Interview: Profit Killers and Pitfalls to Avoid in your eCommerce Strategy, with Andrea Leigh, Founder & CEO, Allume Group

Transcript:

​​Peter Crosby:
Welcome to Unpacking the Digital Shelf where we explore brand manufacturing in the digital age.
Hey, everyone. Peter Crosby here from the Digital Shelf Institute. All right, so I lied. We've been calling it Profitability Month on the podcast, but here we are spilling into May because there's just so darn much important to say. And this episode is an audio version of a recent DSI webinar featuring, of course, Lauren Livak, director of the DSI, and the brilliant Andrea Leigh, founder and CEO of Allume Group. They discuss how to embed the best practices for achieving profitability into your strategy and some of the pitfalls to avoid with specific retailers that can be profit killers.
Lauren Livak:
Hello, everyone, and welcome to today's DSI webinar as a part of Profitability Month. So we are in April and the theme is Profitability Everything; P&L, profit, finance, how to become more profitable in your business. I'm so excited to have Andrea Leigh from the Allume Group here today to talk to us about Profit Killers and Pitfalls, one of my favorite titles of a webinar ever, to avoid in your e-commerce strategy.
Andrea, thank you so much for being here today and for walking us through this. I will let you introduce yourself and kick off. Just a couple quick housekeeping items too. Please feel free to ask questions throughout this whole presentation. You can put it in the chat or the Q&A and we will make sure that we get to them. Andrea, thank you so much and hit it.
Andrea Leigh:
Thank you, Lauren, for having me. And thanks to the DSI. We have always been very appreciative of the partnership with the DSI in helping bring all kinds of education to all of you digital professionals. So thanks for having us. Today we're going to talk about getting rich, so profit killers and pitfalls in your e-commerce business, and we're going to give you a success framework for mutual profitability between consumer brands and e-commerce retailers. This is part of a whole profitability month for DSI. Right, Lauren? We've got-
Lauren Livak:
Yes.
Andrea Leigh:
We had, I think, coming up supply chain, how it can affect profitability with Jamie Dooley from TPG. That's coming up on April 10th.
Lauren Livak:
Yes.
Andrea Leigh:
On the 17th, you've got a part two to that, the importance of engagement with revenue growth. On the 24th, there's a profitability Q&A with Chris Perry from Firstmovr. So lots of leaders in this space that you'll get to hear from later this month.
Lauren Livak:
Yeah. Thanks for the teaser, Andrea. I appreciate it.
Andrea Leigh:
Yeah, no problem. I'll be attending some of those. They look amazing. So I'm Andrea Leigh, I'm the founder and CEO of Allume Group. We are an education company. We do live workshops, like today, and we also have an e-learning platform with a good number of courses, a robust curriculum, on e-commerce related topics. I am also co-host of The CPG Guys podcast. If you don't listen to The CPG Guys podcast, I highly recommend it.
We interview retailers, we interview brands, and we interview service providers every week so you can hear some of the latest and greatest from the provider space as well how other consumer brands and retailers are thinking about commerce. I'm the former VP of Ideoclick. We were an Amazon-managed services agency that served about two to 300 consumer brands on Amazon. I'm also a former Amazon executive. I was a category leader there for 10 years across a great many product categories.
But some of my bigger claims to fame at Amazon were launching their automated price matching system as well as the launch of the CRaP program, or the CRaP program. If you're not familiar with that, that's the Can't Realize a Profit. It's Amazon's way of designating between products that are profitable and unprofitable. I'm also a Top 100 Retail Influencer, so you can follow me on LinkedIn for lots of educational content on e-commerce.
This is actually one of our courses that we're going to go through today, so you can get a badge on LinkedIn and bragging rights for taking one of our courses. So I'll flash these instructions again at the end of the course. But you can scan this QR code, you'll take a very brief survey, it's like three questions, and then be given your credential to add on LinkedIn as completion of one of our courses that builds up to our e-commerce strategy certification.
Before we get started, I would like to hear from all of you and let you all hear from one another. What is your biggest profitability challenge in e-commerce? We've listed some here, but on number seven you can see we have an other. So you welcome to drop it in the chat or the Q&A if your profitability challenge area is not listed.
Lauren Livak:
Molly, if you could pull up the poll, we'll have everyone vote. Perfect. All right, so everybody should see a poll come up on their screen. Please go ahead and vote. I see some votes coming in, so I will let everyone respond really quickly. Make sure you go back to your Zoom screen and answer. All right, perfect. We see answers coming in. I am going to close the poll in three, two, one. All right, Molly, you can close the poll and let's see where we're at.
