Demystifying Ecommerce

Ecommerce was a secular trend that a lot of brands were comfortable skimming since offline stores contributed to a lion’s share of sales. Covid-19 has accelerated a change in consumer behavior that makes it imperative for all brands to get their ecommerce strategy right.

Jeff Bezos famously said that he builds Amazon’s business strategy based on the customer needs that remain stable over time – vast selection, cheap price, and fast delivery. There is a 4th customer need that is equally important – intuitive shopping experience. A superior shopping experience is the very reason why vertical platforms exist while horizontal platforms almost always beat verticals on selection, price, and delivery speed.

Understanding these 4 fundamental levers of ecommerce is key to build a winning ecommerce strategy!

Vast Selection

The more, the better?

A vast selection is the most obvious advantage offered by Ecommerce over offline retail as incremental selection can be added at minimal / no cost. A large selection also comes with associated challenges of enabling customers to discover the right product for their needs. Vertical platforms consider intelligent curation as a key strength to deliver an uncluttered customer experience.

Selection design

Selection design is the process of deciding what constitutes a representative selection option for consumer and the right breadth and depth of options for each category and sub-category. This requires a deep understanding of the consumer and the selection available in the market. This is particularly important for categories that house vast selection while for head categories with limited selection, brand and specs together determine the laddering of selection.

Merchandising

A comparison of sales velocity to stock depth yields a meaningful framework to decide on the role of each product in the assortment and this in turn guides the merchandizer to plan specific actions.

• A product that has high sales velocity with proportionately high depth is a cash cow. This product is either a bestseller or has the potential to be a bestseller on the platform and needs to be the focus of product marketing
• A product that has disproportionately high sales velocity compared to stock depth is a star. This product can yield twin benefits of being a margin driver as well as act as an effective hook to bring traffic into the brand store
• A product with low sales velocity vs. stock depth is a dud. This product is either not right fit for consumers or is overpriced. This product would need to be liquidated in an upcoming sale event
• A product with low sales velocity and low stock depth is an experiment. This is usually the case with new launches where the objective is to sense the demand before investing in higher stock

Is listing selection everything?

Listing selection is the first step towards making a product available. However, consumer need is fulfilled only if the product is in-stock. This is challenging since not all product categories lend themselves to being delivered nationally from a single warehouse either due to cost constraints or handling constraints. This necessitates multiple warehouses and the science of deciding inventory allocation between these warehouses. Ecommerce platforms that started off with a retail-only model expanded into the marketplace model to expand selection and achieve higher in-stock by leveraging inventory available with sellers in their warehouses. Conversely the ecommerce platforms that started off as marketplaces also built their own retail model to stock up fast moving products that need to be in stock always.

Should a brand operate in wholesale model or marketplace model with platforms?

Many brands seek to operate in a wholesale model with marketplace platform so that the inventory risk is transferred to the platform and onus of sell-through is shifted downstream. This thinking is flawed as the platform would eventually liquidate the products at deep discounts diluting brand equity in the process. Besides marketplace platforms will always take a higher margin on the products they buy on wholesale model. Marketplace model on its own may limit ability to access faster service or tap higher peaks. A hybrid model where the fast-movers are offered via wholesale model and range is offered via marketplace is a win-win for both brand and marketplace platform.

Cheap Price

Consumer Behavior

It is a common misunderstanding that consumers who shop via ecommerce seek higher discounts and hence the channel is not as profitable as offline. The average markdown is higher in ecommerce compared to offline as it is easier for consumers to apply price and discount filters to discover cheaper products.

Is it ok to offer higher markdown via Ecommerce?

Realized price of a product needs to cover the operating expenses in addition to the product cost while being competitive. Operating expense via ecommerce is lesser for most product categories since the cost of delivering a product to customer’s house is usually lesser than the cost of placing the product in a retail showroom close to the consumer. Hence it is logical for brands to offer higher markdowns via Ecommerce as compared to offline and yet realize the same operating margin.

Irrational fears impact pricing decisions

Channel conflict is a commonly cited reason why brands do not exercise this logical pricing philosophy – the idea being that if the same product is available at different prices across different channels, consumers would be predisposed towards one channel making the other channel redundant. However, this does not consider the fact that the experience offered by the two channels is different rendering this comparison invalid.

