Mystery of the Missing Profits

Published November 3-14, 2023

Digital’s Promise and Reality – 1

The Land of Digital promised untold riches for brands. The dreamy vision of eCommerce painted a world without walls, where businesses, no matter their size, could seamlessly transition from local storefronts to global powerhouses. The digital paradigm shift promised the allure of not just vast audiences but also a chance to cultivate intimate relationships with customers. Data analytics tools aggregated every customer action and promised insights into consumers’ desires, habits, and preferences, implying a future where every online shopping experience would feel tailored and unique. The very architecture of online platforms, from their algorithms to user interfaces, was built with the promise of propelling businesses to new heights, buoyed by the promise of limitless reach and scale. With infinite scale would then come exponential profit growth. This was the hope.

The reality has turned out to be very different. As the dust settled, the complexity of building digital businesses has become apparent. It’s not that the promises were hollow, but rather that the practicalities of the vast digital market had nuances that weren’t initially apparent. The once blue ocean turned shark-infested as businesses flooded the digital space. The consequence? A heightened race for consumer attention, leading to an escalated marketing arms race. Discounts, once an occasional incentive, became an omnipresent necessity. Flash sales, promotional events, and loyalty programs were no longer value-added strategies but essential tools for survival.

Furthermore, the initial enthusiasm over easy acquisition of new customers from an unlimited universe of prospects soon met the sobering reality of escalating advertising costs. Platforms like Google and Facebook, that once provided relatively cost-effective advertising solutions, started demanding a king’s ransom as more brands jostled for the same ad space. Moreover, as the digital age matured, so did the discernment of the consumer. As choices multiplied, so did consumer demands. The benchmark for delivering a stellar customer experience continually elevated, necessitating persistent investments in innovative technologies and thus further straining financial resources. The delivery timelines have been squeezed to their limits, and the margin for product error has become almost non-existent. Even products meeting most criteria face returns due to minute discrepancies, resulting in logistical challenges and shrinking profit margins.

The rise of digital marketplaces like Amazon and Alibaba added another twist. They bridged the gap between consumers and brands, but at a cost. While they offered the lure of vast user bases, they also held significant power over the brands that operated within their platforms. High commission fees, competition with private-label products, and the potential dilution of brand identity became common challenges. Brands found themselves in a conundrum: to either relinquish a portion of their autonomy for the promise of amplified reach or to tread the competitive waters of the open digital red ocean.

As businesses reach digital’s limits, D2C brands are coming full circle by embracing brick-and-mortar establishments. These offline stores serve as touchpoints for enhanced customer experiences and also as crucial avenues to tap into new growth trajectories and diverse market segments. However, such expansion comes at a cost. The required capital must either be sourced from operating profits or external financing, posing another layer of challenge for these brands.

Against this backdrop, there is the rise of what McKinsey calls the “zero customer.”

Digital’s Promise and Reality – 2

McKinsey wrote in a recent story about the “retail reset”:

Consumers are increasingly shopping across channels, showing little loyalty, and expecting fast shipping and sustainable products. Meet today’s “zero consumers.”

Zero boundaries. Browsing in stores used to be one of the primary ways that shoppers came across new products. But the purchase journey is now more fragmented. Nearly half of consumers—and approximately 70 percent of millennials and Gen Zers—say they rely on social media, celebrities, and articles or blogs for purchase inspiration. And they’re shopping fluidly across channels.

Zero in the middle. Consumers are moving away from the middle of the market—they’re either scrimping or splurging. Total consumer share of wallet spent on mid-priced goods and services has declined almost 10 percent in the past five years.

Zero loyalty. About half of consumers reported switching brands in 2022, compared with only one-third in 2020. What’s more, about 90 percent said they’ll keep switching. Absent truly differentiated, exclusive offerings, the retailer will soon become a utility—just a means of distribution.

Zero patience. Consumers are much less willing to wait. Free standard shipping, once offered by only a few retailers, is fast becoming table stakes. Amazon’s delivery speed and the rise of “buy online, pick up in store” have raised consumers’ expectations: a plurality of customers today report that three-day shipping is the slowest they’ll tolerate before looking to other retailers.

The vision of an unbridled digital utopia has thus evolved. While the promises of global reach and direct customer interaction remain, they now come with the wisdom of experience. Brands must navigate a landscape that demands adaptability, strategic innovation, and an understanding that while the digital realm offers unparalleled opportunities, it also presents unique challenges. The dream of supernormal growth is still attainable, but it requires a more nuanced, multifaceted approach than initially envisioned.

The biggest challenge though has been the elusive nature of profits. Even as brands see revenue growth, true bottom-line sustainability is in question in not just native digital businesses but also in traditional brick-and-mortar brands venturing into the digital realm.