Okay, so it looks like we have 38% are focusing on distribution strategy, price matching as a challenge area. Coming in second is retailer pressure on trade terms. Is that surprising to you, Andrea? Not super surprising to me, but I'm curious.
Andrea Leigh:
No. I'm also not surprised that it's a bit of a mixed bag in terms of a little bit of a distribution across the different challenge areas. There is something that most, if not all, of these e-commerce profitability challenges have in common, and it is that they are largely under your control as an organization. And it's hard. It's not to say that that makes it an easy path forward, but they are largely within your control.
So today we're going to talk about how you can harness some of that control and work within your organization and with the retailer to improve some of that, some of those profitability items. First, we'll talk a little bit just about mutual profitability in e-commerce. This is, I have to say, one of my favorite topics. It's my favorite topic for a couple of reasons. I think it's really interesting and there are a lot of ways to solve the problem.
So I think there's some creative problem solving that gets to happen. But I think it's also about partnership and relationships and negotiation and trust, and those are all really important skills for us to have in business in general. We'll talk a little bit about that as well. Then we will walk through the RICH framework for mutual profitability. RICH stands for Renegotiate, Invest in win-wins, Carefully optimize advertising, and Heed the root cause. Then we will wrap up with a few takeaways.
We'd mentioned that a lot of the profitability challenge areas are largely within your control in your organization or within your client's control if you're in an agency environment. And today's goal is to really empower you and give you some tools and vocabulary and frameworks that you can use inside your organization. Within the DSI membership, we are often working with super users. A lot of you are experts in this already.
You understand how to measure it, you understand in many cases how the retailers think about it, you know what to do. It's just really hard to do it. It's really hard to gain support within your organizations. That's the thing we hear most often from our clients, is that they know that it's something to do with their distribution strategy, they know that it's price matching across retailers, they know these things, but it's really hard to evangelize some of that change and make a business case for some of that change within the organization. So we'll talk a little bit about that today.
First, just what is mutual profitability? The goal here on both sides, both the supplier and the retailer, are to reduce costs between production and consumption. So that's at its most basic level. It's how do we reduce costs between production of our products and consumption of our products on both sides, on the retailer side and on the supplier side. I think we've probably most of us have experienced that if we're able to improve that retailer profitability, we're often able to improve our own profitability just as a result.
Because retailer profitability means we can get better negotiated terms, we can get better advertising exposure, better things happen, more growth if we're able to improve that retailer profitability. And it gives us better access to some of the win-win types of programs that we'll talk about later, which can result in higher growth rates, things like subscriptions and retail media and all those types of growth drivers. So is it possible for both the retailer and the supplier to become more profitable at the same time?
I believe that it is, yes. That's because we at Allume Group subscribe to a philosophy of negotiations that are called interest-based negotiations. In an interest-based negotiation, the general idea is that the more interest we bring to the table between the two parties, the more likely we are to have a mutually beneficial or a mutually successful outcome. As an example, if we're just negotiating on a damage allowance, for example, someone's going to win and someone's going to lose.
Whereas if we bring more interest into the negotiation, if we bring in other challenges that we're having with the business, maybe our content updates aren't sticky or we're having some challenges from a supply chain perspective or we're getting a lot of chargebacks or we need the retailer to order or something a little bit differently, if we bring more interest into the negotiation, we have a higher chance of increased success on both sides for both parties.
But the challenge with interest-based negotiations is that it requires a lot of trust between the parties and it also 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. So we have to really think about how do we work together within our organization because a lot of those things that I mentioned, the supply chain challenges or sticky content or whatever it is, those are interests that might not be within our own department.
So we really need to reach out within our organization and think about how can we make the negotiation mutually successful for the retailer, but also for us as an entire organization, kind of putting our big hat on. So this isn't easy, right? This is according to Profitero's Organisational Benchmarking Survey. 49% of brands say that these pricing and profitability scenarios are their top challenge area in e-commerce. And almost 30% say measuring the return on e-com is the top challenge area. So this is really hard. This is not an easy thing for us to do.
But our goal is that you leave today's webinar with some helpful sound bites, some frameworks, and some ideas that you can try to improve your e-com profitability with retailers both through some of the external initiatives with retailers, but also internally. So we teach at Allume Group everything based off of the e-commerce success framework. I'm going to walk through that really quickly so that you can see where mutual profitability sits in terms of the pillars of success in e-commerce.
In order for products to be successful in e-commerce, we have to have a sustainable strategy. That includes our pricing strategy, distribution strategy, promotional strategy. We also have to have items properly and accurately set up in retailer digital catalogs. Garbage in is garbage out and we will experience a lot of hiccups later if we don't have the correct information in. We can also optimize things like search and retail media spend by having really strong content on our pages.
