Getting your e-commerce strategy wrong can be very costly
We all know that there is huge growth in buying online, and it seems reasonable to assume that this growth will continue exponentially. That, though, brings risks. For some companies getting their e-commerce strategy wrong will break them, either because they do not work out the role of their physical retail spaces (bricks) or do not understand the nuanced differences between Direct 2 Consumer (D2C) and e-commerce. The winners will be those who can create a sustainably profitable online business. To do that will require a focus on gross margin management and bottom line profit as much as top line growth and, for the big brands, it will require them to work out how they can offer customers something different from the online retailers.
That starts by being very clear about the different ways to get goods to customers. D2C is where the supplier ships the product directly from the brand owner to the customer. E-commerce is where the customer buys a product online from a re-seller – Amazon, Bigbasket.com, Tesco.com, Walmart.com etc. Each has a different relationship with the person making the purchase.
Many businesses are achieving scale online, but do so by allowing e-commerce sales to dilute their gross margins. That then undermines the value of their brands and both their D2C offering and in store sales. We can see how this happens in the example of a Clarins skincare product which is sold through the brand D2C channel and through two atypical e-commerce sites:
The first thing that jumps out is the price difference between the different sites. The same product is 20% cheaper through Amazon and Boots than when bought on the Clarins owned D2C. This means that the gross margin percentage from sales on the e-commerce sites dilutes the businesses value of the products in their own D2C channel.
While a shopper is ‘in’ the Clarins online shop, the brand can control what they see such as the brand equities and emotive themes. It can also direct them to other products that it can cross sell to complement this one. This is likely to immerse the shopper in the Clarins brand world, and result in increased basket size, allowing them to sell more products.
However, as the savvy shopper realises that the re-seller e-commerce shops are better value, they will go to those sites and won’t see any of that information. Instead they will see the cross-selling items that Amazon or Boots think will encourage more purchases, which are highly unlikely to be Clarins branded products.
So, in this scenario, the best case for Clarins is that shopper buys the product that dilutes the gross margin. The worst case is that they see another product that looks like it has similar benefits for a better price and Clarins lose the sale altogether.
An online price war is great for the customer, but terrible for a business’s margin which, in the long run, will cause significant damage. It is just not possible to force e-commerce channels to align to the brand’s pricing strategy, so the brand has to find a way to differentiate itself to maintain a good gross margin, achieve scale and win. In other words, they need to ask, what can they do that Amazon can’t?
Bricks and mortar
Most companies see bricks and mortar stores and digital stores as very different beasts. Yet while the way you search, select and purchase goods differs, ultimately, they are all above the line retailers, who offer the same goods to everyone. Even though online retail is getting smart and using analytics to create meaningful targeted adverts aligned to a shopper’s preference, ultimately, if you search for Clarins moisturiser in boots.com, Amazon and Clarins D2C, you get offered the same product at different prices. As a customer you will wisely choose the cheapest option, which is good for you, but bad for Nivea’s gross margin.
So, if the current retail channels are above the line, then brands need to look at a below the line retail approach where they target specific customers. That means creating products that are not just targeted towards an individual, but made for them, customised to their particular needs. It sounds hard, almost impossible to do, but there are a number of ways to do this successfully.
Let’s take the Clarins example. It is already a great product, but if it was more specifically targeted to the individual consumer; their exact skin type, needs, and environment, then it would be a more effective product. To do that, Clarins would first need to understand a little bit more about the buyer, and find ways to get this information through their own D2C channel (or app). If they can do this, then we can imagine a scenario where Clarins offers a custom (unit of 1) product that is personalised to an individual and only that individual.
To do that, all it really needs is to know a little more about the consumer. Then through using some new manufacturing techniques like late stage customisation and digital manufacturing, it can micro dose the exact active ingredients that person needs into the base Nivea formula to create a customised Clarins product.
Think for a moment about what that offers, we would have a mainstream brand that can differentiate and avoid store brand copy cats, as well as stave off the e-commerce gross margin war, by creating individual products based on a few simple bits of consumer data, (and adopting some modern manufacturing processes). Assuming then that the consumer sees or feels the benefits of this new targeted formulation, the next time they shop for their favourite moisturiser, will they look for the ‘general’ version that everyone can get, or will they go back to the brand D2C channel and buy the product that was designed specifically for them?
Some brands are already thinking about this approach and offering varying levels of personalisation. Function of Beauty Function of Beauty is doing this in hair, though on a limited scale currently. This trend will only continue as big brands search for a way to offer their customer base a product that both enhances their experience and improves brand loyalty. Importantly it also allows that loyalty to be focussed through a channel that doesn’t harm their business, as they will sell that custom product exclusively through their own D2C channel.
That means those customers who shop on value can continue to access the base product at the place they find it the cheapest. However, those who are more engaged in the brand experience and product benefits, will be shopping exclusively at the brand’s D2C channel, who sell a product Amazon simply can’t, one that was designed specifically for them. By using online to play to their strengths in offering a truly personal product, brands can outflank their e-commerce competitors.