I asked ChatGPT to list out the top challenges faced by retail and ecommerce businesses which hurt profitability:

High Customer Acquisition Cost (CAC): With increasing competition, the cost to acquire new customers, especially via online advertising platforms like Google and Facebook, has skyrocketed.
Cart Abandonment: Many customers add products to their shopping carts but do not complete the purchase, leading to potential revenue loss.
Thin Margins: Heavy discounts and promotions, often needed to attract customers, can erode profit margins.
Inventory Management: Overstocking can lead to increased holding costs and potential obsolescence, while understocking can result in lost sales.
Returns and Refunds: High return rates, especially in categories like fashion, can lead to logistical challenges and added costs.
Shipping and Fulfilment Costs: As customers increasingly expect fast and free shipping, managing shipping costs while ensuring timely deliveries becomes challenging.
Fraud: E-commerce businesses are susceptible to various types of fraud, including chargeback fraud and fake transactions.
Platform Fees: Selling on third-party platforms or using certain payment gateways often comes with associated fees that can reduce profitability.
Technology Investments: Continual investments in technology to improve user experience, backend operations, and cybersecurity can strain finances.
Regulatory and Compliance Costs: Adhering to ever-evolving e-commerce regulations, data protection laws, and trade policies can add to operational costs.
Competition: The ease of setting up e-commerce businesses means that niches can quickly become crowded, driving up costs and driving down prices.
Customer Loyalty and Retention: With so many options available, retaining customers and fostering loyalty becomes difficult. Acquiring a new customer is often more expensive than retaining an existing one.
Global Supply Chain Issues: Factors such as trade wars, pandemics, and geopolitical tensions can disrupt the supply chain, leading to delays and increased costs.
Changing Consumer Behaviour: With trends evolving rapidly, staying relevant and catering to the changing needs of the consumer is a constant challenge.
Physical Store Overheads: For omnichannel retailers, the overheads associated with maintaining physical stores, including rent, utilities, and staff salaries, can be significant.

Against this backdrop, how does a brand bridge the gap between the promise of the digital goldmine and the sobering reality of no or low profitability? In this series, we will discuss the mystery of the missing profits for digital consumer-facing businesses. More importantly, we’ll chart out a comprehensive roadmap for brands to harness the genuine potential of digital and eCommerce and build profipolies (profit monopolies) by driving exponential forever profitable growth.

Where are the 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?”

The short answer: Elsewhere. The profits are on the balance sheets of the ads sellers, arms sellers, and access sellers. They are just not with the actual sellers!

Ads sellers: In the world dominated by algorithms and screen scrolls, visibility is everything. Ad sellers, like Google and Meta, have capitalised on this need. They’ve transformed the digital ad space into a highly competitive auction arena where brands pay escalating amounts to be seen. Even with large ad budgets, there’s no guarantee of conversion, meaning companies often spend exorbitant amounts on customer acquisition (and in many cases, reacquisition) with no assured return on investment. The result is that while ad revenues for these tech giants soar, the actual businesses striving for customer attention find their profit margins squeezed.

Arms sellers: Cloud services have undeniably transformed the way businesses operate, offering scalability, flexibility, and efficiency. However, they come at a price. As businesses scale, so does their reliance on these services, leading to escalating costs. Data needs to be captured, stored, and analysed. AI algorithms need to search for patterns. All this comes at a cost. Companies like Amazon, Microsoft, and Google, which dominate the cloud services sector, continue to grow, fuelled by the profits that, in another reality, might have remained with the eCommerce and digital enterprises using their platforms.

Access sellers: Then come the marketplaces – platforms that promise brands unparalleled access to customers. Yet, these gateways come at a steep price. Brands often find themselves paying hefty commissions, adhering to strict platform-specific guidelines, and competing in a red ocean of endless vendors. In this scramble, while the marketplace platform ensures its cut from every transaction, the individual sellers find their profit margins thinning. The scenario is exacerbated when marketplaces roll out their own in-house brands, vying for a slice of the lucrative segments.

In essence, 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. For businesses to truly thrive and regain their profitability, there needs to be a fundamental shift in strategy, one that prioritises sustainable growth over sheer volume and seeks to balance out the power held by the digital giants. So, what is it that brands can do? The answer lies in understanding the eFolly of every digital business.

Follies

The term “folly” typically signifies a lack of sound judgment, leading to unwise actions or decisions. It can denote either a foolish act or an object representing such behaviour. It traces its origins to the French word “folie,” which means “madness” or “foolishness”.

History is rife with examples of follies that have had significant impacts on societies, nations, and individuals. As Alan Axelroad writes in his book “Profiles in Folly: History’s Worst Decisions and Why They Went Wrong”: “Most of what you’ll find here are decisions by smart, savvy people that nevertheless went miserably, abominably, and often irreversibly wrong. Why pick at history’s scabs? The easy answer is another question: Inching along the freeway, who can turn away from a flaming car crash? The more meaningful answer is that probing our vulnerability is a project poignant and compelling precisely for what it reveals about the ways in which high-stakes decisions—decisions that must be made and that cannot be evaded—may produce disastrous results. There but for the grace—the grace of what, precisely?—lie us, in flames.”

