Mystery Of the Missing Profits – Part 1
Written by
Rajesh Jain
Rajesh Jain

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Mystery Of the Missing Profits – Part 1

Published : November 29, 2023 | Updated : May 23, 2024

Digital reality and promise

The digital landscape promised untold riches for brands. eCommerce painted a world without walls, where businesses could transition from local storefronts to global powerhouses regardless of their size. This paradigm shift promised brands vast audiences and a chance to cultivate customer relationships. Data analytics tools aggregated customer actions, giving insights into their desires, habits, and preferences, promising a future where every shopping experience would feel tailored and unique.

The architecture of online platforms, from their algorithm to user interface, was created to propel businesses to new heights, buoyed with the promise of limitless reach and scale. It was hoped that with infinite scale would come exponential profits.

However, the reality has turned out to be quite different, with the complexity of building digital businesses becoming apparent. The promises were not hollow; however, the practicalities of the digital market had nuances that weren’t initially apparent. As businesses flooded the digital space, it led to a battle for consumer attention and an escalating marketing arms race.

Discounts, an occasional incentive, became a necessity. Flash sales, promotional events, and loyalty programs became essential tools instead of value-added strategies.

The initial enthusiasm over easy customer acquisition soon met the sobering reality of escalating advertising costs. Platforms such as Google and Facebook, which provided cost-effective advertising solutions, soon began demanding a king’s ransom as more brands competed for ad space. As the digital age matured, so did the discernment of the consumer. Growing choices also saw an increase in consumer demands.

Expectations of a stellar customer experience necessitated persistent investments into innovative technologies, straining financial resources. Delivery timelines have also been squeezed, and margins for product errors have become nonexistent. Even products that meet most criteria face returns due to minor discrepancies. This results in logistical challenges, further shrinking profit margins.

Digital marketplaces such as Amazon and Alibaba have further complicated matters, bridging the gap between consumers and brands, but at a cost. These marketplaces offered vast user bases but held significant power over brands operating within their platforms. High commission fees, competition with private labels, and the dilution of brand identity became common challenges. As a result, brands found themselves in a dilemma. They could relinquish a part of their autonomy for the promise of amplified reach or tread the competitive waters of the digital red ocean.

As businesses reach the limits of digital, D2C brands are once again embracing brick-and-mortar establishments. These offline stores act as touchpoints, enhancing customer experiences and allowing brands to tap into new growth trajectories and diverse market segments. However, this comes at a cost. Brands must source the capital required from operating profits or external finance, presenting another challenge. Against this backdrop, there is the rise of what McKinsey refers to as the ‘zero consumer.’

The zero consumers

McKinsey, in a recent story about the ‘retail reset,’ wrote,

“Consumers are increasingly shopping across channels, showing little loyalty, and expecting quick shipping and sustainable products. Meet today’s zero consumers.”

Zero boundaries

Browsing in stores was one of the primary ways shoppers discovered new products. Today, however, the purchase journey is much more fragmented. Nearly half of consumers and 70% of millennials and Gen Zers say they rely on social media, celebrities, and articles for inspiration to make purchases. They are also shopping fluidly across channels.

Zero in the middle

Consumers are moving away from the middle of the market. Instead, they are either scrimping or splurging. The total consumer share spent on mid-priced goods and services has decreased by 10% in the past five years.

Zero loyalty

Nearly half the consumers switched brands in 2022, compared to just one-third in 2020, with around 90% saying they will keep switching brands. Without truly differentiated, exclusive offerings, the retailer could soon become a utility, just a means of distribution.

Zero patience

Consumers are also less willing to wait. Once offered by a few retailers, free standard shipping is fast becoming the minimum requirement. Amazon’s delivery speed and the rise of ‘buy online, pick up in store’ have significantly raised expectations. Customers today have said three-day shipping is the slowest they will tolerate before moving to other retailers.

Challenges faced by retail and eCommerce businesses

As a result, the vision of an unbridled digital utopia has evolved. The promises of global reach and direct customer interaction remain. However, they now come with the wisdom of experience. Brands must navigate a landscape that demands adaptability, strategic innovation, and an understanding that the digital realm offers unparalleled opportunities but also poses unique challenges. While supernormal growth is still attainable, it requires a more nuanced and multifaceted approach.

The biggest challenge faced by brands is the elusive nature of profits. While brands are seeing revenue growth, true bottom-line sustainability is being questioned in native digital businesses and traditional brick-and-mortar brands that have ventured into the digital realm. I asked ChatGPT about the challenges retail and eCommerce businesses face.

  • High Customer Acquisition Cost (CAC): As competition increases, so does the cost of acquiring new customers through platforms such as Google and Facebook.
  • Cart abandonment: Customers often add products to their shopping carts but don’t complete their purchases, leading to revenue loss.
  • Thin margins: Heavy discounts and promotions to attract customers eat into profit margins.
  • Inventory management: Overstocking leads to increased holding costs and potential obsolescence. Meanwhile, understocking results in lost sales.
  • Returns and refunds: High return rates can lead to logistical challenges and added costs.
  • Shipping and fulfillment costs: With customers expecting quick and free shipping, managing shipping costs and ensuring timely deliveries becomes challenging.
  • Fraud: eCommerce businesses are susceptible to fraud, such as fake transactions and chargeback fraud.
  • Platform fees: Selling on a third-party platform or using specific payment gateways comes with fees that erode profitability.
  • Technology investments: Continuous investments in technology to improve user experience, backend operations, and cybersecurity can strain finances.
  • Regulatory and compliance costs: Adhering to eCommerce regulations, data protection laws, and trade policies increase operational costs.
  • Competition: The ease of setting up an eCommerce business means increased competition, which can drive up costs and drive down prices.
  • Customer loyalty and retention: With so many options, retaining customers and fostering loyalty becomes challenging. Acquiring a new customer is more expensive than retaining an existing one.
  • Global supply chain issues: Trade wars, pandemics, and geopolitical tensions can disrupt the supply chain, leading to delays and increasing costs.
  • Changing consumer behavior: As trends evolve, staying relevant and catering to the consumer’s changing demands becomes a constant challenge.
  • Physical store overheads: For omnichannel retailers, overheads associated with maintaining physical stores, such as rent, utilities, and staff salaries, can be significant.

So, how does a brand bridge the gap between the promise of the digital goldmine and the sobering reality of no or low profits? In this series, we will discuss the mystery of the missing profits for digital consumer-facing businesses. We will also create a comprehensive roadmap to help brands harness the potential of digital and eCommerce, and build Profipolies (profit monopolies) by driving exponential forever profitable growth.

Continued in Part 2

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