PxL: Transforming eCommerce P&Ls

Published July 11-17, 2023

What It Means

Globally, eCommerce companies are facing challenges in sustainable profitable growth as the era of growth-at-all-costs with funding on tap has ended. Improving (or becoming) profitable means two things: how to grow revenues (and therefore gross margin) and how to keep costs under control. Revenue increase comes from both sales growth from existing customers and via new customers. Among the costs, one of the biggest heads is typically marketing spends – acquisition of new customers via digital platforms. So, the most important levers for profitable growth come down to getting more from existing customers and reducing CAC (customer acquisition cost). In this series, I will discuss how B2C/D2C brands can do both and thus transform their P&L from low/no profits to high and sustainable profits.

I am going to take the financials of two public ecommerce companies as examples so we get a sense of the opportunity. They are among the top-ranked public eCommerce companies.

This is from Chewy, whose mission is “to be the most trusted and convenient destination for pet parents and partners everywhere.” Q4 below refers to the Oct-Dec 2022 quarter (13 weeks ending Jan 29, 2023).

This is from Nykaa, India’s leading beauty products and fashion brand. Q3 below refers to the Oct-Dec 2022 quarter.

Here is a comparison of the numbers for both companies.

The few important numbers to focus on:

YoY revenue growth (Nykaa doing quite well)
Advertising and Marketing as % of Gross Margin (mid-20% range for both)
EBIDTA

Now imagine if the companies could grow revenue even faster by reducing marketing costs: the EBIDTA on impact could be significant. The actions needed to accelerate growth AND reduce marketing spends are the key to transforming the P&L.

If a company can grow revenue (and therefore gross margin) 10% faster (normalised GM growth from 100 to 110), and halve the marketing spend, the EBIDTA impact is significant. In the case of Chewy, EBIDTA will increase by $76 million + $91 million = $167 million (a 1000% increase). In the case of Nykaa, EBIDTA will increase by Rs 634 million + Rs 822 million = Rs 1456 million (a 200% increase).

Consider a typical eCommerce company.

Revenues: 100
Gross Margin: 40
SG&A: 25
Marketing: 10
EBIDTA: 5

Now, what happens if we grow revenues (and GM by 10%) and reduce marketing spends by 50%?

Revenues: 110
Gross Margin: 44
SG&A: 25
Marketing: 5
EBIDTA: 14

EBIDTA almost trebles!

This is what I mean by “transforming the P&L.” So, how can ecommerce companies do it?

I will call the new set of ideas: PxL – transforming the P&L. They build on the Building High-Growth Profitable D2C Businesses and the ProfitXL idea. [PxL could also mean supersizing Profits: Profit + XL; making Profits extra large.]

Theory

An eCommerce business has two categories of existing customers: Best and Rest. The Best customers are engaged and frequent buyers, while the Rest are less engaged or even disengaged. Then, there are the Next customers – those whom the brand acquires, typically via marketing spending on Big Adtech platforms like Google and Meta. Best Customers are important because even though they are a small percentage of the overall base, they account for a large share of the revenue and even greater share of the profits. [I have discussed this framework in my Velvet Rope Marketing series as part of my marketing essays.]

The challenges for an eCommerce brand are the following:

Best customers: How to increase share of wallet?
Rest customers: How to get them to engage more with the brand?
Next customers: How to reduce “AdWaste” by reducing or eliminating wrong acquisition and reacquisition?

eCommerce brands have three ways of interacting with their customers:

Properties: their website or app, where the transaction gets done
Push Channels: the ways to bring their customers to their properties
Plans: the media plans which target new (and some existing) customers

The PxL approach advocates does the following:

Best customers: remove friction in their engagement and ensure omnichannel personalisation and the ‘perfect’ next action by maximising zero- and first-party data
Rest customers: build better hotlines via the push channels to reactivate many of them
Next customers: get as close to zero-CAC acquisition by driving referrals, reactivating instead of reacquiring customers, and using data from Best customers to sharply target acquisition

As it turns out (and we know because we are customers), most eCommerce journeys suffer from broken experiences. PxL is about beautifying every broken profit killing customer experience on properties and push channels to create a profipoly (profits monopoly). The focus of PxL is beyond just retention and engagement; it is about directly improving the economic engine which drives sales growth, cuts wasteful spending, and thus drives greater profitability. What is the point of engaging and retaining customers if they do not transact?!