Here are some noteworthy examples of follies, listed by ChatGPT:

The Trojan Horse (Ancient Greece): The city of Troy accepted the wooden horse, thinking it was a gift, but it was filled with Greek soldiers, leading to the city’s downfall. This is where the term “Trojan Horse” in modern cybersecurity comes from.
The Sinking of the Titanic (1912): Deemed “unsinkable”, the Titanic tragically collided with an iceberg on its maiden voyage due to several errors in judgment, including ignoring iceberg warnings and not having enough lifeboats.
The Sale of Alaska (1867): Russia sold Alaska to the United States for $7.2 million, considering it a useless territory. Today, Alaska is known for its vast resources, including oil.
Maginot Line (1930s): France built this line of concrete fortifications, obstacles, and weapons installations along its borders to deter German invasion. However, the Germans simply went around it, through Belgium, making the expensive line largely ineffective.
Bay of Pigs Invasion (1961): The U.S.-backed attempt to overthrow Fidel Castro in Cuba ended in failure, serving only to strengthen Castro’s position and embarrass the Kennedy administration.
Chernobyl Nuclear Disaster (1986): Due to a combination of flawed reactor technology and inadequately trained personnel, a routine safety test went wrong, resulting in the world’s worst nuclear disaster.
The South Sea Bubble (1720): A speculative bubble in Great Britain involving the shares of the South Sea Company. Many people invested and lost vast amounts of money when the bubble burst.
The Decision to Invade Russia (Napoleon in 1812 and Hitler in 1941): Both leaders attempted to invade Russia and failed miserably, with their armies decimated by the harsh Russian winter and determined resistance.
Dot-com Bubble (Late 1990s – 2000): A period of extreme speculation that occurred in the late 1990s, where stock prices surged based on internet-related companies. Many of these companies were often not profitable, and when the bubble burst, many investors faced substantial losses.

These examples highlight the spectrum of human decision-making, from strategic blunders to overconfidence, and the sometimes catastrophic consequences that can ensue. The digital world of the past quarter century has been no stranger to follies – what I term as “eFollies”.

Digital Follies

In the rush to harness the seemingly boundless opportunities of the digital age, many industries inadvertently handed over significant profit streams to emerging players – many of them outsiders to the industry. Some chased scale, while others sought to be early adopters, often without a clear strategy. Here’s a deep dive into these follies.

Media and Publishing: Perhaps one of the most significant missteps in the digital transition was committed by media houses and publishers. Lured by the promise of expansive online audiences, many began offering content freely. This pursuit of ad revenues led to two considerable pitfalls. Firstly, the perceived value of quality content eroded. When audiences are accustomed to free access, convincing them to pay becomes a Herculean task. Secondly, the ad dollars didn’t flow to the publishers but instead to platforms like Google and Facebook, which aggregated content and drew audiences, thereby commanding the lion’s share of ad revenue.

Music Industry: Before the dominance of streaming platforms like Spotify or Apple Music, the music industry was grappling with rampant piracy. Instead of swiftly evolving with user-friendly, digital purchasing options, the industry clung to physical sales and litigious actions. This delay in adapting allowed tech players to step in, fundamentally altering the industry’s profit models forever.

Banking: Traditional banks with legacy systems were slow to recognise the allure of digital banking. Fintech startups, without the baggage of brick-and-mortar operations, rapidly developed and offered user-friendly apps, instant loans, or fee-free transactions, drawing away a segment of the customers seeking convenience.

Digital/B2C/D2C/eCommerce companies have also committed a mistake of similar scale – what I call “eFolly”. The allure of digital brought forth the promise of infinite scale. In this brave new world, every company sought to grow big rapidly, with a strategy heavily skewed towards acquiring new customers. The eFolly: ignoring existing customers. This blunder has many sub-elements, each of which has been devastating for profitability.

Obsession with Acquisition: The business narrative became about growth figures, often centred on user acquisition. Massive budgets were allocated to digital ads, luring new users with heavy discounts. Ironically, the cost of acquiring a new customer often outstripped the lifetime value of that customer, especially when considering the discounted rates.
Neglect of Retention: With eyes set on the horizon, many businesses forgot the goldmine in their backyard. Existing customers, if nurtured and engaged, can be sources of consistent revenue and organic growth through referrals. Yet, surprisingly, retention strategies took a backseat.
Underestimating Word-of-Mouth: In the digital age, the power of word-of-mouth is amplified. Most brands have not leveraged the power of referrals, especially from their Best customers.
Unsustainable Discounting: Many eCommerce businesses banked on discounts to lure and retain customers. However, this strategy eroded the perceived value of products and services, making profitability a mirage.

