Mystery Of the Missing Profits – Part 5
Written by
Rajesh Jain
Rajesh Jain
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Mystery Of the Missing Profits – Part 5

Published : December 22, 2023

In the fourth part of this series, I talked about eBreakthroughs and how they can help brands fix the five profit-killing funnel frictions. I also discussed the three primary funnel frictions (ToFu, MoFu, and BoFu) and how each can be addressed. In this part, I will focus on why businesses must pivot from growth-at-all-costs to focusing on profitability and the benefits of adopting such a strategy.

Why now

There are several compelling reasons for brands to pivot from a growth-at-all-costs approach to one that focuses on profitability.

End of the era of easy money

Businesses have long benefited from a surfeit of venture capital and lax monetary policies. This has led to them prioritizing growth over profitability, as they could always rely on the next funding round to cover operational costs. However, capital is becoming more challenging to secure with changing economic conditions and cautious investment sentiment. Investors are beginning to realize that not all growth is good growth.

A business model that burns cash to acquire new customers without a clear path to profitability and strong unit economics is considered risky. Instead, long-term sustainability is becoming a more significant factor in business evaluations and valuations.

Rapidly rising customer acquisition cost (CAC)

The digital advertising space has become saturated, increasing customer acquisition costs. Competition for the same digital real estate and audience attention has reduced the efficiency of each advertising dollar. Businesses must rethink their marketing approach and focus on retaining and maximizing the value of existing customers instead of continually paying a premium to acquire new ones.

Post-pandemic normalization of digital growth

The Covid-19 pandemic led to an unprecedented rise in digital adoption. However, as the world adjusted to the new normal, the digital growth rate began to stabilize. As a result, businesses can’t rely on the pandemic-induced digital surge to boost numbers and must focus on extracting more value from their existing customer base.

Change in strategy from Martech vendors

Martech vendors have understood the challenges businesses face in a saturated digital market, leading to a noticeable shift in their approach. Many Martech vendors now offer tools designed to offer integrated stacks instead of siloed point solutions. This helps enhance customer retention, drive engagement, and increase their lifetime value. Using AI-ML, these platforms aim to help brands maximize returns from existing customers, aligning with the changing priorities of the businesses they serve.

The rise of Email 2.0 as the fulcrum

One of the earliest digital communications tools, email, is experiencing a renaissance. Email 2.0 transforms emails from simple communication tools into dynamic platforms for commerce and engagement. It allows brands to create interactive experiences within the inbox, enable transactions, capture feedback, and run mini-apps. The inbox acts as a pivot around which digital engagement and commerce can revolve and offer businesses a cost-effective channel to engage and transact with their customers.

Here is an excerpt from my earlier writing on ‘Email 2.0: The Fulcrum for Fixing Five Funnel Frictions’

“Email 2.0 enhances interaction between brands and customers and shapes a richer understanding of each customer. This helps foster stronger and more meaningful relationships. Email 2.0 seamlessly integrates AMP, Atomic Rewards, and Microns, emerging as an omnichannel solution that tackles barriers and navigates the journey from initial contact to purchase completion. These elements make Email 2.0 the bedrock of a revolutionary approach to address funnel frictions, improve customer experience, and achieve sustainable growth.”

Customer expectations and demand for personalization

Customers have grown accustomed to personalized experiences, making generic mass marketing campaigns less effective. Businesses are realizing they must tailor their approach to cater to individual customer preferences and behavior. Such an approach is more feasible and cost-effective with an existing customer base.

Evolving regulatory landscape

Privacy regulations such as GDPR in Europe and CCPA in California have enforced stricter data collection and user consent rules. These regulations have made it difficult for companies to acquire new customers. They have also forced mobile operating systems like iOS and Android to focus on privacy. Such circumstances make it logical for businesses to focus on deepening relationships with existing customers whose data and consent they already have access to.

These factors provide a compelling rationale for businesses to adopt a balanced strategy emphasizing profitability by maximizing revenue from existing customers.

The prize

Implementing the ideas I have discussed so far can result in a transformed P&L, thanks to a rise in revenue and a reduction in marketing-related expenses. This is shown in the table below.

Before
After
Change
Revenue
100
120
+20%
Gross Margin
40
48
General & Admin Expenses
25
25
Marketing Expenses
10
7
-30%
Adtech
8
4
Martech
2
3
Profit
5
12
+220%

The profit growth results from a strategy that ensures existing customers return for more and bring their friends. Businesses cannot sustain on paid acquisition of new customers alone, especially when it is happening into a leaky bucket. The mystery should never have been about missing profits; it should have been about why CEOs, boards, and investors allowed the shift to lossy digital businesses.

Considering that profits in eCommerce are a rarity, it is crucial to understand the benefits of a business that doesn’t depend on external funding (whether from investors or traditional money-making lines). Pivoting towards profitability holds many rewards in terms of monetary gains and strategic advantages. While a ‘green’ P&L is the most obvious benefit, the implications of this ‘back-to-basics’ shift are much deeper.

Independence and freedom

A profitable venture is not beholden to external investors or forced to pivot on investor whims. Profitability allows brands to chart their own course, seize new opportunities, and innovate without continuous fundraising rounds.

Happy customers turn advocates

Profits are more than just numbers on a balance sheet. They indicate satisfied customers who come back for more. Happy customers can provide stable revenues and become a brand’s most effective marketers by vouching for its products and services.

Reinvestment in customer experience

Businesses can redirect profits towards improving customer experience. This allows businesses to enhance the customer journey through upgraded tech platforms, improved customer support, or innovative loyalty programs.

Fuel For business expansion

Profits are not an endpoint but a launchpad. This gives businesses the capital needed for expansion, such as entering new markets, diversifying the product line, or making strategic acquisitions to bolster market position.

Profits foster innovation

Businesses can reallocate profits back into research and development, allowing them to stay ahead of the curve and ensuring longevity in a competitive marketplace.

Employee satisfaction and retention

A profitable business can invest more in its employees through competitive salaries, training, or benefits. Not only does this attract top talent, but it also ensures their retention, creating a virtuous cycle of growth and innovation.

Risk mitigation

A profitable business can withstand economic downturns and unexpected market shifts. This is because they can adapt and pivot without facing existential threats, ensuring operational stability and continuity.

Profits in the digital/B2C/D2C/eCommerce world aren’t just about financial success. They represent a business’s ability to serve its customers effectively, innovate consistently, and stay resilient in a dynamic market.
If you have not read the earlier parts, you can start with Part 1 of this series here.

Continued in Part 6

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Written By: Rajesh Jain
Rajesh Jain
Founder and Group MD, Netcore Cloud