The Trading Intelligence Quarterly: Issue 2

8/8/2019 The Trading Intelligence Quarterly: Issue 2

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The Trading

IntelligenceQuarterly

Balancing theonline highwire:how to growand make

money.

October 2010

Issue 2

eCommera

Welcome 03

Making money online 04-08

How are we measuring 09-14online protability?

Google: priorities 15-17to maximise online prot

Spotlight on Amazon: 18-19Is Zappos broken?

Contents


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eCommera is a specialistretail-focused ecommerce

product and servicesbusiness.

We deliver robust andexible technology to

enable you to trade online,combined with insight tohelp you focus on protableaction. Its our blueprint for

your success.

We call it trading intelligence.For further information

Email [email protected] [email protected]

Call us on +44(0)20 7291 5800

Or visit www.ecommera.com

eCommera


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Welcome to the second editionof The Trading Intelligence

QuarterlyOnline prots will become animportant aspect of a retailersperformance over the next fewyears.

Overall retail growth is predicted to slow, so

growing online sales while optimising the protopportunity will become increasingly critical.

So far all the hype around online retail, andcustomers growing appetite and sophisticationin purchasing online, has failed to materialise instrong prots. Indeed for many standalone onlineretailers prot remains an elusive target. While afew such as ASOS and Net-a-Porter have shownit can be done, most prot announcements are a

low key event and something of a disappointment.

Multichannel retailers rarely break out theironline prots but our experience indicates a reallack of condence in how to maximise prots.The industry is so new that there are few modelsof success to emulate and no real sense yet of bestpractice.We have seen three different types of retailer

uncertainty:

The protable who are not sure about how togrow and stay protable;

The unprotable who do measure their prot,but are not sure how to turn it around; and

The large number of retailers who fail toproperly measure their online protability.

It is this lack of awareness of protability that

is most worrying to future online growth andsuccess. To realise that goal of strong, protablegrowth online, retailers must enforce rigorous andsophisticated measurement of marketing, productsand customers.

This edition of The Trading Intelligence Quarterlygives some answers to the crucial question HowCan We Make Money Online? We offer thisadvice based on our experience of working with

hundreds of online retailers. This is backed up byour recent survey ndings of over 100 ecommercedirectors which gives a fascinating look at whatmeasurements are being used and, even moreimportantly, not used.

We also assess the long term protability ofZappos, getting underneath its initial strongprots to question their long term strategy. Andwe are delighted to include insights on how to

make money from one of the great online successstories - Google.

I hope you will nd it an invaluable guide toexploring how you can improve your onlineprotability.

Andrew McGregorCEO and co-founder, [email protected]

03

www.ecommera.com


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Ofine retailing has long been a lucrative andprotable sector. As ecommerce gathers pace,many retailers have assumed that they can applythe same principles and make the same high protsonline. The numbers tell a very different story.Many online retailers took a long time to get toprotability (Amazon, Overstock, Zappos), others

are still trading but not yet protably (Bluey,Figleaves, Ocado), many went bust without evermaking a penny (etoys, webvan, boo, pets.com).

It is increasingly clear that there are real differencesin how to make money from online retailcompared to physical retail. For retailers this is ahard adjustment - the economics of physical retailare well understood and the route to success triedand tested but cannot simply be replicated online.

This article assesses how the three core economicfundamentals of retail protability differ betweenonline and ofine:

Store economics: The P&L of an individualstore.

Growth:The dynamics and strategies forprotable growth.

Trading:The day to day dynamics of sales,stock and margin.

We then offer suggestions on how to crack theillusive code to growing a protable onlinebusiness.

1. Store Economics

Physical retail: Store economics in physical retail

means the relationship between gross margin,rent and staff that drives an individual storesprotability - a formula known by everysuccessful retailer that makes their format(s) work.

Vs.Online retail:The order is king - storeeconomics in the online world are driven by protper order and volume of orders.

In the ofine world, the critical costs of rent

and staff are variable per store but fxed per sale.Online, the critical costs are either variable perorder (picking, packing, packaging, postage)or are crystallised per order (marketing,promotions). Online protability requires afocus on orders as the variable unit, rather thanthinking of online as just another store.

Cracking the code: store economicsThe challenge is to get the right cost structure per

order: but there is no one right answer. Averageorder values for successful retailers can be 10or 1000; some retailers charge for delivery and

How to make money onlineMichael Ross, Co-founder and Director, [email protected]

Highlights

Online retailers need to rethink their models of growth andprot - the economics of physical retail cannot be successfullyreplicated online.