Products have to be financially viable. They have to be financially viable for us as the manufacturer and they also have to be financially viable for the retailer in order for the retailer to be interested in driving demand for us. They need to be in stock. We can't sell something that's not on the digital shelf and they need to be receiving traffic and activity. That's where we start thinking about promotional strategy and retail media and driving traffic to our items.
The concept of mutual profitability hits on two parts of the pillar. It hits on the sustainable strategy because it's often taking a step back and reflecting on as an organization our go-to-market strategy, our distribution strategy, our pricing and promotional strategy, but also on the financially viable piece because we obviously need this business to be viable. You can use this as a tool internally within your organization.
We go through this exercise a lot with clients where we actually have them rank themselves. Where do they sit on each of these components of the e-commerce success framework from a good, better, best standpoint? It can really be a useful tool inside the organization to help align everyone and rally around where our biggest opportunities are. If financial viability and sustainable strategy are pain points for you within your organization, which they might be because you're here today, this is a tool that you can use to help you build a business case internally.
First, let's get on the same page about economics of e-commerce. There are typically three different terms and there's variations of these for different retailers that they'll use to talk about e-commerce profitability. Pure profit margin, net PPM, and contribution profit are the three different measures. Within the fully loaded contribution profit model, there are a lot of costs and a lot of revenues incorporated into that.
I'm not going to spend a ton of time on this because you have another podcast coming up where you're going to spend time actually building a retailer P&L for your e-commerce business or for the specific customer. But the thing that I will say is that internally and with the retailer, what gets measured gets done. The comments on this would be, so first, getting some internal alignment on what measure of profit you are using and what you're tracking against.
Whether that's like EBITDA or contribution margin or ROI on retail media spend or whatever it is, making sure that you're aligned inside your organization, but also being mindful of the measure that the retailer is using and tracking against. Because if you're tracking against different measures, you're going to obviously have a problem. You want to be speaking the same language. But it's also important to notice that the retailer is going to use whichever one serves the best in the moment.
As an example, in our experience with Amazon, if they're negotiating on trade terms or funding from the commercial team, they're going to be talking about PPM, net PPM, because they want to incorporate that as the... They want to isolate that essentially. If they're talking about how you need to have different packaging or reduce the weight of your products so that they can ship more economically, in that case, they're probably going to use contribution profit.
So it's important to understand the measure that the retailer is using. Amazon, as an example, does have the most sophisticated contribution profit tracking tool. So every single cost and revenue associated with an item is tracked in their CP tool. But other retailers are getting there as well and catching up on the item level profitability. The good news is there are a lot of costs here, but that means there are a lot of opportunities. Each one of these can be line items to isolate and try to improve.
And every e-commerce marketplace is a little bit different. I think this is where, when we talk about mutual profitability, it helps to get really specific and even specific about each retailer. But the one thing that they all have in common is that they're all sort of designed to sell the next best thing. So if your product's out of stock or if the product's not profitable enough for the retailer or there's some challenges there, other products will float up in the search results to take the place of it.
I think in thinking about these different retailers, and we've just got three here as an example, Amazon, Walmart, and Target, really understanding their overall strategy, their pricing strategy, their philosophy, but more importantly where their profit comes from, I think, is an important factor because you're going to negotiate differently with each of them knowing their strategy. I'm just going to zero in on the profit comes from section. So if you look at Amazon, most of their profit now and their growth for that matter is coming from software and services.
This is really thinking about Amazon Web Services, Amazon advertising, revenue, third-party seller services. So their business model is becoming more about the commissions on those types of activities versus the margin on the retail business. That's important to be mindful of when we're going to the negotiating table with them. For Walmart, it's a little bit more about scale. So it's just a really low margin on a whole lot of sales across a whole lot of stores.
Then with Target, they operate a little bit more like a fashion retailer, not just in the apparel and accessory space but in general, and a lot of their profits coming from their private label. So when we're negotiating with Target, we need to be mindful that some of our most competitive brands are actually some of the ones that they own and where they drive a lot of their profit.
So the retailer e-commerce profitability really depends on a few different things. First, it depends on the delivery mix. Delivery is the biggest expense in e-commerce and they're the retailer balance of ship to home versus buy online pickup. First of all, the economics of those businesses are really different. Pickups obviously a lot less expensive for the retailer, but being mindful of that mix for that retailer is going to be really important when you're negotiating with them because it'll help you understand their cost structure a little bit better.
