As e-commerce accounts for increasing percentages of a brand’s current and future growth, a paradox has arisen: e-commerce is often a less profitable channel than other traditional brands’ retail and wholesale channels.

In the old world, where e-commerce often made up a small percentage of a company’s sales, the demand to improve the profitability of online channels was easily dismissed. But as businesses see the proportion of e-commerce sales increase dramatically, the urgency has arrived.

E-commerce is no longer seen as a borderline case, it is the future of retail. This renewed focus has led many leadership teams to ask their digital leaders: What drives ecommerce profitability – and how can we improve it?

I wrote a research to answer this question, titled The main drivers of profitability on the digital shelf with contributions from Molly Schonthal, Founder of the Digital Shelf Executive Forum, Chris Perry, Co-Founder of FirstMovr, and Peter Crosby, Executive Director of the Digital Shelf Institute. The study presents information based on qualitative interviews with digital commerce leaders of multinational brands in the fields of health and beauty, electronics, grocery and home with annual revenues of more of $ 250 million.

Four key themes emerged from this research: the very definition of profitability itself, a company’s product category and price, media spend and attribution, and the brand’s relationship with Amazon.

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1. The definition of profitability

First, it has become clear that brands often do not speak the same language. Some companies define profitability with the contribution margin. Others have less forgiving measures like Net Operating Income (NIFO). And then within these companies, different departments have different profitability goals. One respondent remarked, “Internally we have salespeople who are commissioned on gross sales. We have marketing and e-commerce specialists who get bonus on EBIT (earnings before interest and tax). So, as you can imagine, conversations between the two groups are not improving over time. “

The company’s strategic goals and item inclusions for the e-commerce department were also seen as important factors affecting profitability.

However, not everything is out of the hands of digital and e-commerce leaders – many have cited success with ideas ranging from using customer data to make product engineering changes that have improved the profitability, to the internal defense of a harmonized P&L structure that will adapt to the new world in which they operate. in.

2. Product category and price

Some aspects of a business are relatively fixed, such as product category, price, and supply chain. These “immutable” factors have a significant impact on the profitability of the company’s e-commerce channel, for example:

  • More expensive items with an average selling price (ASP) above $ 200 can often be more profitable on e-commerce than traditional retail channels.
  • CPG brands generally struggle to be profitable in e-commerce channels compared to traditional retail channels. An exception is beauty products, which often generate a higher profit margin.

But again, many successes and ideas were shared by research participants. One respondent said that the packaging design review was one of their top three drivers of profitability: “Our packaging being mostly on store shelves can get quite expensive, especially for smaller items. continuously work on revising the packaging. “

3. Media expenses and attribution

Media spend is often one of the biggest expenses for a brand’s e-commerce channels and, as such, represents one of the most readable opportunities to increase profitability.

But Lina Racaniello, vice president, Marketing, Brand Management and D2C sales at Dorel Home and a member of the Digital Shelf Institute’s executive forum, says that while it’s straightforward to attribute lower marketing ad spend to certain products and market channels, the challenge arises when there is an investment in brand media that creates product awareness in an industry and multiple points of purchase, both online and offline. “How can manufacturers or brand owners best attribute that to a channel or a product?” ” she asks.

Research participants shared success stories of reallocating co-op fees to ad spend in retailer media and continuously testing the basics and cap of ad spend on each retail media platform. .

4. Amazon relationship

Amazon being the largest source of e-commerce revenue for most brands, reviewing the selling relationship and tightening business terms with Amazon can be one of the most effective activities for a brand in improving. of its profitability.

Some respondents referred to the “3P” (third-party seller) sales model on Amazon as an opportunity to recover profitability on this channel.

And after?

Much of the value of this research is that profitability data is confidential and difficult to obtain. At the same time, brand leaders are highly motivated to know what an appropriate baseline is for their category and what actions have made a difference for their peers.

A common theme across the report’s four main findings is the need for cross-functional collaboration within organizations and realigning incentives for an omnichannel world. The truth is, we may already have as much data as we need to start making these changes.

“On the one hand, the huge amount of data generated on different media platforms that don’t necessarily ‘talk’ to each other makes it worse,” says Lina Racaniello of Dorel Home. “On the other hand, the progress we have seen in business intelligence and modeling has improved the situation a lot. Having a data culture in any organization is the best place to start for brands to create alignment through a shared definition of metrics first.

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