E-Retail

Businesses use the internet as a merchandising, marketing, and servicing channel to sell physical and digital goods directly to customers. Amazon is the leader in business to consumer E-Retail, and the company’s breadth, depth, and market dominance must be considered for any new entrant into E-Retail.

When it works well:

Strengthened relationship going direct to customers

The direct to consumer model has been embraced by businesses who want more control and who want to eliminate having to pay a retailer a huge fee. For example, retailers like Target and Nordstrom often receive 45-55{4b0c188ae8604bf014d8bc27c7c65bbf455b55139b6ec077c9ec57d60479b1a7} of the total retail price for any product sold, and the product seller is not in control of the customer experience. From the start, businesses can ensure the customer experience is delivered exactly as they intend, allowing them to learn more quickly and have deeper insights into customer data.  

Large variety, algorithmic personalization

Amazon is best known for their ability to cross-sell products that fit with your current search and your purchase history. Using algorithms to analyze user behavior, past and predicted future behavior, is critical to increasing average order value and frequency of purchase.

Strong marketing: acquisition, retention and upsell

The best E-Retail businesses are expert online marketers, and spend a great deal of time optimizing their marketing “funnel” – monitoring how time, effort, service, offers, and paid media affect customer acquisition, retention, and the ability to upsell new products. E-Retail marketers aim for a critical ratio: ensuring that their cost of acquiring a customer (CAC)  is substantially lower than that customer’s predicted lifetime value (LTV).

Niche E-Retail  

The other type of E-Retail company that has an easier time competing are those that deliver niche products to distinctive market segments. Customer acquisition costs are kept low at the start because the product truly serves an unmet need, and customer referrals drives initial growth. But as the business scales, these same companies will still need to invest in marketing acquisition.

Free shipping, free returns

If margins and growth plans allow, E-Retail sites who are able to offer free shipping and free returns tend to outpace those that charge for shipping. Customers are also willing to wait for free shipping, or pay to have the appearance of free shipping, and often balk at E-Retail companies that have shipping fees of any kind.

Challenges to the E-Retail model

Margin pressure

Most E-Retail entrepreneurs learn that profitability is hard to attain at the start. While there are margin advantages in going direct-to-consumer, it still costs money to acquire customers, often with higher inventory costs, and higher product return rates than brick and mortar channels.

In terms investor valuation, E-Retail businesses are less valuable to investors than ad-supported businesses or Software-as-a-service other types of business models in terms of future growth, because of unit economics. For each unit of product sold, there are inherent costs (costs of goods sold, marketing cost, operational costs) versus a purely digital product.

Marketing economics

Many first time E-Retail merchants are surprised to confront the marketing economics required to build and sustain a healthy business. Suffering from the “build it and they will come” syndrome, these startups (or established indirect sellers venturing into E-Retail for the first time) spend their efforts on site design and merchandising, but do not plan for the required ongoing marketing investment. Mapping out customer acquisition costs by stage (awareness, sign up for email list, purchase) and comparing to customer lifetime value will give E-Retail managers the framework needed to manage the sales cycle profitably.

Amazon service, shipping and delivery expectations

Customers of Amazon, who are able to have their products delivered as soon as one day after shipping, with Saturday and Sunday delivery, have heightened expectations from other online shopping experiences. Companies are keeping warehousers closer to buying hubs.

Amazon’s most radical shift was setting the expectation of same-day or next-day delivery in key metro areas. For example, Amazon Prime customers can get a product shipped within one hour in NYC.

The business model mechanisms to test:

Mechanism to test Metrics to measure
Do I have attractive products, priced well? Conversion to customer
Are customers buying more than one thing? Are we creating paths to buy more? AOV = Average Order Value
Is our user experience working? Do we keep customers throughout the process? Can we retarget lost customers? Shopping cart abandons
Am I spending less to acquire a customer than we receive revenue per customer? CAC (Cost of Acquiring a Customer) and LTV (Life Time Value)
Do we have margin advantage? Gross margin {4b0c188ae8604bf014d8bc27c7c65bbf455b55139b6ec077c9ec57d60479b1a7}
Does the customer like our products? Product return rate
Does the customer have a great experience? Net promoter score

Emerging trends in E-Retail:

M-Commerce

The rapid rise in mobile based shopping and purchases indicates that all sizes of E-Retail company must have at bare minimum a website that is mobile-responsive (adapts to a mobile browser) and/or have an app designed for browsing and shopping.

Super flexible logistics

E-Retail leaders are investing in their logistics flexibility: adaptable delivery of products, on-demand global fulfillment.

On-demand and subscription E-Retail

One of the fastest growing forms of E-Retail is the monthly gift-in-a-box made popular by Birchbox and similar companies. These business models differ from the standard direct-to-consumer model because of the revenue smoothing that can occur. See Reason Street’s Subscription Business Model description to learn more.

Private label E-Retail

Amazon is experimenting with its own line of diapers, Amazon Elements. THe line of diapers and wipes will be available only to those who pay for Amazon Prime membership. Expect Amazon to cannibalize core product lines with private label offers.

Deeper Dives on the E-Retail Business Model 

Bessemer’s Top 10 Laws of E-Commerce, by Bessemer Venture Partners, 2010 (pdf)

How to Choose an E-Commerce Business Model by Shopify

RIP Content and Commerce by Erin Griffith, Forbes, 2015.  

How to Estimate Lifetime Value for an E-Commerce Business Sample Cohort Analysis, by Lightspeed Venture Partners, 2012.

How to Tell if Your Marketing Economics Are Broken or Brilliant, by Chris Bolman at Percolate, 2015.

That’s a Nice Little $40M E-Commerce Company You Have There. Call Me When it Scales, by Josh Hannah at For Entrepreneurs, 2014.

What are the Most Important Metrics for E-Commerce Companies, Quora Discussion.

Understanding Customers’ Repeat Purchase Intentions in B2C E-Commerce: The Roles of Utilitarian Value, Hedonic Value and Perceived Risk, Chao-Min Chiu et al, Info Systems, 2014. (academic paywall)

Breaking the Ice in B2C Relationships: Understanding Pre-Adoption E-Commerce Attraction, Damon E. Campbell et al, Information Systems Research, 2012. (academic paywall)

We thought E-Retail was fairly straightforward until we dug into the emerging complexities. What do you think about the E-Retail model in the era of Amazon? Have you ever launched an E-Retail business? Do you have other resources or company suggestions we should source? Share your comments or suggest another business model to add to our library.

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