The most important idea we will discuss in the PxL journey is Email Shops (as part of Inbox Commerce). By moving the conversion funnel from the website and app to the inbox, Best customers can be persuaded to transact more and Rest customers can be reactivated and engaged, and moved along their transaction journey. At every step, the focus must be on frictionless and personalised experiences. Email shops, powered by Email 2.0, combined with other innovations like Atomic Rewards, Full-stack Martech, AI-enriched product catalogs, and Progency can transform eCommerce businesses and help them transform their P&Ls.

Metrics

Let’s begin by taking a look at the eCommerce funnel and where the profit killing and loss creation points are.

Smart Insights has this funnel view:

ChatGPT offered this overview:

Website or App Traffic: This is the total number of visitors that arrive at your site or app. The success of this stage is often measured in terms of growth in absolute numbers, as well as the sources of traffic (organic, direct, referral, paid, etc.).
Bounce Rate: This is the percentage of visitors who leave your site after viewing only one page. A typical benchmark for bounce rate is between 20% to 45%. Higher rates might indicate issues with your landing pages, while lower rates suggest that visitors are engaging more deeply with your site.
Product Page Views: A common benchmark for the percentage of website visitors who actually view a product page is 60-80%.
Add to Cart Rate: This is the percentage of visitors who add a product to their shopping cart. Average benchmarks for this stage can range anywhere from 5% to 15%.
Cart Abandonment Rate: This is the percentage of visitors who add a product to their cart but do not complete the purchase. On average, this rate is quite high, often around 60% to 75%.
Conversion Rate: This is the percentage of visitors who complete a purchase. Average eCommerce conversion rates typically range from 1% to 3%. However, it can go as high as 5-7% for well-optimized sites or specific industries.

The numbers are quite similar to the Smart Insights funnel.

Now, let’s add an additional layer. How do people come to the website (or app)? They can come on their own (branding), via search engines or social media (organic or paid), or via push messages (email, SMS, push notifications, WhatsApp). For existing customers, email is one of the most important channels to drive traffic. (In app-heavy markets like India, push notifications also work very well as long as they are not blocked.)

Of the emails sent, open rates are about 10-20% and clickthrough rates are typically 10% of the opens, which means CTRs are 1-2%. Also, brands send emails to the more engaged consumers on their list to not negatively impact their domain reputation, leaving about 60-70% of the list untouched. Putting it in easy-to-understand numbers:

Let’s say a brand has a list of 10,000 email IDs
Assume 70% is dormant (inactive)
So, they send emails to 3,000 email IDs
Of these, 10% open – about 300
Of these, 10% clickthrough – about 30
Of these 30 site visitors, about 15% will add an item to cart – so about 4
Of these, 3% buy – which makes it 1

So, 1 person buys from a list of 10,000 email IDs (from a single email campaign).

eCommerce brands do multiple email campaigns in a month, visitors also come through other methods (memory, SEO, SEM, SMS, and so on). From conversations with US customers, what I have gathered is that email accounts for over 20% of revenues. ChatGPT: “As of my last training cut-off in September 2021, it was common to hear that email marketing could contribute anywhere from 10% to 30% of a company’s total online sales.” Bard: “According to a study by Epsilon, email marketing generates an average of $38 for every $1 spent. This means that email campaigns can account for a significant portion of revenue for ecommerce companies. In fact, some companies report that email marketing accounts for up to 50% of their revenue.”

Profit Killers – 1

I asked ChatGPT for the top 5 profit killers for eCommerce brands:

High Customer Acquisition Costs: Acquiring new customers is often much more expensive than retaining existing ones. If an eCommerce company is heavily reliant on paid advertising or other costly acquisition methods, and it doesn’t balance this with strong customer retention strategies, this can quickly eat into profits.
Cart Abandonment: When shoppers add products to their cart but do not complete the purchase, this is a missed sales opportunity. Cart abandonment can be caused by many factors, such as unexpected shipping costs, a complicated checkout process, or a lack of payment options.
High Return Rates: Returns are a fact of life in eCommerce, but a high return rate can be a major profit killer. This is particularly true in industries like fashion, where return rates can be very high. The cost of processing returns, including shipping, restocking, and customer service, can quickly add up.
Poor Inventory Management: Both overstocking and understocking can be costly. If a company has too much inventory, it risks having to sell it at a discount or even write it off entirely. On the other hand, if it doesn’t have enough inventory, it risks losing sales and damaging customer relationships.
Low Conversion Rates: If an eCommerce company is successful in driving traffic to its site but unsuccessful in converting that traffic into sales, this can be a major profit killer. Low conversion rates can be caused by many factors, including poor website design, uncompetitive pricing, or a lack of customer trust.