Data is critical to prots - properly gather and leverage data onprots, customers, products and marketing.


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returns, others do not; many retailers haveaggressive promotional campaigns and aregenerous with vouchers, others never discount;Ive seen very successful retailers with 1%conversion rates, and unprotable ones with 4%conversion rates.

We advocate a 4-step approach to getting to theright store economics:

Understand where you are today: manyretailers simply dont even look at anecommerce P&L, let alone one structuredaround the underlying drivers (fgure 1).

Understand what happens to prot whenyou pull different levers: for example, a freedelivery over 50 promotion will increaseaverage order value, increase conversion rate

and reduce delivery revenue. However, thekey question is what it does to prot per orderand volume of orders. Understand the impactof a voucher for new customers vs. increasingmarketing spend per order. Understand theimpact of reducing retail prices vs. a targetedpromotion.

Be prepared to make bold decisions to get tothe right P&L structure for growth. Limit

vouchers, increase delivery charges, prunemarketing spend. Ive met a number of onlineretailers who lose money on every order andthen try to make it up in volume!

Keep optimising: improvements to the sitefunnel, new payment methods, better on-sitesearch, improved navigation, personalisation,recommendations will often have little impactindividually but nudge conversion up over

time, with consequent impact on both volumeand prot per order.

www.ecommera.com

0405The Trading Intelligence Quarterly. How to make money online

Figure 1: The drivers o online proft

2. Growth

Physical retail:Growth is driven by twodynamics - (i) growth in square footage (i.e.,new stores or store expansion) and (ii) samestore sales (like-for-likes). Once a retailer has a

successful format, growth is simply a matter ofnding more locations.Vs.

Online retail: Growth online is a new paradigm,driven by building and nurturing a customerbase.

Zara has opened, on average, a store a day forthe last few years. Each store brings new footfall

and new customers. The strategy may be hardto execute but is simple to conceive. Footfall - agiven of the physical world where rent equalsguaranteed visitors - needs to be sought andbought online. Retailers with ofine brandsclearly get a base level of trafc for free but ifthey dont play in the online marketing world,they are simply leaving prospective customers fortheir competitors.

Gross tradingprofit

Trading profitper order

Number of

orders

Gross profitper order

Averageorder value

Deliveryrevenue/costper order

Promotioncost per order

Online visitors

Marketing costper order

Gross margin

Marketing costper visit

Conversion

rate

-

-

-

x

x

x


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Actual Forecast

Too fast(unsustainable)

Optimal zoneof growth

Too slow(under-potentialised)

Annualgrowth

%

Growth online is driven by three very differentdynamics:

Customer acquisition - the number of newcustomers acquired in a period.

Customer retention - the percentage ofcustomers who repurchase, their orderfrequency and spending pattern.

Range expansion (unconstrained by shelf space)which widens the customer acquisition net,

fuels repeat customer activity and drives higherbasket values.

Cracking the code: growthDriving protable growth online requiressophisticated marketing optimisation: how much tospend acquiring and retaining a customer, howmuch to spend overall on marketing and how bestto allocate this spend across various marketingtouch points.

Building on the order economics above, weadvocate a 3-step process to cracking growth:

Marketing protability: understand theprotability of each keyword, afliate, bannerand email, as well as the sensitivity of protabilityto different attribution windows. In addition,understand the incrementality of each marketingevent - just because someone clicked on your

advert, doesnt mean that they wouldnt havepurchased anyway. All this is critical tounderstanding the relationship betweenmarketing spend and new customer acquisition(the supply curve of customers).

Customer economics: understand lifetime valueeconomics through mining the repeat purchasedynamics. Translate this into a customer-drivenbusiness plan which exposes the trade-off of

growth vs. protability - i.e., what percentage oflifetime value should be invested in customeracquisition.

Customer-product economics: understandingthe roles of products in the customer lifecycle is

also critical. Products may have low sales butcould be key to acquiring high value customers.Other products may look unprotable but aregreat add-on purchases. Mine on-site and off-site search to identify adjacent categories whichcan drive customer acquisition and retention.

Using this analysis, retailers can understand theiroptimal zone of growth - too high and its either

unprotable or unsustainable, too low and you areleaving customers for your competitors. Againthere is no right answer but the smart retailers areclear about whether they are trying to drive cash,medium-term prot or long-term growth and canthen adjust their path accordingly. Too manyretailers make the mistakes of benchmarkinggrowth rates against retail like-for-likes, creatingunrealistic top-down targets, extrapolating fromhistorical rates or focusing too much on top-line

sales.

