The essential playbook for profitable growth in retail ecommerce

Focus on daily issues, interesting technologies and new trends lead many to forget the most simple and necessary things to address in business.

For years, growth was the only imperative that mattered. But in recent years both profitability and sustainability has become even more important – whether it is looking at the value gained from your online sales to the whole company as a big brand or at the company valuation of pureplay ecommerce companies. And it was honestly about time… This radical change has particularly hit retail and companies where the digital commerce experience has grown to be a significant part of the overall business.

We have already witnessed several promising ecommerce companies in Europe facing financial difficulties, including bankruptcy or refinancing. Simultaneously, growth and profitability unexpectedly seem to decline or vanish an get on the agenda in CEO offices of major brands. Consequently, numerous significant brands are now questioning why this is happening, whether they should continue to invest digitally at the same level, and if they are doing the right things.

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So dear CEO or Board: How sure are you that you are doing the right things in your digital sales efforts and what is next?

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Having seen, helped, and worked to develop many digital businesses both from a tech and a business perspective, there is always one very important question that is often not answered with enough precision: “How do I actually drive profitable growth in my business?”

This article is our guide to understanding most businesses, and how they should deliver profitable growth from their online driven revnue in the coming years. This is an attempt to install an operational playbook and mindset for companies to become better at driving sustainability in the digital and ecommerce space. And it’s an attempt to help companies to stop driving “empty revenue”.

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What is the competitive mindset in your company?

It all starts with Michael Porter. If you’ve read our other articles (https://www.valtech.com/blog/ecommerce-the-end-of-an-era-and-the-beginning-of-a-new-one/), you’ll know that we keep returning to Michael Porter and his framework from 1980:

Either you compete on cost, and you standardize everything, or you compete by differentiation. Otherwise you end being stuck in the middle (or make a strong niche player).

It’s a simple question that help understanding the overall competitive view of your business.

• Companies with a significant digital footprint and a strong focus on cost need to scale with low margins and a tightly rigged cost budget in order to deliver in the cheapest possible way to the customers.
• Companies that solely focus on differentiation need to develop a strong brand narrative, a distinct product range and ways of working in order to create more perceived value to customers.
• Niche players have established themselves in a market as leaders by a clear focus on width and depth in a particular segment, and therefore manage to stay relevant to that niche.

So, which of the three competitive strategies are you pursuing?

Unfortunately, in our experience, many do not have a clear answer to this, and therefore end up being stuck in the middle while trying to compete – but not being able to - due to?expensive technologies and self-inflicted complexity.

Let us just take the area of choosing technology as an example. It’s rather important to understand that your competitive choice dictates and will have massive implications on your tech costs – but very few really gets this. If you compete on cost, then buy a standard platform, use standard functionality, and stick to this. Avoid customization. If you, on the other hand, compete on differentiation, you might need a unique check out function or customer experiences that’s not standard – but then recognize this and build it custom from the get-go rather than buy a standard platform and customize it afterwards.

But enough about this, let’s focus on how to drive growth – specifically profitable growth.

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How to drive growth?

There are fundamentally four important and distinct growth strategies. These four growth strategies have been developed by Applied Mathematician and Business Manager Igor Ansoff in 1957 and is still highly relevant and highly applicable today – particularly for digital driven businesses (no complex theory). The growth matrix simply looks at growth from two perspectives:

-?????? Existing and New Products

-?????? Existing and New Markets

In the following, we’ll dive deep on the 4 distinct growth strategies and give our view on how to apply these to generate profitable growth in the retail ecommerce and digital business area.

Growth focus areas

A. Existing Products and Existing Markets – Market Penetration

Market Penetration is a simple, yet extremely difficult growth strategy. Here, companies are playing with existing products in an existing market. Market conditions today are extremely fierce, and most companies are fighting hard for even the smallest inch. The revenue growth models drive a race towards the bottom and drain profits. So key question is how to drive profitable growth?

The short answer is an extreme focus on analytics and details.