So that delivery mix is really important as you can see. A retailer Kroger's really, from a digital sales perspective, indexing a lot more towards buy online pickup in store versus obviously Amazon who's a pure play who's shipping everything to home. So delivery mix is an important factor. Then the maturity and scale of the retailer is another important factor. For example, on the delivery side, Kroger up until a more recent announcement had been using Instacart for all of their home delivery.
That's expensive. That's not a very scaled out solution. It also depends on the maturity and scale of their membership programs. So like Walmart Plus, Amazon Prime, Target Circle, RedCard. Then lastly on retail media. So really thinking about how much of their revenue is coming from retail media. For all the players besides Amazon, it's still pretty small revenue line item. Then lastly, just their leverage relative to yours. That's an important factor in their e-commerce profitability, how big of a player they are in their category.
We've been using some of the bigger box examples, but if you're a pet food manufacturer, you might be working more closely with Chewy and doing half of your sales there. So how big of a player they are in their category, how much reach they have, and how much skill they have there as well. And just to dive a little bit deeper on these retailer delivery economics, because this is the biggest cost driver in e-commerce for the retailers.
Really, if you look at the three different delivery methods, buy online pickup, home delivery, which includes perishables or ship to home for shelf stable items, the economics of each of these orders are really different. So understanding that retailer's mix, I think, will give you some insight into that retailer negotiation. For pickup orders, those are typically really big orders, typically the highest. They have a little bit lower of a delivery cost.
Home delivery for perishables has some of the highest delivery costs, but at least it can be amortized over a medium-sized basket. Then for ship-to-home shelf-stable items, those are onesie-twosies. The delivery economics for those are the worst because they're allocating that delivery cost to one or two items per order. So really thinking about which of these, the retailer, is indexing more too will give you some insight into their economics which can help in the negotiation.
There are really only four ways to improve e-commerce profitability. The first is you can drive just more revenue. Even more revenue without improving profit margins at all just drive more revenue, which in turn will drive you more profits. From this perspective, we're talking about things like some of the loyalty-driving initiatives like subscriptions and loyalty marketing. So you can drive more revenue from existing customers. You can also drive up retail prices. That helps drive more revenue.
You can do that through assortment, differentiation, exclusives, et cetera. So you can attempt to just drive more revenue in one way or another. As we go through this, I encourage you to think about which of these four is your organization focusing on and think about how that's maybe playing out for you and how you might be able to expand into some of the other three. The next way to improve e-commerce profitability is to drive down costs.
You can make products more e-commerce friendly, more shipping friendly, better suited for those delivery economics. You can improve some of the compliance with the retailer supply chains so that you're receiving less retailer fees or chargebacks. You can attempt to drive more efficiencies in the supply chain for both parties. There are also some retailer programs that can be win-wins. On the Amazon side, that might be Vendor Flex or looking at some of the pallet ordering programs they've been pushing.
Those things don't make sense for every brand, but it's really just about doing the math to see, based on what they want to charge you for that program, what are the cost savings that you're going to incur within your organization? So drive more revenue, drive down costs. The third way is to give the retailer more money. You can advertise. That also would help you drive some more revenue, to have some more performance-based marketing. Or you can just pay the retailer.
You can buy things you don't need. You can pay CRaP allowances or margin guarantees. Those generally aren't a great long-term strategy, but they can be a good bridge solution if you have new assortment that's going to be hitting. And that assortment might be more suited for e-commerce or carry higher profit margins for you in the retailer. So it might be a good short-term solution. So drive more revenue, drive down cost, give the retailer more money, or don't sell stuff that's unprofitable.
We're seeing more and more brands do what we call self-CRaP out, or items that are just driving a lot of losses for that retailer that are starting to affect the overall negotiation between the supplier and the retailer and put the supplier in a bad position, even if it's a top seller. If you've got a $7 mascara that's really unprofitable for that retailer because it's always shipping alone and shipping to home, that might be an item to discontinue for that retailer.
Those are hard choices to make because they have an immediate revenue impact for us as consumer brands. You can also have someone else sell them. So do it through a third-party seller on one of the major marketplaces or through a trusted reseller. There's some other ways to ensure that the shopper still has access to the products, but not sell them yourself and not be in that negotiation with that retailer. So-
Lauren Livak:
Andrea-
Andrea Leigh:
Yeah.
Lauren Livak:
Just a quick question around the don't sell stuff that's unprofitable. In terms of maybe an item not being profitable on its own, what are your thoughts on bundling or doing some sort of gift pack? Is that an opportunity from a profitability standpoint that can help?
Andrea Leigh:
Absolutely. I would put that under the designing maybe the product... going to the drive down cost and designing the product a little bit more for online, like are there ways to increase the pack size? Even if it's price match, if you're selling a three-pack of hand soap and the retailers are still matching it as three of the singles, depending on the economics of the item, it still might be better profitability than if you were to sell it alone.
