What it means
Global eCommerce companies are facing challenges in sustainable profitable growth as the era of growth-at-all-costs with funding on tap has ended. Improving (or becoming) profitable means two things: how to grow revenues (and therefore gross margin) and how to keep costs under control.
Revenue increase comes from two sources: sales growth from existing customers and new customers. Among the costs, one of the biggest heads is typically marketing spends – acquisition of new customers via digital platforms. So, the most important levers for profitable growth are getting more from existing customers and reducing CAC (customer acquisition cost).
In this series, I will discuss how B2C/D2C brands can do both and transform their P&L from low/no profits to high and sustainable profits.
I am taking the financials of two entities that are among the top-ranked public eCommerce companies as examples:
This is from Chewy, whose mission is “to be the most trusted and convenient destination for pet parents and partners everywhere.” Q4 below refers to the Oct-Dec 2022 quarter (13 weeks ending Jan 29, 2023).
This is from Nykaa, India’s leading beauty products and fashion brand. Q3 below refers to the Oct-Dec 2022 quarter.
Here is a comparison of the numbers for the two companies.
The few important numbers to focus on:
- YoY revenue growth (Nykaa is doing quite well)
- Advertising and Marketing as % of Gross Margin (mid-20% range for both)
- EBIDTA
Now imagine if the companies could grow revenue even faster by reducing marketing costs: the EBIDTA impact could be significant. Accelerating growth AND reducing marketing spends are the key to transforming the P&L.
If a company can grow revenue (and therefore gross margin) 10% faster (normalized GM growth from 100 to 110), and halve the marketing spend, the EBIDTA impact is significant. In the case of Chewy, EBIDTA will increase by $76 million + $91 million = $167 million (a 1000% increase). In the case of Nykaa, EBIDTA will increase by Rs 634 million + Rs 822 million = Rs 1456 million (a 200% increase).
Consider a typical eCommerce company:
- Revenues: 100
- Gross Margin: 40
- SG&A: 25
- Marketing: 10
- EBIDTA: 5
Now, what happens if we grow revenues (and GM by 10%) and reduce marketing spends by 50%?
- Revenues: 110
- Gross Margin: 44
- SG&A: 25
- Marketing: 5
- EBIDTA: 14
EBIDTA almost trebles!
This is what I mean by “transforming the P&L.” So, how can eCommerce companies do it?I will call the new set of ideas: PxL – transforming the P&L. PxL evolves from the concept of ‘Building High-Growth Profitable D2C Businesses’ and the ‘ProfitXL’ idea. [PxL could also mean supersizing Profits: Profit + XL; making Profits extra-large.]
The theory of PxL
An eCommerce business has two categories of existing customers: Best and Rest. The Best customers are engaged and frequent buyers, while the Rest are less engaged or even disengaged.
Then, there are the Next Customers – those whom the brand acquires, typically via marketing spending on Big Adtech platforms like Google and Meta.
Best Customers are important because even though they are a small percentage of the overall base, they account for a large share of the revenue and even greater share of the profits.
The challenges for an eCommerce brand are:
- Best Customers: How to increase share of wallet?
- Rest Customers: How to get them to engage more with the brand?
- Next Customers: How to reduce ‘AdWaste’ by reducing or eliminating wrong acquisition and reacquisition?
eCommerce brands have three ways of interacting with their customers:
- Properties: their website or app, where the transaction gets done
- Push Channels: the ways to bring their customers to their properties
- Plans: the media plans which target new (and some existing) customers
The PxL approach advocates the following:
- Best Customers: remove friction in their engagement and ensure omnichannel personalization and the ‘perfect’ next action by maximizing zero- and first-party data
- Rest Customers: build better hotlines via the push channels to reactivate them
- Next Customers: get as close to zero-CAC acquisition by driving referrals, reactivating instead of reacquiring, and using data from Best Customers to sharply target acquisition
As it turns out, most eCommerce journeys suffer from broken experiences (and we know because we are customers). PxL is about beautifying every broken profit-killing customer experience on properties and push channels to create a Profipoly (profits monopoly).