Optimal retailer growth rate

eCommera

The Trading Intelligence Quarterly. How to make money online


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Cracking the code: tradingEvery category has its own trading dynamic - the

levers you pull day to day to optimise the trade-off of sales, stock and margin. The dynamicsvary depending on the supply chain, lead time,margin, minimum order quantities and productlifespan.

Some examples show how

The key to online protability is to leverage thenew data, understand the new costs and takeadvantage of the new levers to make better, faster,more nuanced trading decisions.

Successful retailers:

Understand product protability: the key is tounderstand which products make money, whichlose money and which make nothing.

3. Trading

Physical retail: Trading ofine means how tomake the day-to-day trade-offs between sales,stock and margin.

Vs.Online retail: Trading online has the additionalchallenges of efcient buying and routing oftrafc, and managing product just in time.

Applying the trading dogma of physical retailto online is guaranteed to sub-optimise prots.

Retailers can make much better trading decisions ifthey properly leverage the data available to them:

New information: retailers can distinguishbetween products that arent selling or arentviewed, ensure trafc levels are optimised andevenly distributed. Retailers can understandprice elasticity and product substitutability.Data that is expensive or impossible to accessofine is typically free and easy to access online.

New costs: the online world brings new anddifferent costs. The fundamental challenge isthat it is now remarkably easy to lose money ona product by spending more money drivingtrafc than you generate in gross margin.

New levers: trafc can be turned on and off.Depending on the category (and productsubstitutability) trafc can be elegantly rerouted

to products that are in-stock, overstocked orhigh margin at the click of a button. Productscan be offered with differing promises frompre-orders to back orders. The reality is thatcustomers will commit to products theyvenever touched (from an iPad to a designer bag)and will wait for the products they want.Display is now decoupled from delivery.

The Trading Intelligence Quarterly. How to make money online 0607

www.ecommera.com

CategoryCharacteristics

of productsTrading

challengesNew onlinechallenges

Beauty/jewellery/continuity

fashion

Long lifeand low

obsolescence

Driving stockturn withoutlosing sales

Using onlinedata to

optimise stockturn

Brandedfashion

Seasonal lifewith upfront

stockcommitments

Sell-through i.e.,maximisingcumulative

gross margin

Optimising thedistribution oftrafc to drivesell-through

Fast(CMT)fashion

Short-life andexible

manufacturing

Stock turn andsell through

Using onlinedata to

de-risk thesupply chain

Electronics

Lowmargin andobsolescence

Add-onpurchases

and optimisingpromotions or

bundles

Managingproduct

protability


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Cumulativeprofit

Products arranged by profitability (descending)

High Medium Low Zero Negative

100%

80%

60%

40%

20%

0%

Manage

availability

Low views,

in stockStock no views Views no sales Products not

profitable

.................................................................................................................................................................

.................................................................................................................................................................106%

The Trading Intelligence Quarterly. How to make money online

Identify appropriate actions that distinguishbetween different zones of protability

(fgure 2). Marking down product forclearance can be either pointless (if customersarent viewing it) or expensive (vs. a targetedmarketing campaign).

Organise to take action: ensure that budgets,processes and decision making facilitate theright trading decisions.

***

As retailers increasingly look online to drive bothgrowth and prot, the pressure to understand thefundamental drivers increase. We believe thisrequires retailers to rethink their model, or risksystematic underperformance.

Figure 2: Understanding product proftability

eCommera


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Bill Hewlett, the co-founder of Hewlett-Packard,is reputed to have coined the phrase: You cannotmanage what you cannot measure. In onlineretail, this is especially true. As discussed before,underlying the three economic fundamentals of aprotable online business is the need for rigorousmeasurement of protability - understandingwhat happens to prot when you pull differentlevers; and understanding customer, marketingand product protability in order to allocate

spend to maximise returns.

The focus of this research was to understand howretailers are currently measuring their protabilityonline - from their web site to specic products,customers and marketing activities.

The industry is too immature to yet know whatbest practice measurement should look like.However, it is clear that higher performing onlineretailers are more sophisticated and focusedin their measurement of protability. We cantherefore suggest the basics of good and badprot measurement.