Here is what I wrote in a previous essay: “Countless eCommerce companies grapple with slim or non-existent profit margins. On the surface, the hefty price tag of customer acquisition (CAC) seems to be the primary culprit. But a deeper analysis reveals an industry-wide problem lurking beneath the surface. This is what I term as the “eFolly” – the decision to ignore existing customers and almost exclusively focusing on new customers. This eFolly of disregarding current customers pervades digital companies across the board. It is a costly misstep that eCommerce leaders perpetrate, inadvertently (and inevitably) gnawing away at their profitability. In the absence of external capital to absorb losses, this blunder can even lead to startup failures.”

In their pursuit of scale, many businesses overlooked foundational principles, with profitability being the primary casualty. They have lost many battles through the years – strengthening the ads, arms, and access sellers with their eFolly of ignoring existing customers and almost exclusive focus on new acquisition for growth. But there is light at the end of the tunnel. An array of new technologies can help them pivot, reverse their losses, and win the future profits war.

Breakthroughs

Throughout history, human advancement has been punctuated by breakthroughs — moments when innovative ideas, inventions, and technologies have burst through barriers, paving the way for exponential progress. These breakthroughs, more than just solutions to existing problems, acted as catalysts that helped entire industries leapfrog into new eras of growth and prosperity.

James Watt’s refinement of the steam engine in the late 18th century did more than make a machine more efficient. It became a primary driver of the First Industrial Revolution, turning manual crafts into mechanized industries. This not only revolutionised manufacturing but also laid the foundation for modern urbanisation and changed the socio-economic and cultural conditions of the time.

While the concept of an electric light was not new, Thomas Edison’s invention of a practical and durable light bulb made lighting cheaper, better, and safer. Cities no longer slept, factories could operate longer, and the invention electrified other sectors, leading to developments in electrical engineering and the eventual birth of household electrical appliances.

Marconi’s development of the radio gave birth to an era of wireless communication. This pioneering innovation served as the backbone for a myriad of other technologies — from television to mobile phones — transforming how we communicate, entertain, and inform.

Tim Berners-Lee’s HTML and WWW architecture did more than create a system to view web pages. It democratised information, broke down geographical barriers, and became the bedrock for the digital age. This leapfrog moment saw businesses, services, and social networks connect the globe in an unprecedented manner.

Tesla, alongside other players, recognised that for electric vehicles (EVs) to become a viable alternative to gasoline-powered cars, the battery was the key. Innovations in lithium-ion batteries, in both efficiency and cost, have started to make EVs popular.

Our understanding of DNA was a significant leap in itself, but the discovery of techniques like CRISPR-Cas9 has allowed for precise editing of genomes. This could revolutionise medicine, allowing for tailored treatments or even the eradication of certain genetic diseases.

Google’s “Transformers” revolutionised AI, especially in Natural Language Processing. By introducing attention mechanisms, Transformers could better understand context in sequences, leading to advanced models like GPT. This breakthrough transformed Generative AI capabilities, enabling more human-like text generation and broader AI interactions in daily tech.

What these breakthroughs underscore is the idea that innovation is more than iterative progress. At times, it shatters the ceiling of what’s deemed possible, propelling industries and societies into new paradigms. Each leap builds upon the work of countless individuals and often paves the way for further leaps, creating a cascade of progress that defines human history. We stand at a similar moment in eCommerce – one which will transform the P&Ls of industry players and give them the booster shot to power exponential forever profitable growth, thus creating profipolies.

eBreakthroughs

To recap, profits have become the elusive goal – the equivalent of telecom’s last mile problem – for digital/B2C/D2C/ecommerce ventures. While there’s profit to be made, it’s largely sidestepping these brands. Their critical oversight, the neglect of existing customers, has hit them with a dual setback: stagnated revenue growth and escalating new customer acquisition costs. This combination effectively zeroes out profitability, and consequently stifles innovation and growth potential. However, the horizon isn’t entirely bleak. A slew of innovations offers a beacon of hope and the potential to transform eCommerce P&Ls. Let’s delve into these “eBreakthroughs” as potential antidotes to the past “eFolly.”

