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"The customer is the channel, essentially, in this era of commerce we're in." — Jordan Jewell, Analyst in Residence, VTEX
For the last few years, brands have been hyper-focused on growth, but the pendulum is starting to shift back to a focus on ecommerce profitability because of persistent inflation, higher materials costs, and ongoing economic uncertainty among consumers.
Brands now have entered the profitability era, and they’ll need to adjust their business and ecommerce strategy to ensure they boost their bottom line, says Jordan Jewell, the analyst in residence at the commerce platform provider VTEX.
Jewell conducted research in partnership with the consulting firm Publicis Sapient and released a new report on this topic, "3 Investments To Drive Ecommerce Growth."
He also joined a recent episode of the "Unpacking the Digital Shelf" podcast, "Navigating the Era of Profitability," to discuss the report’s findings and how brands can optimize the digital side of their business for greater efficiency, cost control, and ecommerce profitability.
Jewell says ecommerce has gone through three distinct eras over the last 15 years.
The first era, which includes the period from the 2008 recession to the start of the pandemic in 2020, was the old normal and defined by predictable growth. Brands balanced growth and profit, made measured investments, and ecommerce was viewed as a side project, Jewell says.
The COVID-19 pandemic defined the next era. Online and offline retail exploded over this two-and-a-half-year period.
"During that era, we really saw what I call the 'era of growth at all costs,'" Jewell says. "I don't know that retailers and brands were even thinking about it this way. They just had so much demand that they were just trying to fulfill that demand. Every category was growing."
Jewell adds that "ecommerce was viewed as a savior" during this time, but this thinking among brands started to shift in early 2022. He says brands and retailers experienced a lot of inflation-defined growth during the COVID era rather than true growth. We’ve now entered the era of profitability, where they must make more selective investments.
Though brands have come to view ecommerce as important and not a side project, they aren’t just looking at this part of the business from a growth standpoint. They want to make sure ecommerce is actually profitable.
Research from Publicis Sapient included in VTEX’s report found that ecommerce isn’t meeting profitability targets for 37% of retailers — which means growth will no longer be enough — and both brands and retailers need to be laser-focused on growing their profit margins on digital channels.
Jewell says brands can make three big strategic investments to drive ecommerce profitability:
During his interviews with brands for the report, Jewell found companies dedicated about 80% of their marketing budgets, on average, to customer acquisition. However, they haven’t gotten a significant return on their investment. Loyal customers actually drive more profit for brands, Jewell says.
He created a tool called the “customer profitability matrix” that allows brands to map average order values (AOVs) for each customer and their recurring orders to better understand which customers contribute to their profit.
This matrix is valuable to brands, because, in the profitability era, they need to focus more on loyalty than acquisition. To accomplish this, Jewell says it’s key for brands to collect more first-party data from customers to better understand them. They also must become channel-agnostic.
"The customer is the channel, essentially, in this era of commerce we're in," Jewell says.
First-party data will be crucial. For brands that have their own direct-to-consumer (DTC) channel, collecting this data will be much easier. Once they have these consumer insights, they can deploy them in various ways, such as improved email targeting and more personalized messaging.
"If you just change the way you're marketing so that you're focused on bringing customers back more than once — whether that's SMS, live streaming, live shopping, emails, whatever it might be — focus on bringing back customers more than once because you know that will contribute to your profit margins," Jewell says.
Amazon may be the leader in this space, but that doesn’t mean brands and retailers can’t strengthen their own inventory and fulfillment capabilities.
In his research, Jewell found companies often treat inventory and fulfillment as an afterthought and look at shipping simply as a cost center rather than a profit center.
However, brands and retailers need to prioritize speed and convenience to better meet customers’ expectations and engender their loyalty.
"The way customers buy — whether it's on a marketplace, a retailer, or your branded site — they're thinking of inventory and fulfillment on the same pedestal as the product itself in many cases. So what if we focus on that more?" — Jordan Jewell, Analyst in Residence, VTEX
In the report, Jewell developed an "omnichannel maturity model" that features five stages to help brands assess the maturity of their inventory, order management, and fulfillment operations.
He found that 55% of organizations are at the first two stages of maturity. However, Jewell says not every company needs to get to level five. Level three or four would probably be ideal for most brands. At this stage, companies are likely using several warehouses for fulfillment and have updated inventory for the marketplaces they sell on.
Though it’ll take more investment to make inventory and fulfillment a strength, Jewell says this area of the business is low-hanging fruit for driving profitability. Brands can boost their margins by treating fulfillment like a product, unifying their inventory, and diversifying the marketplaces on which they sell.
Amazon has driven a "homogenization of ecommerce," where brands present product content in virtually the same way regardless of channel.
"Pretty much every site and retailer has taken that mold and not innovated on it a ton, which I don't think is inherently that bad," Jewell says. "I don't think you need to have a flashy looking site, whether it's on Amazon or your own DTC site, but I do think there is a desire, a hunger from consumers to engage with them [brands] differently."
In the era of profitability, brands need to focus on creating a differentiated customer experience. They can harness video, prioritize product page optimization, and leverage an API-first approach to set themselves apart, according to Jewell. Video, in particular, will be crucial for brands.
"Your conversion rates are more likely to be higher the more you use video on your product pages or on your homepage, so think creatively about how to enable that," Jewell says.
Brands can do live shopping events or offer conversational commerce through messaging apps or live chatbots to better engage customers in real-time. They also can repurpose some of this content — from live shopping events, for instance — and use it on their product detail pages (PDPs).
"Brands and retailers can step outside of that traditional experience box and just enable their customers to interact with them and buy from them differently," Jewell says.
In a post-pandemic world, profitability is now king. Luckily, Jewell and VTEX have given brands a solid roadmap for how to shift from a growth-centric operation to one focused on driving ecommerce profitability.
Whether it’s leveraging video, optimizing their PDP, strengthening their inventory and fulfillment capabilities, or focusing on loyal customers, brands can pull several levers to increase their profit margins and create a more resilient business — one that is better prepared to navigate the next era of ecommerce, no matter what it might look like.
To hear more of Jewell’s insights on ecommerce profitability, listen to the full episode.