Research methodologyThe data for this report is based on independent

research undertaken by Coleman Parkes frominterviews with 101 UK Ecommerce Directorsduring September 2010. All companies hadto have annual online turnover in excess of 3Million, 51 companies had online turnover of3-20 Million, and 50 companies had onlineturnover of over 20 Million. Respondents wereEcommerce Directors or the person in charge ofEcommerce.

Ecommerce research ndings: How arewe measuring online protability?Barry Wyse, Retail Practice Leader, eCommera

[email protected]

Highlights

High growth online retailers value protability measurement, using moresophisticated techniques and focusing their efforts on measuring thethings that really matter. Our survey ndings indicate that if the basics ofprotability are done well then growth is underpinned.

In contrast online laggards do not value measurement at all, in particularfailing to measure customer protability, customer satisfaction andmarketing performance.

Even within the high performing retailers, there is a wide discrepancy inwhat is being measured, and everyone is still trying to work out what thebest indicators of online protability are.

0809

www.ecommera.com


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Research ndings: What Can We Learn AboutProt Measurement?

1. Growth Rates

What was your year on year growth or ecommerce

last quarter?

Insight: Almost half of respondents are growingat a rate of less than 20%.

As online growth has slowed, there is anincreasingly heard industry wisdom thatsuggests online retailers need to accept lowergrowth rates and focus their efforts on customerretention. This misses a critical industry dynamic.Whilst the overall market growth has slowed (amathematical inevitability), the absolute growth

in s is still signicant. Moreover, for the newerentrants, they are able to win customers fromcompetitors - customer loyalty is more nuancedonline and most retail customer journeys start ona search or quasi-search site.

The Trading Intelligence Quarterly. How are we measuring online protability?

2. How Regulary To Measure

How regularly is proft rom your website measured(taking into account margin, marketing and delivery

cost/revenue)?

Insight: Relatively few are measuring web site

protability frequently enough, ideally on aweekly or daily basis.

Most retailers recognise the value of measuringthe true end-to-end protability of the ecommercechannel. The challenge is measuring it at theoptimal frequency. This should be driven bycategory and scale, and aligned with how oftenyou need to take action and respond to whatshappening.

Good practice: daily/weekly measurement ofprot will ensure that retailers are quicklyaware of any positive and negative trends.

OK practice: monthly measurement isacceptable for early stage and small businesses,or slow-moving categories.

Bad practice: measuring quarterly/annually/

not at all is a high-risk strategy. Retailers runthe risk of making local decisions relatedto pricing, marketing or promotions thatsub-optimise prot.

Leaders

Players

Cruisers

Laggards

Growth rate

Over 40%

21% - 40%

1% - 20%

No growth/decrease

Total

%

22

30

35

13

eCommera

Daily 5%

13%Weekly

12%Annually

22%Quarterly

42%Monthly

0 5 10 15 20 25 30 35 40 45

Not at all 6%


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3. Understanding Your Customers

(a) How do you measure customer proftability?

Insight: Getting the right customer segmentationis critical and requires deep customer insight.

Most online retailers will generate 80% of prots

from 20% of customers and for many protis even more concentrated. Understanding thecharacteristics of both the high-prot segments(to ensure you retain them) and the low-protsegments (to increase their prot) is critical.

There is no right answer to segmentation, but itshould be actionable, manageable and aligned toprotability. Typically, a good segmentation willbe based on deep insight into different customer

motivations. Smart retailers think in terms of anoptimal segmentation which evolves with scale.

Beware some of the pitfalls:RFM is a good starting point but often leadsto blunt action as customers can be loyal butinfrequent - so for example a regular Christmasgift shopper may be treated the same as a lapsedcustomer.

Avoid segments which will not benet fromhomogenous communication, and avoid toomany segments as this can be expensive anddifcult to manage.

Respondents selected one or more options.

Insight: While many retailers are failing tomeasure customer satisfaction at all, those thatdo tend to focus on the narrow on-site aspectof the transaction rather than the full customer

experience.

Relentlessly tracking customer satisfactionis critical to online retailers. It allows a fullunderstanding of a customers end-to-endtransaction, where placing the order is only thestart of the experience. The more successfulcompanies gather customer feedback at all stagesof the process, for every transaction. Too manyfocus their customer satisfaction ratings on the

on-site visitor experience only.

Good practice: insight-driven segmentation(typically individual customer and non-RFM

segmentation).

OK practice: RFM segmentation.

Bad practice: not at all.

