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"There is something that most, if not all, of these ecommerce profitability challenges have in common — and it is that they are largely under your control as an organization. It's not to say that makes it an easy path forward, but they are largely within your control." — Andrea Leigh, CEO, Allume Group
To achieve profitability, brand manufacturers need to understand what levers to pull to increase revenue and what pitfalls to avoid that will kill their profits.
Andrea Leigh, founder and CEO of Allume Group, an ecommerce education consultancy, led a recent Digital Shelf Institute (DSI) webinar focused on this very topic, "Profit Killers and Pitfalls to Avoid in Your Ecommerce Strategy."
During the webinar, Leigh shared the best ecommerce strategies that can help brands more effectively negotiate, forge better, more profitable retailer relationships, and optimize different parts of their ecommerce business to boost their margins.
If you want to drive ecommerce profitability for your brand, Leigh’s tips and insights are a must-read.
Brands face several challenges on the road to profitability, including retail pressure on trade terms, the growing expense of retail media, price matching, chargebacks, shortage claims, and other fees. They also must contend with internal challenges, such as bad assortment decisions and supply chain issues. Taken together, all these factors make it difficult for brands to eke out a respectable profit margin.
However, Leigh says it’s still possible to overcome these challenges.
"There is something that most, if not all, of these ecommerce profitability challenges have in common — and it is that they are largely under your control as an organization," she says. "It's not to say that makes it an easy path forward, but they are largely within your control."
Focusing on mutual profitability is one way brands can boost their bottom line.
Mutual profitability involves tactics that reduce costs between the production and consumption of products on both the retailer and supplier side. It requires negotiation, trust, and a true partnership between both parties.
"Most of us have experienced that if we're able to improve retailer profitability, we're often able to improve our own profitability just as a result," Leigh says.
Several dynamics affect retailer profitability, and these factors vary by retailer. It’s crucial for brands to understand these differences before they enter any negotiation. Some factors that affect the underlying economics of retail are the delivery mix and the scale and maturity of the business.
Various retailers also have a different delivery mix — from curbside pickup to ship-to-home — each of which affects their cost structure. Different parts of their business also may be more mature and scalable than others.
For example, whereas some retailers use Instacart for delivery, which isn’t very scalable and is very expensive, others already may have their own delivery service.
The source of overall profitability also varies by retailer. Amazon is increasingly focused on commissions rather than margins in its retail business. Target drives a lot of its profits from its private-label products, while Walmart is more focused on scale and making its profit based on sales volume across its huge retail and digital footprint.
Leigh says it’s possible for retailers and brands to be profitable simultaneously if brands employ interest-based negotiations, an approach Allume Group teaches its clients.
With interest-based negotiations, the general idea is that the more interest that both parties bring to the table, the more likely they are to have a mutually successful outcome.
"The challenge with interest-based negotiations is that it requires a lot of trust between the parties, and it requires us to use joint problem-solving skills, both with the other person that we're negotiating with on the retailer side, but also within our organization," Leigh says.
Organizational alignment is crucial because it streamlines the identification process of the ecommerce lifecycle and can increase revenue or drive down costs. Allume Group provides what it calls an "Ecommerce Success Framework" to help brands improve profitability both internally and externally with retailers.
Allume’s framework details the pillars for success in ecommerce.
These pillars can also support the best ecommerce strategies, and include:
Leigh says the concept of mutual profitability touches two of these pillars.
"It hits on sustainable strategy because it's often taking a step back and reflecting as an organization [on] our go-to-market strategy, our distribution strategy, our pricing and promotional strategy, but also [it hits] on the financially viable piece because we obviously need this business to be viable," she says.
Allume provides a tool its clients can use to rank themselves on each of these pillars. This helps with organizational alignment and enables brands to surface potential opportunities to increase profitability. From there, they can negotiate with or work more collaboratively with retailers to drive mutually beneficial and profitable outcomes.
Allume also offers a RICH Framework for driving mutual profitability:
Leigh says there are two sets of negotiations in which digital teams must engage: One is internal with their partner teams, and the other is external with retailers.
To successfully renegotiate with both groups, teams must find data that helps them better understand how a given retailer measures profitability and then use this information to better prepare for negotiations with that retailer.
They also must isolate their point of leverage and identify the value they offer internally to other parts of the organization and the value the brand delivers overall to its retail partners. Next, Leigh says it’s essential to relax and go slow.
Brands should segment retailers to inform service and funding levels, manage the annual vendor negotiation (AVN) and joint business plan (JBP) process as a project, and not feel pressured to close.
Lastly, using all these inputs, they should make the case internally for business change, challenge channel-specific mindsets in favor of a more holistic approach, and then present clear "asks" to their retail partners.
Next, brands must invest in win-wins to reduce profit killers, whether it’s poor assortment decisions and price pack architectures or offering products that don’t make economic sense online.
Leigh says digital teams need to make the business case internally for their brand to participate in different profit improvement tactics, such as designing for online, offering exclusives, auto-replenishment, subscriptions, and participating in retailer supply chain programs and performance marketing.
They can make this case using competitors who are driving ecommerce success with the same tactics, arguing the potential for lost market share if their own organization doesn’t follow suit.
Leigh adds that brands should compare the cost of retrofitting certain items for ecommerce to the cost of innovation, as well as the cost to participate in supply chain and performance marketing programs to the cost of paying increased fees or terms.
Doing this due diligence can help them make better decisions about where to invest their time and resources to maximize profitability on both their end and the retailer’s end.
A one-size-fits-all advertising strategy is no longer effective for brands, especially when it comes to retail media. They need to harness the best ecommerce strategies to increase the profitability of this channel.
According to Leigh, the targeting capabilities of retail media platforms have advanced so much that bidding on a bunch of high-traffic keywords is no longer a winning strategy.
Instead, brands need to get really specific about their target audience and spread their budget across channels to reach this audience rather than put all their eggs in Amazon’s basket.
Brands need to spend smarter to drive more value from retail media and other advertising platforms. Otherwise, they risk losing money, not generating any significant return on investment (ROI) on their investments, and moving further away from profitability.
The last pillar in the RICH framework is to heed the root cause of your profit killers.
During the webinar, Leigh gave the example of a biodegradable natural dish soap that crafted great messaging to position itself as a premium product. However, after launching at a price point of $15.99 on Amazon, the soap’s price gradually went down to $5.99 thanks to price matching and promotions.
"Within two weeks, all of the marketing investment that this brand had made in positioning this biodegradable dish soap as a premium product that goes out at a $15.99 price point is now down to $5.99, and Amazon's not interested in selling it anymore," Leigh says.
This is a prime example of why it’s crucial for brands to understand what’s killing their profitability.
In this case, the brand’s distribution strategy may have been a profit killer because selling the product to different online retailers only increased the potential for price matching. Instead, it may have been best to pick one channel and sell through its own direct-to-consumer (DTC) channel.
The best approach will differ for every situation, but it’s critical for brands to gather data and pinpoint the factors that drive their profitability challenges. Addressing these factors at the root level can position brands for profitable growth.
Achieving profitability will require adopting a flexible, multi-faceted approach and the best ecommerce strategies, but Leigh believes brands can accomplish this by understanding retailer-specific profitability dynamics and by keeping in mind the RICH Framework for mutual profitability.
But most of all, it’s crucial for ecommerce teams to invest in building stronger internal relationships across functions and stronger retailer relationships that allow them to work together toward a common goal — profitability.
"Spending some time investing in those relationships is really important," Leigh says. "I think it really does come down to relationships."
To hear more of Leigh’s insights on ecommerce profitability, listen to the full podcast episode of "Unpacking the Digital Shelf."
