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multichannel
How to understand cross-channel
customer behaviour
eCommera
In partnership with WPP and Google
Making money multichannel
Highlights
• Online retailers need to rethink their models of growth and profit – the economics
of physical retail cannot be successfully replicated online.
• Data is critical to profits – properly gather and leverage data on profits, customers,
products and marketing.
Offline retailing has long been a lucrative and profitable sector. As ecommerce gathers pace,
many retailers have assumed that they can apply the same principles and make the same high
profits online. The numbers tell a very different story. Many online retailers took a long time to
get to profitability (Amazon, Overstock, Zappos); others are still trading but not yet profitably
(Bluefly, figleaves, Ocado); and many went bust without ever making a penny (etoys, webvan,
boo, pets.com).
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This article offers an insight into the economics and customer behaviours that can help to
make money online:
eCommera
04–05
Physical retail: Store economics in physical retail means the relationship between gross
margin, rent and staff that drives an individual store’s profitability - a formula known by
every successful retailer that makes their format work.
vs.
Online retail: The order is king – “store” economics in the online world are driven by
profit per order and volume of orders.
How do the three economic fundamentals of retail profitability differ between online and
offline? And how do you crack their code to make money online?
a) “Store” economics
In the offline world, the critical costs of rent and staff are variable per store but fixed per sale.
Online, the critical costs are either variable per order (picking, packing, packaging, postage)
or are crystallised per order (marketing, promotions). Online profitability requires a focus on
orders as the variable unit, rather than thinking of online as just another store.
1. Understand where you are today. Many retailers simply don’t even look at an ecommerce
P&L, let alone one structured around the underlying drivers (Figure 1).
2. Understand what happens to profit when you pull different levers. For example, a free
delivery above £50 promotion will increase average order value, increase conversion
rate and reduce delivery revenue. However, the key question is what it does to profit per
order and volume of orders. Understand the impact of a voucher for new customers vs.
increasing marketing spend per order. Understand the impact of reducing retail prices vs.
a targeted promotion.
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Making money multichannel
3. Be prepared to make bold decisions to get to the right P&L structure for growth. Limit
vouchers, increase delivery charges, prune marketing spend. We’ve met a number of online
retailers who lose money on every order and then try to make it up in volume!
4. Keep optimising. Improve the site funnel – examples include: new payment methods,
better on-site search, improved navigation, personalisation and product recommendations.
These will often have little impact individually but will nudge conversion up over time, with
consequent impact on both volume and profit
per order.
Average order
value
Gross profit per
order
×
- Gross margin
Delivery
revenue/cost
per order
Trading profit
per order -
Promotion cost
per order
Marketing cost
Gross trading
profit
× - per visit
Marketing cost ÷
per order
Number of
orders × Conversion rate
Online visitors
eCommera
b) Growth 06–07
Physical retail: Growth is driven by two dynamics - (i) growth in square footage (i.e., new
stores or store expansion) and (ii) same store sales (like-for-likes). Once a retailer has a
successful format, growth is simply a matter of finding more locations.
vs.
Online retail: Growth online is a new paradigm, driven by building and nurturing a
customer base.
Zara has opened, on average, a store a day for the last few years. Each store brings new
footfall and new customers. The strategy may be hard to execute but is simple to conceive
– footfall is a given of the physical world where rent equals guaranteed visitors. In contrast,
footfall online needs to be sought and bought. Retailers with offline brands clearly get a base
level of traffic “for free” but if they don’t play in the online marketing world, they are simply
leaving prospective customers for their competitors. Growth online is driven by three very
different dynamics:
Building on the order economics above, we advocate a 3-step process to cracking growth:
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Making money multichannel
Using this analysis, retailers can understand their optimal “zone of growth” – too high and
it’s either unprofitable or unsustainable, too low and you are leaving customers for your
competitors (Figure 2). Again, there is no right answer but the smart retailers are clear about
whether they are trying to drive cash, medium-term profit or long-term growth – and can
then adjust their path accordingly. Too many retailers make the mistakes of benchmarking
growth rates against retail like-for-likes, creating unrealistic top-down targets, extrapolating
from historical rates or focusing too much on top-line sales.
Annual growth, %
Too fast
(unsustainable)
Optimal zone
of growth
Actual Forecast
eCommera
c) Trading 08–09
Physical retail: Trading offline means balancing the day-to-day choices around sales, stock and
margin.
vs.
Online retail: Trading online has the additional challenges of efficient buying and routing of
traffic, and managing product just-in-time.
Applying the physical trading dogma online is guaranteed to sub-optimise profits. Retailers
can make much better trading decisions if they properly leverage the data available and take
advantage of the new opportunities open to them:
• New information. Retailers can distinguish between products that aren’t selling or
aren’t viewed, and ensure traffic levels are optimised and evenly distributed. Retailers
can understand price elasticity and product substitutability. Data that is expensive or
impossible to access offline is typically free and easy to access online.
• New costs. The online world brings new and different costs. The fundamental challenge is
that it is now remarkably easy to lose money on a product by spending more money driving
traffic than you generate in gross margin.
• New levers. Traffic can be turned on and off. Depending on the category (and product
substitutability) traffic can be elegantly rerouted to products that are in-stock, overstocked
or high margin at the click of a button. Products can be offered with differing “promises”
– from pre-orders to back orders. The reality is that customers will commit to products
they’ve never touched (from an iPad to a designer bag) and will wait for the products they
want. Display is now decoupled from delivery.