(b) How do you measure customer satisaction?

The Trading Intelligence Quarterly. How are we measuring online protability? 10-11

Other 3%

15%Not at all

13%

Non recency-

requency-

monetary (RFM)

segment

32%

By recency-

requency-

monetary (RFM)

segment

37%By individual

customer

0 5 10 15 20 25 30 35 40 45

We dont

measure customer

satisaction

16%

16%

8%Other

20%

We request

eedback ater

every customer

interaction

48%We run regular

on-site surveys to

measure visitor

experience

0 5 10 15 20 25 30 35 40 45

www.ecommera.com

We run regular

post purchase

surveys to

measure end to end

customer experience


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This deep understanding of customer satisfactionis also a key driver of protable investments.

Good practice: regular on-site and postpurchase surveys.

OK practice: Ad hoc surveys either on-site orpost purchase.


4. Understanding your marketing effectiveness

(a) How do you measure marketing channel

proftability?

Insight: Although most retailers are measuringmarketing channel protability, almost no one isusing fully allocated prot as the measure.

Most retailers recognise that they need tounderstand the performance of their marketingchannels, the challenge is how best to do it.Average order value, gross margin, promotionalspend and marketing cost typically vary

signicantly by marketing channel. Only byunderstanding fully allocated prot do thecharacteristics of the channel become clear.

The more typical measures being used may beeasier to report as they drop out of the marketing

system, but they are often misleading indicatorsof prot.

CPO/CPA will systematically sub-optimise, eitheroverinvesting in unprotable orders/customers,or underinvesting in protable ones - they maybe okay performance indicators but do notnecessarily correlate with protability. ROASaccounts for average order value but not margin,delivery or promotions.

Good practice: fully allocated prot.

OK practice: return on advertising spend,CPO, CPA.



Cost per customer

acquisition (CPA)40%

25%Return on

advertising spend

(ROAS)

19%Cost per order

(CPO) measure

8%Not at all

4%Other

4%Fully allocated

proft

0 5 10 15 20 25 30 35 40 45

30 day last click

basis42%

18%Not at all

12%Fractional

attribution basis

10%Sane session basis

10%Customer lietime

value

6%

Multiple

attribution

windows

0 5 10 15 20 25 30 35 5040 5545 60

3%Other

eCommera


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The Trading Intelligence Quarterly. How are we measuring online protability? 12-13

www.ecommera.com

Insight: A remarkable number of retailers are notmeasuring marketing performance at all. Those

that do measure it should be looking at multipleattribution windows much more than they are.

Most retailers are focusing their measurementof marketing performance on single attributionwindows. This is a awed measure, as a typicalorder will touch multiple marketing channels.Using any single attribution window - whethersame session, 30 day last click, fractional orother - potentially excludes marketing events

that are highly inuential either earlier or laterin the customers journey. For example, banneradvertising is often early in the purchase journeywhereas paid search is typically later.

We believe marketing performance is bestmeasured by assessing multiple attributionwindows, specically to understand thesensitivity of marketing protability to differentattribution. The key is to understand which

marketing channels and events are protableirrespective of attribution vs. those channels thatare highly sensitive to attribution.

30 day last click

basis42%

18%Not at all

12%Fractional

attribution basis

10%Same session basis

10%Customer lietime

value

6%

Multiple

attribution

windows

0 5 10 15 20 25 30 35 40 45

2%Other

(b) How do you measure marketing perormance? Thereafter, retailers need to test to understandincrementality (a subject for the next TIQ).

Good practice: multiple attribution windows.

OK practice: single attribution window.



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eCommera

6. What is ecommerce focusing on

What are your top three ecommerce concerns inorder o priority?

Finding the

right sta

Improving

online marketing

eectiveness

Managing

ecommercetechnology

14%

Ecommerce

analytics and

understanding

how to optimise

5%Planning an

international

strategy

Engaging social

media channels

Attracting new

clients to your

site

Retaining

existing clients

0 5 10 15 20 25 30 35 40 45

1st

2nd

3rd

1st

2nd

3rd

1st

2nd

3rd

1st

2nd3rd

1st

2nd

3rd

1st

2nd

3rd

1st

2nd

3rd

1st

2nd

3rd

5. Understanding your products

How do you measure product proftabiliy?

Insight: Fully allocated prot per product is agreatly underused measure of online productprotability.

