In ‘Mystery of the Missing Profits’ I talked about how eCommerce companies were struggling with slim profit margins. I also discussed how they ignored existing customers, focusing almost exclusively on new ones. In this series, I will take a closer look at this issue, and how brands can overcome it and begin their journey toward profitability.
The profits problem
eCommerce companies struggle with non-existent profit margins. The primary culprit of these slim profit margins is the high customer acquisition cost (CAC). However, a closer analysis reveals an industry-wide problem. This is the ‘eFolly’ – the decision to ignore existing customers while almost exclusively focusing on new customers. The eFolly of disregarding existing customers is prevalent in digital companies across the board.
It is a costly misstep that gnaws away at their profitability. Without external capital to absorb losses, this can lead to startup failures.
Half of the global Adtech spending is being squandered. As a result, a significant chunk of the $200 billion AdWaste that could have been potential eCommerce profits ends up in the P&L statements of Big Tech companies, serving as an alarming testament to the magnitude of this eFolly.
Lured by the promise of scale and novelty, marketers constantly seek new customers. As a result, they focus their strategies on the top of the sales funnel, becoming consumed by the deceptive delight of an ever-expanding customer base. In this relentless pursuit of new customers, existing customers are ignored. The quest for new customers consumes significant resources, eclipsing their existing customers.
These existing customers are the ones who have demonstrated loyalty and trust towards the brand but are now ignored in favor of new ones. This creates an attention deficit in existing customers, gradually eroding the potential for repeat purchases, brand loyalty, and advocacy. Instead of using these existing relationships as a catalyst for sustainable growth, marketers engage in bidding wars for new ones, increasing spending to replenish a leaky customer bucket.
This eFolly has far-reaching repercussions on profitability. The continuous hunt for new customers impacts marketing budgets and diminishes the return on investment. It also fosters an unsustainable business model, trapping marketers in an exhausting pursuit of customer acquisition.
Such an approach impacts profit margins and diverts resources that could foster existing customer relationships, enhance customer lifetime value, and fuel organic growth. The lack of focus on existing customers triggers friction across the customer journey, leading to broken experiences and further exacerbating challenges faced by marketers in their quest for profitability.
A neglected customer inevitably becomes a disgruntled one. Missed opportunities to engage and enhance the experience for existing customers become friction points, leading to dissatisfaction and churn. Each instance of churn represents a lost customer, denting the brand’s reputation, leading to a potentially negative review and further churn. Overlooking existing customers in favor of new acquisitions is more than just a faulty strategy and can have disastrous consequences for eCommerce profitability.
However, change is in the wind, thanks to a wave of innovative ideas and ground-breaking solutions. The eCommerce landscape is ripe for transformation, marking a much-needed shift from relentless customer acquisition to meaningful customer retention and engagement. For the first time, marketers have access to tools potent enough to help embark on a journey from eFolly to profitability and, eventually, a Profipoly.
With the right mindset, effective strategies, and the will to redefine conventional norms, exponential, forever profitable growth to build an enduring, great company is an achievable goal.
Establishing deep and meaningful relationships with existing customers has always been arduous. Branding efforts did manage to pull back some customers to brand properties for transactions. However, it remained an expensive line item, frustratingly nebulous and difficult to quantify. The only other hope to bring customers to brand properties is push messages, which are ignored, making them less effective. This has left eCommerce companies with little choice but to use Adtech to retarget their customers.
Once in the Adtech web, brands and marketplaces engage in a ferocious bidding war not just for new customers but also for their own ‘one and done’ customers. This increases marketing costs, leaving profit margins battered and bruised.
However, innovations and transformative ideas are poised to pull eCommerce businesses out of this quagmire. But this transition is far from smooth. I have encountered a reluctance to embrace these game-changers in conversations with managers across the industry. There are several reasons, such as reluctance to try new methods, flawed KPIs, lack of internal resources, short-term mindset, etc.
The comfort of targeting new and existing customers through familiar Adtech platforms often trumps experiments with Martech initiatives. As one CMO candidly admitted, “Profitability is not my concern. I only need to deliver topline growth, which is easier to achieve via spending on Google and Meta.”
However, many marketers are demanding a better return on investment. While this is an excellent first step, they are missing the bigger picture, concentrating on optimizing unit-level spending. Their tunnel vision blinds them to the larger issue – the eFolly of failing to see existing customers as growth engines and profit drivers and its detrimental impact.
This should be the most important agenda for marketers and CEOs. Unfortunately, I see no concrete steps to address the core of the problem. Marketers must shift their thinking towards profitability. To achieve this, they must navigate through the five funnel frictions that I have outlined in my previous trilogy: ProfitXL to Profipoly: Solving the Four Funnel Frictions, Solving eCommerce’s Fifth Funnel Friction: Identifying Unknown Shoppers, and Email 2.0: The Fulcrum for Fixing Five Funnel Frictions. However, they must first acknowledge and comprehend their eFolly.
This transformation journey requires thoroughly examining the funnel elements that marketers know so well – ToFu, MoFu, and BoFu (top, middle, and bottom of the funnel). There is also a need to scrutinize what lies above the funnel (ATF) and below the funnel (BTF). Only then can marketers truly begin changing their minds and turn the tide from eFolly to Profipoly. At stake is the future of eCommerce, $200 billion of AdWaste that can be converted into brand profits.
Continued in Part 2