Few premium brands see ecommerce as a value destroyer and fear that the price premium they command in offline would be compromised by offering a fair price online. Consumers pay a premium on price only if they see value in terms of a distinctive offering. The premium that a brand commands is always relative to the price charged by other brands. By following a rigid philosophy, such brands risk losing consumers to brands who adopt ecommerce as a separate channel on its own right and attune their pricing accordingly.

Brands that approach pricing independently considering a dedicated ecommerce P&L get their pricing right while meeting their P&L objectives. A common solution adopted by brands is DMDC (different models for different channels) strategy.

How should price be set for new products?

From Brand’s perspective, Recommended Retail Price (RRP) of a product should be a function of distinctiveness of the product and detailing / specs of the product vs. competition offering

• A signature product that is distinctive and high on detailing / specs should be priced high vs. peers and merchandised in selection led promotion
• A trend-setter product that is distinctive but low on detailing / specs should be priced high vs. peers but with sufficient room for markdown. This can be a hero product and should be merchandised in pricing led promotion
• A category-leader product that is high on detailing / specs but not distinctive should be priced competitively and merchandised in selection driven promotion
• A basic product that is neither distinctive nor detail oriented should be competitively priced. This can be a hero product and should be merchandised in pricing led promotion

Promotion in Retail can either be selection-led or price-led. Examples of selection-led campaigns include New Season launch or New Brand launch while examples of price-led campaigns include Diwali sales or End of Season sales. The merchandise and pricing strategy for both kinds of campaigns should be thought through while setting the price of new products.

Fast Delivery

Consumers are used to a default instant gratification experience while shopping at an offline store. Hence this leg of experience starts with a disadvantage that the best you can deliver is match offline. The objective here is to minimize the delay in gratification for consumers.

Is delivery all about speed?

There are 3 legs in delivery experience – speed of delivery, traceability of delivery and convenience of delivery. Each of these factors have varying levels of significance in the context of different categories.

• Speed of delivery is critical for daily use categories like Grocery or for very high value items where the customer is highly engaged and anxious about delivery, eg. Smartphones and Televisions
• Traceability of delivery is important for products with a long delivery promise, eg. Imported books or Made-to-order Furniture
• Convenience of delivery (slotted delivery) is important for products that need to be inspected by customer at point of delivery, eg. Fruits and Vegetables, Large Appliances

Is customer willing to pay for fast delivery?

Speed, traceability, and convenience have cost implications. Investment in either or all of these should be made in sync with the value attributed by customer. This is the reason why marketplace platforms offer a premium service for selected assortment under tags like Flipkart Plus or Amazon Prime. These services ensure that customers who value speed can get the popular assortment fast while being part of a subscription or loyalty program. While Amazon Prime is a paid subscription program, Flipkart Plus is an earned loyalty program.

Why do ecommerce platforms build in-house logistics?

Traceability is considered by many as a hygiene factor today. In the early days of ecommerce, lack of traceability was a key reason for ecommerce platforms to build in-house logistics capabilities. As the market developed, many 3P players built customized traceability capabilities for ecommerce. Insisting on 100% traceability may compromise reach as there are geographies where low volume of orders limit serviceability of mature logistics service providers.

Convenience here refers to the ability to offer options for consumer to select a specific delivery slot. Enabling this would entail high cost of last mile asset underutilization unless executed well. High density of orders would facilitate high last mile productivity, the key to offer convenience in a cost-efficient way.

Logistics being a significant cost in ecommerce, strong supply chain operations capability can be a structural differentiator for marketplace platforms as well as brands. While fulfillment technology and operations design play a large role in supply chain efficiency, diligence in daily operations management is the key to building a strong supply chain.

Ecommerce marketplaces have often been ridiculed for deviating from their core competency when they own and manage logistics operations. Own logistics operation not only provides better traceability but also offers higher reliability on promised delivery time since externalities are limited and can be planned for adequately. This translates to being able to offer a better delivery promise reliably.

 Intuitive Shopping Experience

This is the most understated aspect of ecommerce, yet the most powerful differentiator that is responsible for making / breaking platforms.

Amazon dominates the US ecommerce market with the largest selection, cheapest price, and quickest deliveries. Yet Amazon has only 50% ecommerce market share while the rest is fragmented across multiple brand websites and vertical platforms that offer category specific experiences.