Email 2.0: the Fulcrum (powered by AMP); Email Shops, Engaging Footers
Going beyond plain text and images, Email 2.0, enhanced by AMP, offers interactive and dynamic content directly within the email. This includes apps in email that allow direct transactions, and email footers that capture users’ interests, making AMP-powered emails a potent tool for commerce.
Inbox Commerce: Conversion Closest to Customer
Inbox Commerce leverages the intimacy and immediacy of email inboxes, facilitating direct commerce interactions. With minimal friction between the marketing message and the conversion action, it places transactions right where customers frequently engage.
Martech 2.0: Unistack and Unichannel
In the evolving Martech landscape, the focus is on unified platforms (Unistack) that bring together all tech components. Additionally, the Unichannel approach ensures seamless customer experience across all touchpoints, erasing boundaries between different communication channels.
Digital Twin: Large Customer Model, Mirror World, Virtual You
This helps in predicting preferences, ensuring personalisation, and understanding customer paths in the ‘Mirror World’ where the virtual and real converge. Digital Twin technology creates a replica of the customer, drawing on their data and behaviour (along with that from lookalikes among the Best customers) to predict next action sequences for nudges on the buying journey.
Velvet Rope Marketing: Customer Lifetime Value, Best Customer Genome
This strategy is about maximising revenue from high-value customers. By correctly calculating CLV and identifying the characteristics of the Best customers (their ‘genome’), businesses can tailor premium experiences (exclusivity, ease and access) to foster loyalty and higher spends.
Atomic Rewards / Loyalty 2.0: tokens for gamifying micro-actions
The next generation of loyalty programs goes beyond transactions and focuses on micro-incentivies for actions which are upstream and downstream of transactions. By gamifying small actions (like attention, data sharing, reviews, ratings, and referrals), Atomic Rewards gamifies continuous customer engagement.
Progency: Product-led / Problem-solving / Profits-driven Agency
A Progency works as an extension of the marketing team to deliver outcomes and is rewarded based on performance, making it a true business partner rather than a mere service provider. Reactivation of dormant customers is an example of a task well-suited for a progency.
Earned Growth: The North Star Metric
In a shift from traditional growth metrics, Earned Growth focuses on organic sales growth derived from customer advocacy and loyalty. Instead of just acquired growth through marketing spends, this metric emphasises the value of existing customers and referrals.
Every CXO is a Chief Profitability Officer
Gone are the days when profitability was solely the CEO’s and CFO’s domain. In the modern business landscape, every C-suite executive, whether in marketing, operations, or technology, has a role in driving profitability. This shared responsibility ensures a company-wide focus on the bottom line.

Taken together, these breakthrough ideas and innovations can help brands fix the five profit-killing funnel frictions.

Fixing Funnel Frictions

In Solving eCommerce’s Fifth Funnel Friction, I wrote: “[Friction] exists in various forms and has a significant, often underestimated, impact on profits. These frictions have created inefficiencies and roadblocks in online and offline businesses, impeding customer engagement and diluting brand value. ‘Funnel frictions’ in customer journeys are the silent assassin of profits. From unidentified customers slipping through the cracks to inefficient ad spending, these frictions create hurdles in establishing profitable relationships with consumers. They lead to disjointed customer experiences, increased costs, lower conversion rates, and ultimately, eroded profits. The ability to identify and address these frictions, therefore, is not just about improving customer experiences but also about securing a brand’s bottom line.”

I have discussed the five funnel frictions and their fixes in my previous essays.

The 3 primary funnel frictions (ToFu, MoFu, BoFu – for top, middle, and bottom of funnel) reduce the efficacy of transactions from existing customers. The BTF friction is caused by existing customers becoming inactive, while the ATF friction focuses on the waste in acquisition. Here’s a summary.

ToFu (Top of Funnel) – From Identity Gap to Anon-to-Known Conversion

Challenge: Transitioning site visitors, who are mostly anonymous, into identifiable leads.
Solution: Craft strategies to prompt visitors to voluntarily share personal details like email and phone number, establishing a digital connection that paves the way for a deeper relationship in subsequent funnel stages.
Breakthroughs: Email 2.0, Atomic Rewards

MoFu (Middle of Funnel) – Alleviating the Attention Recession through Inbox Commerce

Challenge: Sustaining engagement in a digital environment where attention spans are shrinking.
Solution: Harness the transformative capabilities of Email 2.0. Incorporate innovative features such as Microns, Email Shops, and Engaging Footers, which elevate inbox interactions. Facilitate end-to-end user experiences, from product searches to payments, without ever leaving the email interface. Supplement this with Atomic Rewards, encouraging customers to proactively share zero-party data.
Breakthroughs: Email 2.0, Inbox Commerce, Atomic Rewards

BoFu (Bottom of Funnel) – Transitioning from Red to Green Journeys

Challenge: Catering to potential buyers who, upon reaching a website or app, expect streamlined purchase paths.
Solution: Deploy the sophisticated tools of Martech 2.0 and create Digital Twins through the Large Customer Model, anticipating and suggesting the most appropriate next actions for users. Implement Velvet Rope Marketing to distinguish and cater to high-value customers with exclusive perks, elevating their loyalty and, in turn, overall profitability.
Breakthroughs: Martech 2.0, Digital Twin, VRM

BTF (Below the Funnel) – Counteracting Dormancy and Churn with Reactivation via Progency

Challenge: Maintaining a connection with customers post-purchase and addressing the inevitable lapses into inactivity.
Solution: Instead of falling into the trap of pricey adtech strategies for retargeting, focus on revitalising dormant customers. Engage a Progency that maintains an unwavering focus on rejuvenating relationships with Best Customers, ensuring their journey with the brand continues.
Breakthroughs: Progency, Email 2.0, Atomic Rewards

ATF (Above the Funnel) – Cutting Adtech AdWaste to Achieve Near-Zero Acquisition Cost

Challenge: Acquiring new customers with as low CAC as is possible.
Solution: Drastically reduce AdWaste stemming from misguided acquisition and reacquisition efforts. Three methods to make this happen: reacquisition, referrals, and using Best Customer Genome for targeted lookalikes.
Breakthroughs: Martech 2.0, Email 2.0, Progency

This needs to be combined with two mindset shifts: a focus on Earned Growth as the lodestar, and every CXO should wear the hat of a Chief Profitability Officer, actively driving profitability at every decision point.