Here’s a couple of examples of solid growth pockets in this area:

• POAS
• Basket
• Customer lifetime value

POAS is the low hanging fruit that more companies need to investigate further. Today, many companies buy ads on Meta & Google based on ROAS, but that’s a profit eroding strategy that often just drive “empty revenue” or even loss when all cost are taken into consideration. POAS, on the other hand, will deliver a more balanced view of your ad strategy and only buy profitable ads. It might drive negative growth on your revenue, but it builds a stronger business foundation. And in the end, salaries are paid by the profits not by the revenue.

Basket analysis is crucial to drive profit growth, and we rarely meet companies that really has this in-depth knowledge on what drives basket profitability.

The key questions you should be able to answer for a good basket analysis are:

·????? What items are driving more items in the basket?

·????? What items are driving profitable baskets?

·????? What items are boosting basket size?

·????? What items are driving profitable customers?

Once you know the answers to these questions, not by heart but by numbers, you’ll be able to convert your trade/promotion strategy towards data driven knowledge. This enables a much more profitable promotion strategy. “Is this just what is called personalization to push products and content that is driving profits?” you might wonder. Well, it’s driving the right persons to buy at your shop – which is much healthier in the long term.

Customer lifetime value has been around for ages, and yet very few really understand how to drive this efficiently, particularly in a fully transparent market. One of the mistakes we hate the most is the fitness/telco model, where new and churning customers are getting all the investments and promotions such as “Become customer and get xx free/xx discount” or “please stay, and you will get xx % in discount for a period”. Yes, we know the mechanics works. But this is not Customer Lifetime Value. CLV is derived from a mutual long term and “loyal” relationship. As in other aspects of life, you don’t want friends because you throw money around. You want customers that buy profitably, so you mutually benefit from the relationship. So CLV is about frequency, buying profitable baskets, and choosing profitable ways of being served. There are so many bargain hunters out there, that don’t care if you are profitable or not, but those who are really loyal and have high CLV do.?

So, the key question here is: What is really driving CLV in your digital business. And the underlying questions are:

·????? Which items are driving frequency?

·????? Which items/services are selected in the profitable baskets?

·????? Who are buying these baskets?

·????? Who is the most profitable persona?

Once you know your profitable segment or persona, you’ll be able to hunt and reward intensely to drive your profitable growth.

In short, there are so many opportunities to drive profitable growth in the market penetration scenario, but we acknowledge it’ takes hard analytics and number crunching to start driving profitable growth.

Another topic not covered here that actually also falls in this growth strategy as well is distribution channel management. Many brands still struggle with selling the right products in the right channels and make these choices both strategically and dynamically as they go in order to optimize for profitable growth. Let us promise that we will get back to that in a separate article dedicated ror this later.

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B. New Products and Existing Markets – Product Development

Another way to drive growth is what Ansoff calls Product development. In the digital business it’s often referred to as extending assortment. The rationale here is that more SKUs equal more searchability equals morerelevance equals more sales. Many companies believe this is a simple way to drive growth, and we do see more and more companies taking large increases of SKUs into the assortment. But the key question: is this profitable growth?

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Many companies extend product assortment significantly and end up with a long tail of products that’s “empty” revenue, stock cost, or even just Google cost. In reality, extending product assortment often ends up being more costly than profitable. Driving a profitable product extension requires companies to take a hard look at what it drives: Better baskets? CLV? Better penetration in attractive segments?

We, unfortunately, don’t have numbers to back this up, but we’ve seen too many cases where product development’s only target was to drive revenue growth – and instead it drove profit-erosion. More products are not just equal to profitable growth.

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C. Existing Products and New Markets – Market Development

On the other hand, taking your products and winning concept to new markets is also a viable strategy for many companies. If you are successful in Denmark, why shouldn’t you be successful in Norway, Sweden, and Germany?

Taking your assortment to other countries might penetrate larger markets. But the old term: “you can play internationally, but you win locally” is often neglected in growing markets. There are so many parameters that changes every time you move into a new market. Segments, preferences, competitions, and services changes significantly from market to market. Getting established in new markets is tough and often very costly until the right adjustments to your successful operating model is in place. So how to approach this in a profitable way?