One big mistake that we see here though when it comes to design for online is really assuming the best case scenario. For example, we worked with a client who sells... I'm trying to remember what it was. I think it actually was hand soap. They put together a bundle of three and they were very excited about it because they could make it an inner and it worked really well in the supply chain. But when they ran the economics on it in advance, they assumed that the retailers would not price match like three times the each basically.
We want to assume the worst case scenario when we're designing for online or when we're changing pack sizes. We want to just assume that they're matching it and see even if they are matching one another if the profit margins are improved just because we're able to amortize that delivery cost over a higher retail selling price. So I would encourage you to really make sure that you're doing your math on that in advance before you push something through an innovation cycle because this can be very lengthy and it can be incredibly disappointing.
I mean, it can look really bad for your team if you've pushed this thing through and then it doesn't actually deliver what you were hoping. So plan for the worst case scenario, I would definitely say. So those things all sound really easy, right? Super easy. You can get your product development team to design new packaging for a retailer that represents like 10% of your business. I'm being sarcastic. It's a hard to make business cases for some of these things internally.
Really quick poll. What is your organization's go-to profit improvement strategy? Of those four that we talked about, where does your organization focus the most? Driving more revenue, driving down costs, giving the retailer money, not selling stuff that's unprofitable.
Lauren Livak:
Everyone should see a poll on their screen. Come back to the Zoom window and make sure that you answer the poll. Looks like we have a bunch of responses coming in. Give it a couple more seconds for everyone to answer. All right, we're going to close it in three, two, one.
All right, so it looks like 36% of people say drive more revenue, 27% say drive down costs, and then a tie for 18% around give the retailer more money and don't sell stuff that's unprofitable. I think it's really interesting around the give the retailer more money because everybody's talking about retail media networks and budget... Or the budget's saying the same and not increasing and not being able to share more money. So it's interesting where that falls on the list with the topics that we hear.
Andrea Leigh:
Yeah. And I would encourage you, if you feel like your organization is leaning too heavily into one of these, how can you explore one of the other ones? Because again, the more interest we bring into the negotiation, the higher the chance of mutual success. So if you're squarely in the give retailer more money camp, what are some ways you can also work within your organization to drive down costs?
Or if you're more squarely in the give the retailer more money camp, how can you transition some of that to more performance-based marketing in the drive more revenue? Or focusing on loyalty programs and investing there. I would think about where you sit and how you might be able to move across the different buckets for some variety and that'll improve some of the profitability with the retailer. But it also strengthens some of the partnerships internally within your organization.
Okay, we are going to cover the RICH framework for mutual profitability. RICH stands for Renegotiate, Invest in win-wins, Carefully optimize advertising, and Heed the root cause. There should be some tactics in here that you can take back and use today within your organization and with your retailers. The first is renegotiate. If you think about this, there's two sets of negotiations that we're approaching. One is internal with our partner teams and the other is externally with the retailer.
Within renegotiate, we have four pieces here; find your data, isolate your point of leverage, relax and go slow, and make asks. This is actually another course we teach on retailer negotiations. It's called the FIRM Framework: Find your data, isolate your point of leverage, relax and go slow, and make asks. But with your partner teams, this is really thinking about helping your organization understand how each retailer calculates profitability.
So making sure that you're speaking the same language. So internally, if you tend to really look at contribution margin for that retailer, but that retailer is looking at net PPM or some other measure, training your organization to also measure the same measure that the retailer is using. What gets measured gets done. Same with the retailer, making sure to gather your data and make sure that you're speaking the same language.
Next is isolating your point of leverage. With the retailer, every brand is delivering something of value to each retailer. So maybe if you're... let's say in your Target relationship, you tend to have some really great exciting innovation that they're always very excited about, they believe it drives traffic into their stores. Maybe with Amazon, you have a high subscribe and save penetration rate. Whatever it is, figure out what your point of leverage is with that retailer.
Then similarly within your organization, the business that you are running, if you're running the e-commerce business or if you're running e-commerce for a particular retailer, that customer channel is delivering something for your organization or you wouldn't be doing it. So figuring it out, what is your leverage internally? What value is that partnership driving for the rest of the organization?
Next is relax and go slow. Within our own organizations, it's important to be patient. A lot of these changes take a long time. I worked with a manufacturer a while back in the fashion space who underwent implementing a huge MAP policy. It was an 18-month process for them to clean up their distribution, put pricing policies in place with all of the retailers. I'm not saying everyone should have a MAP policy, I'm just giving an example of a timeline that someone was working with to get all of that cleaned up and for the business to resettle at its new level and to get their organization on board with it because that was a Herculean effort.
