How to Boost eComm Profit Margins by 1000 Basis Points

Published January 9-12, 2024

Mystery

The digital landscape initially seemed to offer boundless opportunities for brands to expand from local to global entities. The promise of direct customer relationships and hyper-personalised online shopping experiences, driven by data analytics, suggested a future of immense growth and profits. However, the anticipated simplicity of establishing a digital business has been overshadowed by unexpected complexities.

The digital market, once perceived as a blue ocean, quickly became saturated, igniting a fierce competition for consumer attention. Regular discounts and aggressive marketing strategies evolved from occasional tactics to survival necessities. Advertising costs on platforms like Google and Facebook soared as the battle for visibility intensified.

Customers became more discerning, raising the bar for customer service and driving up the cost of technological innovation. Logistical demands tightened, leaving no room for error, and even minor product flaws could result in returns and lost profits.

Marketplaces like Amazon and Alibaba offered access to large customer bases but exerted significant control over brands, sometimes undermining their autonomy and identity. Facing these challenges and the plateau of digital growth, D2C brands are now reconsidering physical stores to enhance customer experience and reach new markets, though this requires substantial investment. The digital dream, while still alive, has proven far more complex than originally envisioned.

As I wrote in “Mystery of the Missing Profits”: “Even as digital/B2C/D2C/ecommerce companies are growing rapidly, their profits are not keeping pace. Every B2C/D2C CEO must be thinking: “I’ve integrated every digital facet—from an optimised website and app to a seamless omnichannel experience and prompt delivery. What’s missing in this equation? Why aren’t the profits pouring in?” Even traditional retailers who have invested in digital transformation initiatives would be asking themselves the same question: “Where are the returns on my investment?”… while digital and eCommerce platforms were once hailed as the democratising force for businesses, the evolving landscape paints a more complex picture. The mystery of the missing profits isn’t really a mystery at all when one understands the intricate web of costs and dependencies in the current digital ecosystem.”

I have had scores of conversations with CXOs of these companies in the past few years. What surprises me is a complete lack of understanding in most cases of how much money they are wasting on new customer acquisition and not generating from their existing customers – a double whammy. As I have analysed customer and sales data, I have come to a stunning conclusion: eCommece brands can increase their profit margins by 1000 basis points. In other words, if they make a 2% margin, they can increase that to 12%. If they are losing 5%, they can convert that into a 5% profit, in essence, they can generate ten additional dollars (or rupees) in profit from every 100 dollars (or rupees) of revenue. This can be transformative for the eCommerce industry which has been struggling with profits for an extremely long time. It can ensure long-term survival of many digital brands and additional funds for innovation. It can fulfil the true promise of the Internet in delivering low-cost and convenience for billions of customers globally. In this series, I will show how and why eCommerce companies can make this happen. It is a theme I have covered in many of my past essays. This essay moves the story forward – quantifying gains, offering a playbook, and recommending the first steps – and thus solving the mystery of the missing profits.

BRTLNG

Let’s begin by considering the customer segments every business has.

Best Customers: This elite group represents the top 20% of the base, contributing to 60% of revenue and a remarkable 150-200% of your profits. They are the cornerstone of the business, exhibiting high loyalty and purchasing frequency.
Test Customers: These are part of a significant segment, roughly 40% of the customer base, who have engaged with your brand on a trial basis but have not made subsequent purchases. They are currently dormant and represent a re-engagement opportunity.
Rest Customers: This segment constitutes the middle 40% of your customers. They are neither the most loyal nor completely inactive, but they consistently contribute around 30% of the revenue, playing a supportive role in the business’s financial ecosystem.
Left Customers: These are the individuals who have churned from the brand after a single interaction. They are the ‘one and done’ customers, whose journey with the brand was short-lived, whether due to unmet expectations, dissatisfaction with the product or service, or simply because they had a singular need that was fulfilled.
Next Customers: This segment encompasses the potential customers who are yet to engage with the brand. They are the prospects and the key to the business’s future growth.
Guest Customers: These are the anonymous/unidentified visitors. Successfully enticing them to reveal themselves and opt-in for communication transforms these hidden prospects into potential profit-centres.

We can sequence these as Best-Rest-Test-Left-Next-Guest (BRTLNG). Understanding these segments will help us solve the mystery of the missing profits.

Next and Guest Customers: ‘Next’ customers are pivotal to the profit conundrum, often being a primary cause for profit erosion due to disproportionate spending on customer acquisition. A substantial portion of the adtech budget is squandered in this pursuit, resulting from misdirected acquisition efforts and the inefficient reacquisition of past customers. Moreover, without timely identification and engagement, ‘Guest’ customers risk slipping through the cracks, especially as a cookieless future looms, which could sever retargeting opportunities and erode potential revenue streams.
Best and Rest Customers: These groups harbour significant untapped revenue potential for the brand. Unfortunately, the current engagement strategies fall short. The ‘Best’ customers aren’t receiving the exceptional, differentiated experiences they deserve, which I have coined as “Velvet Rope Marketing,” akin to a VIP treatment. Meanwhile, the ‘Rest’ customers are missing out on the compelling, personalised omnichannel experiences necessary to inspire more frequent purchases.
Test and Left Customers: Efforts to address customer dormancy and attrition in these segments are often inadequate. Brands typically overlook direct re-engagement tactics with these groups, inadvertently relegating them to reacquisition campaigns where significant funds are expended just to re-establish contact. This not only forgoes new revenue possibilities but also results in costly attempts to reinitiate dialogue with customers who may have otherwise been retained more economically.

