Online Retailing! PartTwo.
Competition and Profitability Impacts of Online Retailing Tracks on Retailers to Adopt the Ultimate Strategies Acts.
Continuing from Part 1, online retailing has threatened the traditional role of physical stores, which used to be the main places customers could discover, compare, and buy products. Many retailers have responded to this challenge by reducing their store development plans and focusing on online platforms. The second part will analyze the effect of online retailing on retailers. I will demonstrate how online retailing has increased competition and reduced profitability and suggest some strategies retailers have adopted to cope with this challenge, such as differentiation, personalization, and loyalty programs.
Online Retailing Competition and Profitability
Online retailers operate through online, such as Amazon, eBay, or Alibaba. Other retailers use online and offline channels to reach and serve their customers. Walmart, Target, and Best Buy are all examples. Online retailing has posed a significant challenge to traditional retailers, as it has increased competition and reduced the profitability of the retail sector. Competition is one of the main challenges of online retailing. According to a Statista report, Apple accounted for 4% of US e-commerce sales in 2020, Walmart for 6%, eBay for 5%, and Amazon for 47%.
Profitability is another challenge of online retailing, as it has reduced margins and increased costs for retailers. Margins are the difference between the revenue and the cost of goods sold (COGS) by the retailers. Online retailing has reduced margins by creating price transparency and competition among sellers. Online retailers often offer lower prices than offline retailers to attract and retain customers. They also have to match or beat the prices of their competitors to maintain or gain market share. For example, a study by Profitero found that Amazon’s prices were 11% lower than Walmart’s on average in 2019.
Costs are the expenses the retailers incur to operate their business: rent, labor, inventory, marketing, logistics, or technology. Online retailing has increased costs by creating higher expectations and demands from customers. Online retailers invest in technology and infrastructure to provide fast and reliable online platforms, like websites, apps, or payment systems. They also invest in logistics and fulfillment to provide quick and free delivery, returns, and customer service. They also invest in marketing and advertising to create brand awareness and loyal customers. For example, a report by eMarketer showed that Amazon spent $18.88 billion on marketing in 2020, an increase of 34% from 2019.
Adopting Strategies
Online retailing has some opportunities for retailers, who can adopt various strategies to cope with this challenge, such as differentiation, personalization, and loyalty programs. Differentiation is a strategy that aims to create a unique value proposition for customers by offering products or services that are different from or better than those of competitors. Online retailers can use differentiation to create a competitive advantage by offering exclusive products, superior quality, or exceptional service. For example, Netflix is an online retailer that differentiates itself by creating and offering original content, such as movies, shows, or documentaries, that aren’t available elsewhere.
Personalization is a strategy that aims to customize products or services for individual customers according to their preferences, needs, or behaviors. Online retailers can use personalization to enhance customer satisfaction, engagement, and retention by offering tailored recommendations, offers, or experiences. For example, Spotify is an online retailer that personalizes its service by creating personalized playlists, radio stations, or podcasts for each user based on their listening history.
Loyalty programs are a strategy that aims to reward customers for their repeated purchases or interactions with a retailer. Online retailers can use loyalty programs to increase customer loyalty, repeat purchases, and referrals by offering incentives such as points, coupons, or freebies. For example, Starbucks is an online retailer that uses a loyalty program called Starbucks Rewards to offer benefits such as free drinks, birthday rewards, or early access to new products.
Ending
Online retailing affects retailers with many challenges, such as competition and profitability. It has increased competition, lower margins, and higher logistics costs. They also have some opportunities, such as differentiation, personalizing products or services, and loyalty programs. However, it has lowered the barriers to entry and exit for new and existing players. Online retailing has enabled many small and medium-sized enterprises (SMEs) to enter new markets and compete with large and established retailers, increasing and enabling many foreign and global retailers to enter and expand in new and existing markets. Online retailing has increased the bargaining power of customers, who can easily switch between different sellers and platforms.
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