We worked with another manufacturer who flipped their business from 1P to 3P and then back again due to some very strange internal dynamics at Amazon. That's a lot of change to undergo and it took a long time. So just really being patient. Considering if you're not doing this already, segmenting the retailers that your organization works with to inform some of the funding and service levels, to provide some more clarity and guidance within the organization and with the retailer.
I'm always surprised each year how many manufacturers are surprised when the AVN process starts, particularly Amazon because they send these crazy emails with big asks. But we shouldn't be surprised. Happens every year, we should manage it like a project. Is there a way we can manage it like a project within our organization that has a project manager and internal milestones and delivery dates and we spend some time upfront planning and thinking about what we want to get out of this AVN process. So managing a project and not being pressured to close.
I don't know if we have any smaller manufacturers on the call today, but really thinking about when those automated asks come through from the retailers, not to click on the accept button and be comfortable asking for more data and more time from the retailer. Then lastly is making asks. So thinking about how do we make a business case for change internally. We talked about those four different ways to improve profit and how we might want to flex from one to the other. So how can we make a business case for that?
We often come across these very channel-specific mindsets within organizations. So this is like, if you're on the Walgreens team, this is a skew that's really important here. It's important for my business looking after Walgreens. But if that skew is creating a lot of churn and problems and price matching across the other channels, figuring out ways to help people put their big hat on so that we're able to think holistically as a business. Does that skew actually make sense for that retailer in the bigger picture?
Then with the retailer, again, when we're thinking about all of our asks and bringing our interests to the table, how can we think outside of our department? There's no poll here, but just a really quick question for reflection. I encourage you all to think about a time where you had a really successful negotiation. What made it a success and how could you think about that success driver in internal negotiation? So if you're negotiating something internally, how could you take what made you successful and apply it?
Okay. Renegotiate, we talked about. Now talking about invest in win-wins to mitigate some of those profit killers. So assortment, really thinking about looking at, how do we make a case for some of these things. We know that these are profit improvement tactics; designing for online, exclusives, focusing on auto replenishment and subscriptions, participating in some of the retailer supply chain programs and performance marketing. But how do we make a business case for some of these internally?
From an assortment perspective, these are some great examples on the screen here of products that were designed for online. We think that Tide PODS have always been around, but when I was on the grocery category at Amazon, these were invented because they ship better and they are a little bit of a higher price point and they're a great online skew. So a lot of these products that we take for granted, powdered drinks, single serve coffee, were largely successful because they were designed better for e-commerce profitability and they performed really well online.
So I would encourage you to look in your competitive set to see who is being really innovative in this space and who's designing products really well for e-commerce success. You can use those skews in your business case. These are some competitors we're looking at in some of the things that we're doing. Another thing we've seen clients do is compare the cost of some of the retrofitting that has to happen as a part of having products that aren't designed well.
If you go to a liquid laundry detergent, you might have to tape the top of it. It's heavy, it's going to have a high damage rate. And look at the cost of some of that retrofitting and compare it to the cost of innovation. That's another thing that we've seen manufacturers be successful with. Similarly, with supply chain programs and performance marketing, again looking at what does it cost to participate in some of these versus what are you paying in increased fees or terms because there's more cost between production and consumption with that retailer.
So that's invest in win-wins. Then next is carefully optimized advertising. This is an area we're seeing brands be very focused on. It isn't a one-size-fits-all strategy for retail media anymore for a couple of reasons. I mean, first, if you're just bidding on a bunch of high traffic keywords, that's a really unprofitable strategy for you as a brand. But also the capabilities of these retail media platforms have advanced so much in the last couple of years.
The targeting capabilities, we can get a lot more specific about who we're going after, both onsite and offsite, and spreading the pie a little bit around the budgets outside of just Amazon. We're seeing now brands spending in some cases almost as much as they spend on Amazon on maybe Walmart or Instacart for consumable items. So really thinking about how can we spend smarter, how can we move off of some of those more traditional strategies of very high traffic search-based marketing, or how can we rotate our spend in a little bit more of a hands-on way to win?
This example here was from an organic baby formula where we were... Back in my Ideoclick days, we were working with this brand, they couldn't afford to bid on all of the top keywords in that category. So we took one at a time and then won that one and then got some natural search relevance going and then went to the next one. Then when we were done, we started all over and went back to the beginning. So there are some tactics you can take that are a little bit more... they're a little more time intensive.