Enhancing engagement with the Best and Rest, deploying cost-effective retention strategies for Test and Left customers, and optimising acquisition spends to not only optimise for Next customers but also to identify and convert Guest customers are strategic imperatives to stem the leakage of profits and foster sustainable growth.

Segments and Solutions

Test and Left

Of the three segments, the biggest opportunity is with Test and Left customers. Let’s understand first how these customers hurt brand profitability.

In a typical eCommerce business, here is how the numbers stack up:

Revenues: 100 units
Gross Margin: 40
General and Admin expenses: 25
Marketing: 15
Profits: 0

The marketing costs can be further split into:

Adtech (acquisition): 12
Martech (retention): 3

Here is how the adtech spending can be further broken down:

Good Acquisition: 6
Bad Acquisition: 6

Of the Bad Acquisition:

Wrong Acquisition: 3
Reacquisition: 3

The reacquisition spending is happening largely on account of the dormant (Test) and churned (Left) customers.

The solution to eliminating the reacquisition AdWaste of 3 units (3% of revenues) lies with the Email 2.0 Reactivation Progency. Done right, this can also lead to a 10% increase in revenues (implying 4 units increase in profit margins). Taken together, this is an impact of 700 basis points:

300 basis points from eliminating of the reacquisition AdWaste
400 basis points increase in profits from increased revenue

So, how does the Email 2.0 Reactivation Progency make the magic happen? Here’s a summary:

Progency is a proposed software and service solution that targets dormant/churned customers that brands currently ignore.
Progency uses innovative “Email 2.0” tactics like gamification, AI personalisation, in-email payments, and Action Ads to re-engage these customers profitably.
This eliminates wasted ad spend on re-acquiring dormant customers. Progency also drives incremental revenue from this “Blue Ocean” of ignored customers.
For brands, there is no risk or upfront cost. Progency only gets paid on successful outcomes through revenue share.

Best and Rest

The combination of Velvet Rope Marketing for Best Customers and a next-gen Profipoly Stack which enables the prediction of the next best action for Rest Customers can help drive more revenues. A 10% increase in revenue can drive a 400 basis points increase in profits.

Next and Guest

The goal here is to eliminate wasteful wrong acquisition and ensure immediate identification of anonymous visitors to add 300 basis to the profit margin. This is done via a set of initiatives which can be clubbed under the broad theme of “near-zero acquisition cost.” For example, brands can use the data from the most valuable customers – Best Customer Genome – to influence the targeting of future customers. They can also drive more referrals from existing customers. They could also use gamification for zero-party data, micro-newsletters, in-store QR codes to maximise identification of anonymous visitors.

Additional Reading

The following essays have more on the ideas discussed:

Full Picture

These three slides show the solutions, and their impact on profitability.

The 1250 basis points increase in profit margin can be largely driven on a performance basis – with the brand agreeing to share a fifth of that with the entities helping drive the upside, thus leading to a 1000 basis points increase being captured and retained by the brand.

This is the huge untapped opportunity in marketing. Globally this can lead to hundreds of billions of dollars in retained profits for B2C/D2C brands and open tens of billions of dollars for new age martech SaaS vendors willing to add a Progency complement.

To summarise, here is a 5-step roadmap for marketers:

Optimise Customer Segmentation: Utilise the BRTLNG framework (Best, Rest, Test, Left, Next, Guest) to understand customer behaviours and value.
Reactivation for Revenues: Prioritise re-engagement of ‘Test’ and ‘Left’ customers to reduce ad spend waste, employing Email 2.0 Reactivation Progency to revive dormant and churned relationships and convert them into profitable ones.
Enhance Customer Experience: Implement Velvet Rope Marketing to provide ‘Best’ customers with VIP treatment and use the Profipoly Stack to predict and influence ‘Rest’ customers’ behaviours.
Refine Acquisition Strategy: For ‘Next’ customers, adopt a near-zero acquisition cost approach. Leverage the Best Customer Genome for better targeting, encourage referrals, and maximise identification of anonymous ‘Guest’ visitors.
Performance-Based Profit Uplift: Capture a 1250 basis point increase in profit margins by sharing a portion of the gains with martech partners. By doing so, brands can keep a substantial 1000 basis point rise, thereby significantly improving profitability and paving the way for reinvestment in innovation and growth.

When executed with precision, the strategic approach outlined in this series has the potential to fundamentally transform eCommerce brands from their current state of marginal profitability or even loss-making (“profit-less”) to a state of exponential forever profitable growth, a “profipoly” (profits monopoly).

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