These solutions might appear self-evident and should have been implemented much earlier. And yet, they are not being applied by marketers who keep pouring money into new acquisitions at the cost of bettering relationships with existing customers. The question then arises: Why should we expect a paradigm shift now?

Why Now

There are multiple reasons for a pivot from growth-at-all-costs to focusing on profitability.

End of the Era of Easy Money: The business ecosystem has long benefited from a surfeit of venture capital and easy monetary policies. This has, in many ways, led businesses to prioritise growth over profitability, as they could always rely on the next round of funding to cover operational costs. However, as global economic conditions evolve and investment sentiment becomes more cautious, the once free-flowing capital is becoming harder to secure. There’s a growing realisation, especially among investors, that not all growth is good growth. A business model that burns cash to acquire customers without a clear path to profitability and without strong unit economics is increasingly seen as risky. Long-term sustainability is becoming a more significant factor in business evaluations and valuations.
Rapidly Rising CAC (Customer Acquisition Cost): The digital advertising space has become saturated, resulting in escalating costs to acquire a new customer. With more brands vying for the same digital real estate and audience attention, the efficiency of each advertising dollar has diminished. This phenomenon makes it imperative for businesses to rethink their marketing approach, focusing more on retaining and maximising the value of existing customers rather than continually paying a premium for new ones.
Post-pandemic Normalisation of Digital Growth: The Covid pandemic ushered in an unprecedented boom in digital adoption. However, as the world gradually adjusts to the new normal, this explosive digital growth rate is beginning to stabilise. Businesses can no longer rely solely on the pandemic-induced digital surge to boost their numbers. They must now focus on extracting more value from their existing digital assets and customer base.
Change in Strategy from Martech Vendors: Martech vendors are recognising the challenges businesses face in today’s saturated digital market. As a result, there’s a noticeable shift in their approach, with many now offering tools designed to offer integrated stacks rather than siloed point solutions to enhance customer retention, drive engagement, and increase lifetime value. These platforms, with increasing use of AI-ML, aim to help brands maximise the returns from their existing customer base, aligning with the changing priorities of the businesses they serve.
The Rise of Email 2.0 as the Fulcrum: Email, one of the earliest digital communication tools, is experiencing a renaissance. Termed as ‘Email 2.0’, this evolution transforms emails from mere communication tools into dynamic platforms for commerce and engagement. Brands can now create interactive experiences within the inbox, enabling transactions, capturing feedback, and even running mini-apps. This shift makes the email inbox a potent tool, acting as the pivot around which a significant portion of digital engagement and commerce can revolve, offering businesses a cost-effective channel to engage and transact with their customers. As I wrote in Email 2.0: The Fulcrum for Fixing Five Funnel Frictions: “Email 2.0 not only enhances the interaction between brands and their customers but also shapes a richer understanding of each customer, fostering stronger, more meaningful relationships. By seamlessly integrating elements like AMP, Atomic Rewards, and Microns, Email 2.0 emerges as an omnichannel solution that tackles the barriers and navigates the journey from initial contact to purchase completion. Together, these elements make Email 2.0 the bedrock of a revolutionary approach to mitigate funnel frictions, improve customer experience, and pave the way for sustainable growth.”
Customer Expectations and Demand for Personalisation: Modern customers have grown accustomed to personalised experiences, thanks to the precedence set by leading brands. Generic mass marketing campaigns are becoming less effective. As such, businesses are realising the need to tailor their approaches to cater to individual customer preferences and behaviours, which is often more feasible and cost-effective with an existing customer base.
Evolving Regulatory Landscape: Global privacy regulations, like GDPR in Europe and CCPA in California, are enforcing stricter rules around data collection and user consent. These regulations make it challenging for companies to freely acquire and target new customers based on third-party data. Moreover, this environment is also forcing changes in the mobile operating systems (iOS and Android), who are now putting privacy front and centre. It thus becomes more logical for businesses to work on deepening relationships with their existing customers, for whom they already have consent and data.

All these factors together provide a compelling rationale for businesses to pivot from a relentless chase for growth from new customers to a more balanced strategy that places equal emphasis on profitability by maximising revenue from existing customers.

The Prize

The obvious benefit of implementing the ideas we have discussed is a transformed P&L, thanks to the twin effects of a rise in revenue and a reduction in marketing expenses, as this table shows.