They take a little bit more of a hands-on approach with your advertising provider, but really thinking about how can you stretch your spend a little bit more. And similarly with some of the new targeting capabilities that are available and offsite in particular. If you look at some of the newer demand side platforms like Kroger's Private Marketplace, they have some pretty robust targeting capabilities that are available to target their audience offsite and they track 96% of all their purchases with their loyalty cards. So some pretty incredible and cheaper investments available to you.
Lauren Livak:
Andrea, how do you think about profitability when it comes to all of the new retail media platforms that are coming out? It feels like every retailer's like, "We have a retail media platform, spend more money with us." How, from a brand perspective, do you think about profitability with test and learns and with adding new retailer media networks? What would your process be for evaluating that and deciding where to place your bets?
Andrea Leigh:
Yeah. Well, I think for the big ones, if you're just looking at Amazon, Walmart, Target, and if you're a sizable brand, it's part of the JBP. So you're committed. You're going to have to spend a certain amount that year. So then it's up to you to get smart about how you're going to spend it and really make those dollars work for you. I think it was on a recent earnings call where Doug McMillon from Walmart said, "We don't want retail media to be just an extra tax that our brands, suppliers pay. We want it to actually add value."
I think most manufacturers I talk to would still think it's a tax, right? So I think if you're contractually committed to a certain amount of advertising and it's all wrapped up in your brick and mortar negotiation too, that's a really tough position to be in. Then you're just trying to figure out, how do I spend it as smart as possible? If you have more flexibility and agility within your organization to move the budgets from retailer to retailer throughout the year, I encourage you to do it.
Run some tests and learns, do some small tests across the different retail media platforms, and find the ones that seem to be working for you. We have a whole course on retail media advertising strategy, so I could talk about this all day. But I do think it's important to first figure out what you're trying to accomplish with each retailer before even deciding how much to invest.
Are you advertising on Amazon because they have a specific shopper that you want? Are you advertising on Walmart because there's a competitor that you're concerned about that's gaining share? Figuring out what you're trying to accomplish before you start allocating spend and then tracking those specific objectives and metrics. So if you wanted to get this new customer, are you getting them? Is it working? If you wanted to try to gain share relative to a competitor, is that strategy working?
Then if not, changing the investment so that you can make that happen. That's how I would think about it, and in terms of all the platforms to choose from. But again, it goes back to that agility within the organization. We work with some brands who the budget is fixed for the year and that's what it is. You don't have a lot of flexibility and then you have to work within that.
So we talked about renegotiate, invest in win-wins, carefully optimize advertising, and then H stands for Heed the root cause. This is really thinking about, what are some of the root causes of your profit killers. This is a great story of a... This was a dish soap. The supplier launched on Amazon, Walmart, and Target at the same time with the same product. It's a biodegradable natural dish soap and they had spent a lot of time and energy investing in that messaging, that it's a premium product.
So 15.99 dish soap launched on Amazon. Walmart immediately does a rollback to 9.97. Target decides to beat that at 7.99. Then Amazon matched the 7.99 price, which was ill-timed with a $2 vendor-powered coupon, which brought the price down to 5.99. 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 because it's now CRaP.
So really thinking about the root cause of some of the profit killers. On the brand side, what are we talking about here? Is this our distribution strategy? Should we sell the same product to everyone? Is this a good product for online? I love the Sivino example here of a product that was not well-designed for online and required so much prep that when the shopper gets it, they're probably either confused or disappointed or maybe some combination of both.
But really thinking about what is the root cause of what's driving those costs between production and consumption. Is it our promotional strategy? This $2 vendor-powered coupon was probably not a great idea when we don't know what the market pricing is going to be at for an item. So internally in your organization gathering data about some of these examples and storytelling are really important skillsets to help evangelize change.
A few takeaways and then we can take some questions. We may have add some throughout the session. This mutual profitability is critical for e-commerce success and it is absolutely possible. We talked about some ways that you can achieve mutual profitability today. It requires partnership, it requires trust, it requires interest-based negotiations and thinking outside of our department.
But really understanding those retailer specific dynamics are key. So understanding their cost structure, their mix of ship to home in e-commerce versus online pickup will help you understand the position that they're in coming to the table for a negotiation. We talked about the RICH framework for mutual profitability. So renegotiate, invest in win-wins, carefully optimize advertising, and heed the root cause.
So I encourage you all to think about what was your biggest takeaway today. What are you going to take back and use within your organization? Maybe write it down or put it on your phone. While you're thinking about that, here is how you get your badge for today's course, Mutual Profitability in E-commerce from Allume Group. If you scan this QR code, you will be directed to a survey. You will get an email with your credentials and you can post them on LinkedIn for bragging rights for spending an hour with me today and the DSI.