Product protability online is driven by stock

efciency and marketing efciency. It is very easyin the online world to spend money on marketing(driving visitors to products) which generateseither no revenue or costs more than the grossmargin generated. While gross margin achievedis a good measure of product protability inphysical retail, it does not tell the full story online.We advocate measuring both gross margin returnon inventory (GMROI) to track stock efciency,as well as fully allocated prot per product to

track marketing/merchandising efciency.

Good practice: fully allocated prot perproduct, gross margin return on inventory

OK practice: gross margin achieved

Bad practice: not at all

Insight: Many online retailers are still workingout the basics of growth.

Overall, the large majority of online retailers arefocused on attracting and retaining customers,and improving their marketing effectiveness.

They are still grappling with getting the rightgrowth trajectory.

It is interesting to note that the larger, fast-growing retailers are the ones now more focusedon ecommerce analytics and optimisation.

Gross margin

return on

inventory

46%

30%Gross margin

acheived

16%Fully allocated

proft per

product

6%Not at all

2%Other

0 5 10 15 20 25 30 35 5040 45


15/20

14-15

www.ecommera.com

Google: priorities to maximise onlineprotPeter Fitzgerald, Industry Director, Google UK

[email protected]

Highlights

There are four priorities for maximising online prot margins:

Get the digital basics right, and develop a truly integrated multichannelapproach. Ensure you have the best site usability and the highest speed of

website loading. Multichannel shoppers are the most protable, soculture them by developing seamless and engaging online offerings thatconnect with your high street brand.

Combine assets and focus on strategy to increase international sales.Carefully assess the worth of each market. The ideal model is a fastand efcient site, incorporating local language and style, plus the timelyfullment of orders.

Invest in real time testing and insight so that marketers can react tochange instantly, and base their decisions on up to the hour information.Analytics is critical.

Embrace mobile and m-commerce as part of your online strategy. Ensureyour site can be easily found and used on mobiles, and optimise yourcampaigns for m-commerce.

We live in exponential times. An unprecedentedamount of disruptive, transformative change hascollapsed established boundaries and positioned

the internet at the very heart of our daily lives. Itno longer makes sense to talk about traditionaland new, online and ofine. It is simply the realworld and marketers are challenged to thinkbeyond just ecommerce.

The key to becoming a successful online business,maximising prot margins, is to focus on fourcritical priorities:

Get the digital basics right and develop a trulyintegrated multichannel approach.

Combine assets and focus on your internationalstrategy.

Invest in real time testing and insight; and

Embrace mobile and m-commerce.


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Get the digital basics right and develop a trulyintegrated multichannel approach

Consumers are still buying, but withoutnecessarily considering the difference betweenyour online and ofine shop. Your online store isa continuation of your high street brand and usersexpect the same standards of service and quality.

First and foremost ensure you have the bestsite usability and speed. Research conductedby Forrester Consulting in the US found that

a mere two seconds is the new threshold of anaverage online shoppers patience with websiteloading times. While 40% of shoppers willwait no longer than three seconds beforeabandoning a retail or travel site.

Secondly, develop a seamless and engagingonline offering that resonates with yourhigh street brand and multichannel shoppersbecome your most loyal and protable

customers. Not only do they spend almosttwice as much as their single-channelcounterparts but their online relationship withyour brand can drive additional in-storesales. Research conducted with French retailerAuchan demonstrated that ROPO (researchonline, purchase ofine) is responsible for 13%of ofine sales and each euro invested in paidsearch delivers more than 20 euros ofinein-store.

Combine assets and focus on your internationalstrategy

The internet is the fastest growing channel forretail sales. To date, some bricks and mortarretailers have been slow to leverage theirassets and exploit the webs reach to a widerinternational customer base and incrementalsales.

Pure-plays such as ASOS are a good exponentof the drive towards a more globally focused

strategy with 37% of their total retail sales nowcoming from international sales. High streetretailer House of Fraser has also widened theirmultichannel strategy to start delivering overseasfrom 6.

Marketers looking to make similar in-roadsinto this wider marketplace need to do theirresearch rst. The most successful businesseshave precise models of the worth of each market

and assess critical factors such as broadbandpenetration. When gauging initial demand - andwhat your realistic fullment of deliveries will be- key considerations must include reviewing thecompetitiveness of your shipping offers and theexibility of your companys stock and shipmentpolicies.

The ideal model for international sales is asite with a fast and efcient user experience,

incorporating local language and style. However,success is not limited to only local sites. Thesimple, timely fullment of orders can begin tormly establish your international online store.Amazon demonstrated this with the fullment oforders at rst just from the US, without having adedicated UK store; an experience that they usedto mould their wider online businesses.