Well, to be honest, there are no silver bullet to this. However, using the same skills and analysis as in the market penetration scenario will help a lot. Understanding what key segments, with what product, and how they should be served profitably is crucial in driving profitable market development. Too often, companies enter with a 1:1 approach, copying the local winning formula. But in reality, very few are successful – and those who are successful is often either a true niche play or a heavy differentiation strategy (please recall this from the Porter section). So, go after profitable segments with basket driving items that create frequency.

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D. New Products and New Markets - Diversification

Diversification is generally a tough and even dangerous path to explore. Usually, companies are only really good at 1 or 2 things. Again, this also applies to digital business and ecommerce.?

The obvious area to explore in this approach is to leverage brand assets to open up new opportunities and revenue streams. Choosing your approach here is key. Only a few pure-players and medium sized companies can pull of a “Zalando” and cover many markets while exploring adjacent business opportunities with media and supply chain plays to bolster the bottom-line. But there’s also a different path – being the best to monetise payments, insurances etc. through well proven processes. This is an approach many have followed successfully to harvest potential profitable growth, whilst acknowledging their limited resources.

For heritage brands who’ve established significant ecommerce sales above 20% of their revenues, this is an interesting area to explore. As these companies have expanded their footprint and hunted ambitious ecommerce revenue targets for many years, many brands realise that they’ve been “sweating their brand asset“ by discounting hero products and losing control of sales in multiple distribution channels. This could be the time for brands to create new products that change the consumer perception of their brand and developing real reasons for consumers to not just start but also close their transactions at the brand.com site moving forward.?

Subscription model and increased loyalty efforts can also be explored as opportunities. However, the opportunity to harvest and succeed with this very much depends on fundamental frequency of and need for your products, your width of assortment, and/or brand strength (think Nike, think nutrition products.)

With all the insights above, the key question is: Which distinct strategy are you pursuing? And have you only focused on one?

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Operating to be profitable

Now it’s time to do a reality check on profitability. In all of the above and in your daily operations, there are several areas to consider when supporting profitable growth through your operation model and not just through simple cost-cutting exercises.

We have created a matrix on what we are looking for when we enter dialogues with digital businesses in order to help them identify the best ways to execute profitable growth. We hope this will get you started yourself:

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Profit focus areas

Dear CEO: You need to answer these 3 questions crystal clear:

1. Is your positioning in ecommerce & digital sales clear?
2. Do you operate with a focus, and do you prioritize supporting this position to simplify execution?
3. Are your selected priorities and activities truly supporting sustainable profitability?

With Porter and Ansoff and the above translation of this into the world of ecommerce and digital sales, we recommend you to sit down with your internal key stakeholders and go the extra inch to either validate or to re-think your strategy and operation. You need to do it. Don’t just close your eyes, and hope for the best.

About the Authors:

Carsten Pingel?has been working within digital strategy and business development for the last 15 years. Former experience includes acquiring and scaling high-growth, multi-brand e-commerce businesses, and enabling digital transformation in the largest Nordic media group, Egmont, business development and strategy at Copenhagen Airports, and board positions in high growth e-commerce and SAAS companies. Now Carsten is leading the strategy consulting unit within Valtech, helping companies in their digital transformation, and utilizing data to accelerate growth.

Toke Lund?has been working within management consulting, heading up the strategy office and the consumer insights office at the LEGO Group, driving digital transformation at Salling Group, and working as a digital strategy consultant at Novicell. Now Toke has founded Enterspeed, a software company delivering a high-performance product called Speed layer, which can accelerate digital transformation and composable setups.?

Previous articles from the authors:

https://www.valtech.com/blog/ecommerce-the-end-of-an-era-and-the-beginning-of-a-new-one/

https://www.valtech.com/blog/profit-before-growth/

https://www.valtech.com/blog/ecommerce-are-you-good-or-lucky/

https://www.valtech.com/blog/goodbye-growth-hello-reality/

https://www.valtech.com/blog/the-digital-business-reality-check/

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