Lauren Livak:
Thanks so much, Andrea. One question that I have is you talk a lot about bringing... or working with the rest of your organization, so cross-functional engagement. I think when it comes to profitability, it's really challenging potentially to get the finance team, the sales team, the marketing team, potentially the shopper team all on the same page, especially when it comes to something like retail media because different people own the budgets, different people have a different say and understanding of how it works. So what is your best piece of advice for brands that are struggling with that internal engagement and alignment?
Andrea Leigh:
Yeah. I mean, I think it really comes down to relationships internally and opening some of those communication lines. Depending on the size of your organization, you may not really know your counterparts in some of those other areas, or you may know the people that you work with on a day-to-day basis, but not the leadership. I think spending some time investing in those relationships is really important.
So maybe not necessarily always just reaching out when there's something that you need. But really taking time to get to know their business and their point of view and what they're measured on, I think, can help you make a better business case for something that you need to really understand the other person's perspective.
So asking a lot of questions and really trying to understand where they're coming from because it might inspire new ideas for you as well in terms of ways to work with your finance team, for example, to understand the timelines that they're up against, the constraints that they're up against. So I really think it comes down to the relationships.
Lauren Livak:
I think we underestimate that sometimes, that internal relationships and building that team cross-functionally is so important in addition to all of the external factors that we all have to worry about.
Andrea Leigh:
I would also add having patience, because I think building some of these cases and working inside your organization is... it's really time-consuming and it can feel frustrating, especially when there's a lot of pressure on the e-commerce teams typically to deliver strong growth, fast growth. These have been the growth channels for a lot of our brands for a long time and we're expected to keep it that way. I was looking at a job description for a client recently who's hiring a new VP of E-commerce.
Melissa and I looked at the job description and we were like, "This is an enormous job." It covers every single functional area. I mean, it's basically a president. Covers every functional area, it had huge goals. They're supposed to double the size of the business. And we were just like, "This is a huge job." Relative to if you look at the customer lead for Walgreens or Costco or something... a business that's a little bit more stable.
So I think that we can feel that pressure and we can feel like we're in a rush and feel really impatient with some of the rest of our organization. So I would say find some inner patience, which goes back to the relationships. If you really understand where other people are coming from, naturally that patience follows a little bit.
Lauren Livak:
Yeah, I feel like patience and e-commerce is a critical skill to have and cross-functional relationships. Another question around how to measure profitability in your organization. When you're thinking about how you look at profitability, do you suggest looking at it individually by each retailer, looking at it holistically? With all of these efforts that you're talking about and all of the different factors that you might be able to do, increase revenue, spend more with the retailer, how do you actually look at where you make a difference from a profitability standpoint? How would you suggest assessing that?
Andrea Leigh:
Well, I think spending a good amount of time to build that customer P&L is really important. So understanding all the costs... I mean, because if you're measuring... Let's say you're measuring profitability... Let's just use Amazon as an example. Let's say you're measuring your organization's profitability on Amazon, but you're not including all of the chargebacks and outstanding shortage claims, that's not a complete picture.
And if you're not including that in the picture it, you will struggle to get support to help you with that within the organization. So I think spending some time to really build out that customer P&L, but then also making sure that even if it's a different way of looking at profitability than the retailer, that you're also tracking on what the retailer's looking at, because that's going to be the focus for your JVPs or your supplier negotiation conversations, is going to be their view of it, right? So I think you have to look at both.
Lauren Livak:
Yeah, understanding both sides of the fence is incredibly important, especially from the brand side, understanding what the retailer is looking for. I'm going to give everyone a last opportunity to ask questions. And Andrea, if you don't mind, jumping to the slide where they can get in touch with you. And also-
Andrea Leigh:
Oh, there's some resources in here too. This deck will be available, but some articles we read from some other places that were pretty helpful and courses. Then yeah, you can scan this QR code to become a member of the DSI and over on the right sign up for our newsletter.
Lauren Livak:
Also, if you visit the Profitability Month page, which I put in the chat, you can receive 50% off and the Allume Group courses for the month of April if you want to take any additional courses. They also have some really great content on the DSI that you can check out.
Andrea, thank you so much for joining us today and for walking us through all of these frameworks. Thank you everyone for joining and for some great questions. Really appreciate it. Andrea, thanks as always for being a great partner of the DSI.
Andrea Leigh:
Thanks for having us, Lauren, and thanks everyone for attending today. We hope you got something valuable.
Peter Crosby:
Thanks to Andrea for letting us get a double dose of value out of this impactful content. And thanks to all of you for being part of our community.