low-hanging fruit for everyone. This is about driving more customer value in uncertain times. Relentless focus on increasing revenue quality by maximizing lifetime value of customers will be an area of higher returns for many brands going forward. Even with inflation and a potential recession, now is the time to reach out to existing customers and stick with them through the ups and downs. When we all reach the other side, we can look forward to even stronger unit economics and a promising future.

*Cathay has invested in this company