Alibaba in China trades 3 times as much as Amazon does in US in B2C ecommerce. Alibaba realized the importance of offering distinct experiences to win different kinds of customers. It offers 2 distinct experiences via two B2C platforms to cater to a larger cross-section of consumers in China.

• Taobao for mass market consumers with vast selection and low prices
• Tmall for brand conscious consumers with flagship brand store experience

How to create an intuitive shopping experience?

The ability to understand consumer needs deeply in the context of a category and design for the same is the key to building a seamless and intuitive experience. Please refer to my article titled “How Flipkart built a billion-dollar business in Appliances” for a detailed case study on reimagining shopping experience.

Experience can be structured broadly under two legs of the customer journey – Discovery of a product and Product display page experience. Discovery experience is a function of whether customer discovers a product via Search or Browse

A search customer comes with high intent and prefers to see a specific product or category. In this case, lesser the number of hops to get to the product, the more likely this customer will make a purchase

A browse customer likes to explore and is open to being educated and guided. The browse experience needs to be thought through in the context of the category

• In a specs-heavy category like Appliances, it would be ideal to guide the customer via a use case led decision-making framework
• In a personalized category like Fashion, it would be ideal to guide the customer with a light touch by sharing the emerging trends
• In a high frequency purchase category like Grocery, it would be best to suggest products basis their previous ordering patterns
• In a category with very broad assortment like Books, it makes sense to help the customer navigate through a series of sub-categories to reach the genre of interest

Catalog data density and UGC richness are the two key legs of the product display page experience

• High engagement products require high quality catalog and rich UGC. Eg: Books, Smartphones
• Products with a personal touch require high quality catalog though UGC is less significant. Eg: Fashion, Home Décor
• Standard branded products require a basic catalog and does not require UGC. Eg: Grocery
• Standard unbranded products would need rich UGC to build consumer confidence though the catalog can be basic. Eg: Pots & Pans

What constitutes high quality catalog?

Product Catalog in ecommerce refers to a combination of product imagery, videos, description, specifications, key selling points, etc. The relative importance of these elements varies with the category

• In Fashion, product imagery is the single most important input - Model shoots at multiple angles, detailed laid down shots, 360 degree video
• In Electronics, specifications and a video guide that translates specs to user benefits are the key inputs
• In Books, description is the most important input

How can a brand generate rich UGC?

Enabling UGC is the first step. An equally important step is to drive adoption by persuading and reminding customers to share reviews. The trick lies in making it easy for them to offer reviews and ratings for products they purchased. It is ideal to give customers a free hand in sharing their reviews and then use text mining to understand the aspects reviewed and the sentiment associated with the reviews. A lot of brands make the mistake of enabling UGC without driving adoption.

Should a brand offer a list of products in landing page or create a store-in-store while running a campaign on a marketplace platform?

A mature brand with high intent search traffic should directly list its products in the campaign landing page to minimize hops while a new brand that seeks to acquire new customers should direct traffic to a store landing page since the latter would help build brand imagery that is critical to drive purchase.

Should a brand create its own direct customer interface, or should it partner with a 3P marketplace?

Brands should have a hybrid presence with an owned interface as well as 3P marketplace presence. While selection, price and delivery promise may be identical across the two channels, experience should be the differentiator with owned channel acting as a brand building platform with focus on building brand association and merchandising new products while the marketplace experience should be optimized to drive sales.

 What does a winning ecommerce strategy look like?

A brand can build a winning ecommerce strategy by analyzing its strength and weakness in the context of the 4 fundamental levers of ecommerce – vast selection, cheap price, fast delivery, and intuitive shopping experience

• A brand that attracts consumers to its store by virtue of its vast selection needs to focus on this strength in ecommerce
• A brand that caters to mass-market customers by virtue of its value pricing should leverage this strength in ecommerce
• A brand that offers convenience to customers by being available within a short distance radius should focus on fast delivery as a proxy for convenience
• A brand that offers a differentiated shopping experience to customers offline should also build a differentiated shopping experience online

A winning ecommerce strategy needs to leverage the brand’s unique strengths to formulate a clear Selection-Price-Delivery-Experience plan!