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Making money multichannel
The key to online profitability is to leverage the new data, understand the new costs and take
advantage of the new levers to make better, faster, more nuanced trading decisions (Figure 3).
Successful retailers:
1. Understand product profitability, in particular which products make money, which lose
money and which make nothing.
3. Organise to take action, to ensure that budgets, processes and decision making facilitate
the right trading decisions.
80%
Cumulative profit
40%
20%
0%
eCommera
10–11
Physical retail: Customers browse and purchase at the same time. All sales are easily
credited to a store and – in many cases – an individual salesperson.
vs.
Multichannel retail: Customer behaviour is complex. Some customers browse online and
purchase offline, others browse offline and purchase online.
Understanding the fundamental economics of online retail and how to make money in this
new environment is a key starting point for any multichannel retailer. However, it is no
longer enough. As cross-channel becomes more widely adopted by customers, it complicates
and blurs the boundaries between online and offline. Understanding the economics of
multichannel retail is not easy, but it is worth the effort.
The ROPO effect is everywhere. It is estimated that today some 60% of EU sales are affected
by web research prior to purchase on the high street. Customers who shop across multiple
channels are not better, they are just different and need to be understood.
To fully understand the ROPO effect retailers need to clearly differentiate between correlation
(how customers are behaving) and causality (what is driving that behaviour). The more
retailers understand multichannel behaviour and how to respond to it the more they can drive
an “unfair” share of the online pie.
• What are the key customer journeys (establishing correlation between online and offline)?
How do customers use each channel and in what order? Which pathways are used by your
most valuable customers? Which pathways are most profitable?
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Making money multichannel
2. Data mining. Once the data is gathered, apply data mining techniques to look for patterns
and generate hypotheses.
The profit tree below (Figure 4) incorporates the multichannel effect. Retailers who crack
these economics – and very few in the world have done so – are at a significant advantage.
They are able to make online (and offline) marketing investments that they know to be
profitable but which often leave competitors scratching their heads.
Average order
value
Gross profit per
order
×
Customer value
- Gross margin
Delivery
revenue/cost
per order
Trading profit
per order -
Promotion cost
per order
Marketing cost
Gross trading
profit
× - per visit
Marketing cost ÷
per order
Number of
Offline orders × Conversion rate
influenced
profit
Online visitors
eCommera
12–13
Physical retail: Customers are either in your store, or they are not.
vs.
Mobile: Customer can scan products, check prices, browse competitor sites and purchase
on their mobile from anywhere (including in your store).
Channels are increasingly blurring and converging. Adding to the growth of cross-channel
purchasing behaviours is the rapid acceleration in the use of mobile devices. The channel
becomes less of a separate aspect of retail, as it becomes retail itself. The key to success is
understanding customer behaviour and customer economics.
The notion of the “connected customer” is a relatively recent, but nevertheless transformational,
concept in the changing retail landscape. The increasing penetration of smartphones and the
likely surge in various sizes of tablets will continue to compound the ROPO effect. The mobile
is more and more an extension of the individual. A recent quote from Eric Schmidt at DLD
suggested that people will increasingly be in two states: asleep or connected.
The most simplistic way of looking at mobiles is to see it as “just another browser”. Retailers
simply need to ensure that their sites are “shoppable”. These “mobile economics” – typically 2%-
5% of online sales – are relatively easy to understand and manage.
The challenge is that mobile is increasingly taking on a more complex role in the buying process
that necessitates thinking about mobile in a new way. Their impact on retail sales will be far
greater than ever previously imagined. Already barcode scanning is standard smartphone
functionality, and the mobile-as-payment option is coming soon.
1. Price comparison. Many retailers report customers in their stores scanning barcodes with
the real possibility that they are buying online from competitors. Certainly, in-store price
checking will become a ubiquitous part of shopping. Haggling – a common feature of
retailing in the 1800s - may be returning!
2. In-store information. Best Buy (in the US) has already begun including Quick Response (QR)
codes in its stores to help customers learn more about products, for example by linking to site
reviews.
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Making money multichannel
3. Near-store offers. Retailers – such as Marks and Spencer –are piloting proximity marketing
schemes where offers are triggered to people within a certain radius of the store. In due
course, this will evolve into localised yield management where a store manager – if
sales are slow – can trigger a promotion that will be broadcast to customers (or non-
customers) within X miles of the store.
But this is just the beginning. As retailers take advantage of the personalised nature of the
mobile, we will see the emergence of dynamic pricing – making the best price/offer to an
individual customer based on everything we know about them. Yield management – taken for
granted in the travel industry – will come onto the high street.
***
The economics of the online world are very different to physical retail, and highly complex.
Multichannel and mobile make this even more complicated. And yet retailers who stick their
head in the sand and continue to apply physical retail dogma face a risky future. As ecommerce
and online influenced sales, take an ever greater share of retail sales, those who fail to understand
the new economics of retail risk systematic underperformance.
eCommera
www.ecommera.com
eCommera is a pioneering provider of
intelligent ecommerce trading solutions,
enabling brand owners and retailers to sell
efficiently and intelligently across multiple
channels. A selection of our clients include
Asda Direct, Hamleys, House of Fraser,
Magasin Du Nord, Horze and the London
2012 store.
eCommera Limited
1st floor
84-86 Great Portland Street
London W1W 7NR
www.ecommera.com
Tel: +44 (0)207 2915800
Email: trader@ecommera.com
eCommera