The focus of PxL is beyond just retention and engagement; it is about directly improving the economic engine which drives sales growth, cuts wasteful spending, and thus drives greater profitability. What is the point of engaging and retaining customers if they do not transact?!
The most important idea we will discuss in the PxL journey is Email Shops (as part of Inbox Commerce). By moving the conversion funnel from the website and app to the inbox, Best Customers can be persuaded to transact more and Rest Customers can be reactivated and engaged, and moved along their transaction journey.
At every step, the focus must be on offering frictionless and personalized experiences to the customers. Email Shops, powered by Email 2.0, combined with other innovations like Atomic Rewards, Full-stack Martech, AI-enriched product catalogs, and Progency can transform eCommerce businesses and help them transform their P&Ls.
The metrics of PxL
Let’s begin by taking a look at the eCommerce funnel and where the profit killing and loss creation points are.
Smart Insights has this funnel view:
ChatGPT offered this overview:
- Website or app traffic: The total number of visitors that arrive at your site or app. The success of this stage is often measured in terms of growth in absolute numbers, as well as the sources of traffic (organic, direct, referral, paid, etc.).
- Bounce rate: The percentage of visitors who leave your site after viewing only one page. A typical benchmark for bounce rate is between 20% to 45%. Higher rates might indicate issues with your landing pages, while lower rates suggest that visitors are engaging more deeply with your site.
- Product page views: The common benchmark for the percentage of website visitors who actually view a product page is 60-80%.
- Add to cart rate: The percentage of visitors who add a product to their shopping cart. Average benchmarks for this stage can range anywhere from 5% to 15%.
- Cart abandonment rate: The percentage of visitors who add a product to their cart but do not complete the purchase. On average, this rate is quite high, often around 60% to 75%.
- Conversion rate: The percentage of visitors who complete a purchase. Average eCommerce conversion rates typically range from 1% to 3%. However, it can go as high as 5-7% for well-optimized sites or specific industries.
As you would have observed, the numbers are quite similar to the Smart Insights funnel.
Now, let’s add an additional layer. How do people come to the website (or app)? They can come on their own (branding), via search engines or social media (organic or paid), or via push messages (email, SMS, push notifications, WhatsApp). For existing customers, email is one of the most important channels to drive traffic. (In app-heavy markets like India, push notifications also work very well as long as they are not blocked.)
Of the emails sent, open rates are about 10-20% and clickthrough rates are typically 10% of the opens, which means CTRs are 1-2%. Also, brands send emails to the more engaged consumers on their list to not negatively impact their domain reputation, leaving about 60-70% of the list untouched. Let’s put it in easy-to-understand numbers:
Let’s say a brand has a list of 10,000 email IDs
- Assume 70% is dormant (inactive)
- So, they send emails to 3,000 email IDs
- Of these, 10% open – about 300
- Of these, 10% clickthrough – about 30
- Of these 30 site visitors, about 15% will add an item to cart – so about 4
- Of these, 3% buy – which makes it 1
So, 1 customer buys from a list of 10,000 email IDs (from a single email campaign).
eCommerce brands do multiple email campaigns in a month, visitors also come through other methods (memory, SEO, SEM, SMS, and so on). From conversations with US customers, what I have gathered is that email accounts for over 20% of revenues.
Here’s ChatGPT’s view: “As of my last training cut-off in September 2021, it was common to hear that email marketing could contribute anywhere from 10% to 30% of a company’s total online sales.” Bard says: “According to a study by Epsilon, email marketing generates an average of $38 for every $1 spent. This means that email campaigns can account for a significant portion of revenue for ecommerce companies. In fact, some companies report that email marketing accounts for up to 50% of their revenue.”
Continued in Part 2…
