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Why Profitability is the Key to Success in Ecommerce

Reality Gap

For years revenue growth has been the primary metric of success amongst many brands. The strategy has been to grow a transactional revenue base and establish solid cash flow. Eventually a business can become profitable as operations are optimized and margins expand by reducing the cost of goods sold (COGS) through economies of scale. As e-commerce became a larger portion of the business this model became more entrenched as the hope of reaching a wider audience became a reality. Unfortunately, for many, revenue growth came at a steep price.

there is a gap between revenue goals and revenue attainmentIn 2015, 74% of online sellers said they expected to see revenue growth while only 36% actually attained those revenue growth targets. What confidence did three-quarters of online brands have for expecting revenue growth? Not much – these financial goals have long been the industry standard. Why did only one-third hit those growth targets? The answer – competition.

Simply put, there are more brands fighting for what is essentially the same piece of the pie. Historical data shows that over the last ten years ecommerce as a percentage of total US retail revenue has grown from a paltry 3% to a slightly less than paltry 7%. Ecommerce is a household activity today.  People no longer feel like they are taking a risk buying online and they are happy to forego the instore experience for certain items. “Certain items” is the key word in that last sentence.

Apart from a few promising experiments with groceries and Tesla, people aren’t trying to find new ways to spend more money and most consumers don’t have additional discretionary income that they plan to spend online. Don’t get me wrong; there will be some disruptive brands to emerge but that disruption will almost certainly happen within a hyper-specific market because meaningful innovation on broad scale is hard to attain – it’s rarely relevant to the actual buying process.  Dollar Shave Club is a great example of this. DSC was just bought by Unilever for $1B. Their success is legendary but in absolute terms still very small. They fundamentally shifted the way men buy razors but that model can’t be replicated for every consumer good because each of those goods has unique buying motivations, buying patterns, and buying pains. Imitators won’t have the same success yet there are plenty of imitators. Consider Uber - many have tried to become the Uber of their industry but few have succeeded. While innovations to business models are more portable than product innovations, they require very specific adaptations to be successful.

Disruptive Clouds

This brings us back to my point; massive ecommerce revenue growth is a tall order in today’s market because the pie isn’t growing nearly as fast as the people who want a piece of it. Today, digitally native internet brands like Dollar Shave Club, Warby Parker, Tru-Par, and others are able to jump into well established markets with little up-front investment. With digital natives at the helm these companies have developed strong brands that thrive in the multi-channel internet-first reality of today’s markets.

Much of this success comes from the cloud. Without having to invest in data centers, infrastructure, and support staff they have been able to focus on what makes them unique. They have been able to focus on selling their brand rather than developing IT expertise.

Profit is on the Rise

Just recently, Oracle, in conjunction with DigitasLBi and Spindrift executed a global survey of over 300 Director level ecommerce executives. One the questions we asked was about how they measure success today. Oracle has asked similar questions in past surveys and the results have always indicated that both market-share growth and revenue growth were of primary importance. This year respondents overwhelmingly selected profitability.

The reality of market conditions has begun to set in and those who are responsible for the financial performance of their company are taking note. Profitability is what pays the bills and drives shareholder return.

Think Retention

If profit is the new metric of success it will require many brands to think differently about their business operations. If a company is focusing on revenue growth they have to focus on new customer acquisition. Under this model the primary lever they can pull to affect their desired outcome Customer retention drive profitability within your existing customer baseis to spend money (cost) on advertisements and paid search.  The financial equation here is heavily weighted on the front end and doesn’t always produce great returns unless you operate at large scale or with great proficiency.

The shift to profit-focused operations is essentially a shift from an acquisition model to a retention model. The business must be focused on delighting an existing customer base (revenue stream) and maximizing lifetime value (LTV). It’s generally cheaper to market and sell to a known customer. The average cost of acquisition for a new customer in the US can be quite costly. If that new customer isn’t loyal you’ve wasted all that money. In most cases you won’t begin to see a return on ad spend (ROAS) until after the first purchase. The questions ecommerce brands need to be asking today are how can they maximize ROAS? How can they increase LTV? How can they reduce costs?

OPEX is the Key

When it comes to benefits of the cloud everyone has heard the discussion about moving from CAPEX (capital expenditures) to OPEX (operating expenditures) but I suspect the significance of this gets lost in its familiarity.

The two primary benefits of an OPEX model are:

  1. Reducing large CAPEXs allows brands to invest in multiple parts of their business at once
  2. The cloud and its OPEX model lowers software and related costs by up to 90%

Reducing large CAPEXs is a goal of many organizations today. Keeping cash on hand is nice but spreading large payments out over many months also has the added benefit of allowing that same company to get a firm grip on budgetary needs while also investing in different parts of the business. Resources permitting, internet brands can simultaneously invest in ecommerce, customer service support, email marketing, supply chain efficiencies, or anything else. This is possible because the cost of doing business in the cloud and leveraging SaaS technology tends to be lower.

I have personally seen what would have been a million dollar on-premise implementation come in for $150K in the cloud. The cost of adopting and managing SaaS technology is drastically lower because of the deployment model. Open standards, well defined APIs, repeatable implementation patterns and elastic scaling all contribute to lowering costs on the support side. The on-going costs of ecommerce software have also been drastically reduced since moving to the cloud. For example, prior to the cloud companies would pay for perpetual software licenses to support black Friday and cyber Monday peaks. In most cases, brands now simply pay a percentage of revenue regardless of traffic. Some future looking companies, like Oracle, give flexibility in SaaS pricing models. In addition to allowing brands to pay a percentage of their revenue for running Oracle Commerce Cloud, they can also opt to pay based on utilization (page views). This model is particularly appealing to high value, low volume brands.

The Bottom Line

The cloud is a business enabler in many ways. It enables disruption across the industry and it is also the key to preventing a business from being disrupted.  If companies are going to be more focused on retention and profitability they’ll need to change their customer experience strategies. Experiences designed to sell to new customers may take a backseat to experiences focused on providing long term utility to an established customer base. Now more than ever, continual innovation and rapid deployment of new ideas is vital to success.

At its core ecommerce is an exchange of value. In the best case scenario, the buyer gets a delightful experience and some good or service in The cloud empowers brands to fight the disruptions within their industry with speed and agilityexchange for payment and loyalty. To sustain this relationship the seller has to continue to evolve and match what the customer defines as delightful. Even if a brand knew what this looked like it simply isn’t possible to do it fast enough with on-premise software. Companies should save their money and invest in the cloud. The software is cheaper and the resources they would have needed to keep the lights on can now focus on developing new and innovative experiences.

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