The Trading Intelligence Quarterly. Google: priorities to maximise online protto maximise online prot

eCommera


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Invest in real-time testing and insight

Speed is vital to enduring success in onlineecommerce. To drive new revenues marketersneed to be able to react to change in real-time,and to base decisions on the latest up to the hourinformation. A robust web analytics installationcan show you exactly how customers interactwith your site, what their path to purchase is andwhere they abandon order baskets.

Simply surveying metrics like bounce rate canalso deliver impactful insights. Recently highstreet retailer Next boosted their performancefrom paid search, lowering bounce rates by 37%and increasing per visitor value by 103% byredirecting trafc from their directory sign-up totheir home page.

Not only can you now more easily look underthe hood of your site performance, but you can

freely access and analyse current search trendsvia tools like Insights for Search. Incorporatingthese in your creative messaging and keywordbidding strategy, for example, can help ensurethat you remain ahead of the pack when it comesto connecting with the latest changes in consumerdemand.

The Trading Intelligence Quarterly. Google: priorities to maximise online prot

Embrace mobile and m-commerce

Computers are moving to a pocket near you inthe form of the latest smart phones. The numberof mobile subscriptions in the world is expectedto pass ve billion in 2010, equivalent to 67%of the worlds population. In the UK, consumersare also ahead of the curve when it comes toadopting mobile shopping. Ebay and the MobileMarketing Association recently announced thatUK shoppers bought more through Ebays

mobile app in one month than French consumerspurchased throughout 2009.

Marketers considering how to increase theprotability of their web stores must now treatmobile as an inherent part of their online strategy.Smart phones with full internet browsers deliver ahost of new services from click to call advertisingto location specic targeting, which further closethe gap between the internet and high street.

Ensure that you can easily be found on mobile byoptimising campaigns for m-commerce. Includemobile specic messaging in your ad text andthinking about shorter keyword sets that moreaccurately reect how mobile users search. Also,make sure that you are mobile ready - yourdedicated site should be easy to use and considerfactors like the purchase funnel and how tominimize it with one click purchase.

***In conclusion, the horizons in ecommerce havenever been brighter, nor the freedom to innovateand maximise prots so apparent or readilyaccessible. Those who acquire a competitive leadnow gain a better chance of sustained growthand enhanced prosperity as e-shopping becomesever more natural and popular. Dont ignorethe importance of your online store being the

centrepiece of your multichannel strategy or thesteps that can better guarantee your relevancy totodays digital mass market consumer.

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The bad: store economicsDespite its strong growth, a closer look at itseconomics shows how precarious Zappossmodel really was. Historically it has been highlysecretive about how much money it was reallymaking, despite its appearance of public openness(they offer tours of their ofces).

As part of Amazons acquisition, it had to make

a number of lings to the SEC, and the realityof Zapposs economics became clear. The S-4/Aling made on the 14 September 2009 makesparticularly interesting reading: Zappos wasbarely protable in 2007 and 2008 (see below).Protability at this level is clearly precarious.This highlights the stark challenge that offeringthe things most loved by customers - huge range,free delivery/returns, freephone call centres - alsorenders the economics unsustainable.

Zappos is probably the biggestonline retailer youve neverheard of. It started life in 2000as an online shoe retailer butrapidly expanded its range intoclothing and accessories. It grewfrom nothing to c. $1bn in grossrevenues in under 9 years.

Zappos has led a charmed existence: evangelisedby employees, loved by customers, admired bysuppliers and acquired by Amazon for c. $900m(no doubt pleasing investors). Surely this is themodel of protable growth every online retailershould emulate? But beware of assuming thepublic success story is underpinned by a longterm sustainable prot model.

In our opinion, Zappos had a broken retailmodel, was unsustainably funded and was savedby Amazon. Whether Amazon can continueto drive its phenomenal growth and create asustainably protable model is a fascinatingchallenge. This article focuses on the good, badand ugly of the Zappos model.

The good: growthZapposs growth was textbook: from 0 to $1bn

gross sales in 9 years.

Spotlight on Amazon: Is Zappos broken?

Moreover, it drove this growth by nurturing itscustomer base evidenced by high levels of repeatcustomer activity. Zapposs has a repeat purchaserunrate of 55% - so 55% of its new customersbuy again within 12 months. Compare this to themore typical 20-40% rates seen by other onlineretailers.