The growth in profits is, of course, the outcome of a strategy designed to ensure that existing customers come back for more and bring their friends. No business can ever sustain on paid acquisition of new customers alone, especially when this is happening into a leaky bucket. The mystery therefore should never have been about the missing profits; it should have been about why CEOs, boards and investors allowed the shift to lossy digital businesses!

Given that profits in digital and eCommerce area a rarity, it is perhaps important to understand the benefits of running a business not dependent on external funding (whether from investors or money-making traditional lines). The rewards of pivoting towards profitability are manifold, both in terms of monetary gains and strategic advantages. While a ‘green’ P&L is the most tangible benefit, the implications of this ‘back-to-basics’ shift run much deeper.

Independence and Freedom: A profitable venture isn’t beholden to external investors or forced to pivot based on investor whims. Profitability ensures freedom—freedom to chart one’s course, freedom to seize new opportunities, and freedom to innovate without continuous fundraising rounds.

Happy Customers turn Advocates: Profits aren’t just numbers on a balance sheet; they’re indicative of satisfied customers who return for more. Happy customers not only provide stable revenue but can also become the brand’s most potent marketers, vouching for its products and services, creating a good growth flywheel.

Reinvestment in Customer Experience: Profits can be channelled back into improving the overall customer experience. Whether it’s through upgraded tech platforms, improved customer support, or innovative loyalty programs, businesses can keep iterating and enhancing the customer journey.

Fuel for Business Expansion: Profits aren’t just an endpoint; they’re a launchpad. They provide the capital needed for business expansion, whether it’s venturing into new markets, diversifying the product line, or even making strategic acquisitions to bolster the market position.

Profits foster Innovation: Without the constant pressure to chase funds, businesses can reallocate profits back into research and development. This allows them to stay ahead of the curve, ensuring longevity in a competitive marketplace.

Employee Satisfaction and Retention: Profitable businesses can invest more in their employees, whether it’s in the form of competitive salaries, training, or benefits. This not only attracts top talent but also ensures their retention, creating a virtuous cycle of growth and innovation.

Risk Mitigation: With profits in the bank, businesses can weather economic downturns or unexpected market shifts. They have the cushion to adapt and pivot without facing existential threats, thus ensuring stability and continuity in operations.

In conclusion, profits in the digital/B2C/D2C/ecommerce world aren’t just about financial success. They represent a business’s ability to serve its customers effectively, innovate consistently, and stand resilient in a dynamic market landscape.

Getting Started

How can businesses embark on the journey of profitable growth? (Or, if they are already profitable, how can they boost margins to get an even bigger advantage over competition?) Here is a multi-stage 90-day roadmap to implement the ideas we have discussed.

Launchpad (7 days)

Strategy Foundry: Organise a 2-hour intensive workshop that aligns key departments – Marketing, Digital, IT, and Business Owners – on vision, mission, and key objectives.
Identify “The Crux”: Choose 1-2 pivotal business problems that are both crucial to address and feasible to solve within the given timeframe.

Quick Actions (15 days)

Engaging Footers: Ensure every email is interactive and uses AMP. These “’AMPLets” can be used to gather Zero Party Data, solicit NPS ratings, and encourage referrals.
Microns (Ems): Adopt the “15 seconds daily” top-of-mind branding strategy to improve the open rates of emails by serving users valuable microcontent that not only strengthens brand recall but also offers wisdom and actionable insights.

Early Wins (30 days)

Every Visitor Anon-to-Known: Gather identifiable information at every customer interaction point. Prioritise collecting email IDs and link them with mobile numbers, ensuring a secondary continuous engagement channel.
Email Shops: Explore the potential of Inbox Commerce. Develop necessary APIs to enable smooth transaction completions within email apps, thereby reducing friction in the purchase journey.
Reactivation: Partner with a Progency to focus on re-engaging inactive existing customers, which is typically more cost-effective than acquiring new ones. This will substantially reduce AdWaste.

Big Impact (90 days and beyond)

Velvet Rope Marketing: Use CLV to segment customers. Create a separate Strategic Business Unit (SBU) to provide Best customers with unparalleled experiences. Think exclusivity, ease, and access.
Large Customer Model and Digital Twins: Implement an “Active CDP” (Customer Data Platform) that leverages AI-ML capabilities to enhance personalisation strategies and make predictions more accurate.
Consumer Intelligence: Invest in tools and strategies that offer in-depth insights into consumer behaviour. These insights can guide marketing strategies, product launches, and customer engagement tactics.
Beyond: Visualise the future – where everything is interconnected. Work towards a Unistack (integrated Martech 2.0 stack) and Unichannel (seamless customer engagement across push channels) strategy. This will ensure holistic customer experiences and streamlined backend operations.

North Star Metric

Drive Earned Growth: Regularly measure and optimise for Earned Growth, as a testament to the effectiveness of the strategies for customer retention, cross-sell and upsell, and referrals.