GrossSales($inMs)

$1,000

$900

$800

$700

$600

$500

$400

$300

$200

$100

$02000A 20001A 2002A 2003A 2004A 2005A 2006A 2007A 2008F

$1.6 $8.6 $31.9 $70.1 $184.4 $370.4 $597.0 $840.0 $1,000Gross Sales

March 2001 20.4% 1.50

March 2002 27.0% 1.74

March 2003 33.5% 1.96

March 2004 44.6% 2.36

March 2005 51.0% 2.53

March 2006 51.3% 2.66

March 2007 54.9% 2.68

% customerswho buy again

within next 12 months

avg # purchases byrepeat customers over

next 12 months

(repeat customers)

eCommera


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The Trading Intelligence Quarterly. Spotlight on Amazon: Is Zappos broken?

The ugly: tradingThe mantra of retail trading is turning stock into

cash. There is a delicate relationship betweengross margin, stock turnover and nancing thatmakes this equation work. Zappos faced thedouble challenge of too much stock and notenough cash:

Too much stock: Zapposs stock turn in 2008(the last year reported) was 2.4 too low fora fashion retailer, and particularly poor givenZapposs centralised stock. Moreover, even a

small stock adjustment (c. 6%) would wipe outZapposs prots never a comforting situation. Not enough cash: Zapposs stock was nanced

by a revolving credit line covering c. 60% of itsstock at cost.

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Sales, $m

Cost of goods, $m

GM, $m%

OPEX, $m%

EBIT, $m%

Net Income, $m%

Stock, $m

Stock turnoverStock days

635,011

411,650

223,36135.2%

201,58831.7%

21,7733.4%

10,7721.7%

168,131

2.4x149

526,829

333,884

192,94536.6%

192,94536.6%

32,4996.2%

1,7680.3%

161,988

2.1x177

2008 2007

Headline fgures are below: In an article in Inc magazine in June 2010,the CEO - Tony Hsieh - described what washappening behind the scenes:

. Zappos relied on a revolving line o credit o

$100 million to buy inventory. But our lending

agreements required us to hit projected revenue and

proftability targets each month. I we missed our

numbers even by a small amount, the banks had

the right to walk away rom the loans, creating a

possible cash-ow crisis that might theoreticallybankrupt us. In early 2009, there werent a lot o

banks eager to give out $100 million to a business

in our situation. That wasnt our only potential

cash-ow problem. Our line o credit was asset

backed, meaning that we could borrow between 50

percent and 60 percent o the value o our inventory.

But the value o our inventory wasnt based on

what wed paid. It was based on the amount o

money we could reasonably collect i the company

were liquidated. As the economy deteriorated,the appraised value o our inventory began to all,

which meant that even i we hit our numbers, we

might eventually fnd ourselves without enough cash

to buy inventory.

***

So how will Amazon continue to grow a businessbased on such shaky economics? Having resolved

their access to capital, they are left with thesignicant challenge of sustaining growth, gettingtheir economics right and honing the tradingmodel. On top of this, they have to navigatea strategic dichotomy: Amazons mantra ofcompeting on price vs Zapposs mantra not tocompete on price. All eyes are on them.

www.ecommera.com


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eCommera is a pioneering provider of intelligentecommerce trading solutions, enabling brandowners and retailers to sell efciently andintelligently across multiple channels.

A selection of our clients includes Asda Direct,Hamleys, House of Fraser, Magasin Du Nord,

Horze, the ofcial London 2012 store,T.M. Lewin and USC.

Take control of your ecommerce business with ourexible, multichannel ecommerce platform Modular and extendable

Architected for speed and delivered on demand Continuously innovated and upgraded

Turn the mass of ecommerce data from across yourbusiness into actionable insight and with our ecommerceanalytics dashboard and decision support tools Operational dashboard makes sense of the vast

amount of data

Instantly identify the risks and opportunities Optimise trading performance

Strategy, planning and consulting to accelerateecommerce success The 10Ps of ecommerce is our strategic framework

for our advice and recommendations In-depth and full service ecommerce analytics, using

our Intelligent Trader Dashboard

eCommera Limited1st oor84-86 Great Portland Street

London W1W 7NRwww.ecommera.com

Tel: +44 (0)207 2915800Email: [email protected] D

esignbyStaceyPovey.

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The Trading Intelligence Quarterly: Issue 2

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