In the ever-evolving digital landscape, navigating the path to sustained profitability requires a blend of strategic foresight, swift yet significant actions, and unwavering dedication. This outlined roadmap is more than just a sequence of steps; it’s a transformative blueprint for businesses eager to not only thrive but also excel in their digital endeavours – and solve the mystery of the missing profits! By putting existing customers at the forefront, leveraging innovative ideas and technological advances, and changing CXO thinking, organisations can pave the way for an era of unmatched growth, enduring profitability, and dominant market leadership. The final question: how can all this translate into creating a profipoly (profits monopoly)?

Building a Profipoly

In a previous essay, I wrote: “The eFolly-to-Profipoly journey is about driving change in mindsets and harnessing the potential of innovations. It calls for a significant realignment of the core business philosophy, moving from a culture of relentless acquisition to a more equitable model that values customer nurturing equally. It’s about internalising the fact that real growth and profitability are not the result of ceaselessly hunting new customers, but in transforming each customer into a lifelong advocate. When this view of customer relationship management is adopted, a natural progression ensues, marking the path towards a sustainable, profitable future, rather than forcing a change. This shift, from strategy to a way of life, is a call for CEOs and CMOs-turned-CPOs (Chief Profitability Officers) to think entrepreneurially and champion the transition. It is in this metamorphosis that the essence of real business growth and “built-to-last” endurance lies.”

As I wrote in ProfitXL to Profipoly, “A profipoly provides a brand with a formidable competitive advantage – by monopolising profitability, it drains competitors’ chances of survival.” A profipoly is not merely about dominating a market segment; it’s about mastering the art of sustained profitability in a competitive digital landscape. While a monopoly focuses on market share, a profipoly emphasizes creating unparalleled value for both the business and its customers, ensuring consistent and amplified profit margins. It goes beyond just revenue; it’s about optimising operations, nurturing customer loyalty, and fostering innovation such that the business enjoys a unique, almost monopolistic advantage in its profitability. In a world where many chase volume, a profipoly champions value. A profipoly is thus the ultimate endgame and best moat in a business, a guarantee for exponential forever profitable growth.

In this series, we have discussed various ideas around profitability and growth – simultaneously. Here are four more ideas for businesses to embark on their profipoly journey.

Jim Collins’ Map: Encapsulating the best ideas across all his books, Jim Collins created “The Map” in “Beyond Entrepreneurship 2.0.” This offers a masterclass in building enduring, great businesses.

3B: This is akin to McKinsey’s Three Horizons framework, which I have written about. The 3Bs stand for BAU (Business as Usual) Better, Boosters, and Breakthroughs. It’s an intricate balance of small changes and audacious bets on game-changing innovations. The first B (Better) is about making small, continuous improvements in the daily routine of business – akin to the Japanese idea of Kaizen. The second B (Boosters) is about creating some initiatives which can work to give a fillip to the business – this is ideally done by small cross-functional teams with a timeline that extends beyond the quarter. The third B (Breakthroughs) is about crafting a few 10X options that could pay off big: a new product, a partnership, or an acquisition.

4M: The 4Ms are Magical (Product), Money (Machine), Moat, and Monopoly. I wrote about this in a recent essay: “The starting point must be a product that wows. As you use the product, you wonder how it is happening. The experience is out of this world. As Arthur Clarke said, “Any sufficiently advanced technology is indistinguishable from magic.” That product experience must convert into a money machine: high sales that keep growing. To sustain the profits, there needs to be a moat which will prevent competitors from attacking thus creating a defensible franchise. Eventually, the product must become a near-monopoly with high barriers of entry. It is this which leads to creating exponential growth and an enduring great company.” To this, I would add a 5^th M: Multipliers. Leaders need to think about catalysts that can deliver exponential returns for invested efforts.

Centennials Habits: Alex Hills’ book discusses the 12 habits of great, enduring organisations. The key message: combine a stable core with disruptive edges. Lasting success comes from maintaining an organisation’s core culture while also driving change at the edges. Here are the 12 habits.

Stable core

Purpose
- Habit 1: Build your north star
- Habit 2: Do it for the kids’ kids
Stewardship
- Habit 3: Have strong roots
- Habit 4: Mind the gap
Openness
- Habit 5: Perform in public
- Habit 6: Give more, get more

Disruptive edges

Experts
- Habit 7: Be porous
- Habit 8: Shake all trees
Nervousness
- Habit 9: Get better, not bigger
- Habit 10: X-ray everything
Accidents
- Habit 11: Make time for random
- Habit 12: Break bread

Profits, while pivotal, can be fleeting in a marketplace rife with established competitors and startups. This underscores the need for businesses to craft a long-term vision – ensuring profits are sustained, protected, and grown. Herein lies the essence of the “profipoly” mindset – a blueprint for exponential, forever, profitable growth with a profits flywheel. Modern leaders, tasked with both present and future responsibilities, need to solve the mystery of today’s missing profits, and also lay down robust foundations for future profit engines, thus building a profipoly.

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