Here is my take on the profit killers for eCommerce brands. (I have excluded returns and inventory management.)

Customer Acquisition, Retention, and Engagement

Not making creating a “profits monopoly” (profipoly) as a stated goal for all teams
Not switching focus from new customers to existing customers
Not thinking beyond the buzzwords of engagement and retention
Not measuring AdWaste and making marketing accountable for wrong acquisition and reacquisition
Not doing reactivation (and focusing instead on reacquisition)
Not identifying Best Customers correctly; or not segmenting right
Not measuring against net predicted revenue (based on CLV)
Not creating differentiated experiences for Best Customers
Not leveraging the full potential of referrals – especially from Best Customers
Not using Best Customer Genome to target new acquisitions
Not using micro-incentives (Atomic Rewards) to solve attention recession & data poverty

Data Management and Utilisation

Not creating a unified customer view, and leaving customer data siloed
Not matching product catalog with unified customer data to drive the right recommendations
No measuring and improving Earned Growth, and not making it the new North Star Metric
Not doing a customer-base audit (as recommended in Peter Fader’s book)
Not tracking what different customer segments do outside the brand’s properties

eCommerce Technology and Innovation

Not having a good search solution
Not applying recommendations in all channels
Not enriching product catalog with AI (and relying only on humans for descriptions)
Not moving conversion funnel closer to customers (e.g., AMP in Email, Inbox Commerce)
Not using the full power of new 2-way interactive channels (WhatsApp, RCS)
Not unifying channels, and staying omnichannel/multi-channel
Not using conversational search to help customers refine search results
Not using STO (send time optimization) for sending messages
Not using Generative AI for content generation

Profit Killers – 2

There are 5 key interventions which can help brands convert profit killing moments into profit creators.

Addressing Dormant Users: The 60-70% dormant users in the brand’s email list represent significant potential for reactivation. These are customers who have previously engaged with the brand but haven’t opened emails in many months. Often, brands try to reacquire these customers through costly adtech platforms, but could reactivation via email be a more cost-effective solution? By identifying why these users became dormant (by tracking their cohort-level activity across the Internet) and tailoring email marketing strategy accordingly, brands could reactivate a substantial portion of these users and realise substantial savings.

Engaging Non-Openers: With as many as 90% of users not opening emails, there’s a massive opportunity to increase engagement rate. What strategies could entice these users to open emails from the brand? Doubling the 10% open rate could lead to a proportionate increase in transactions. Consider the use of gamification in the email Subject through Atomic Rewards (Mu) to pique interest and drive engagement.

Incentivising Non-Clickers: The percentage of non-clickers in emails is similarly high, hovering around 90% for most brands. What would motivate these users to click through? This is where innovative solutions like inbox commerce via AMP-powered email shops could revolutionise the clickthrough rate. By providing a direct, seamless path to create a cart and where possible purchase within the email itself, brands can significantly increase their conversion rate.

Improving Website and App Engagement: On the brand’s eCommerce website and app, better search results and personalised product recommendations could encourage more users to add items to their cart. Considering that only a third of those who view products add something to their cart, improving this figure could substantially increase sales. Brands should invest in AI-ML solutions to refine your search capabilities and create hyper-personalised recommendations for each user.

Reducing Cart Abandonment: High cart abandonment rates, often around 60-70%, are a major obstacle for many eCommerce brands. Can the use of AMP emails fast-track transactions and reduce these abandonment rates? By including tailored recommendations based on browsing and interest history, or triggering emails based on merchandising events like new arrivals, price drops, back in stock and category affinity, brands could motivate more users to complete their transactions.

Every stage of the customer journey offers opportunities for optimisation. Any missed action can act as a profit killer, forcing eCommerce brands to invest heavily in new acquisitions when they already have existing customers ripe for re-engagement. Brands could be spending up to a quarter of their gross margin on marketing. Additionally, by creating differentiated experiences for their most loyal and profitable customers (Velvet Rope Marketing) and leveraging referrals more effectively, eCommerce companies can significantly reduce marketing spend and increase customer loyalty.

Most of these are themes I have covered in my marketing essays over the past three years.

So, how do we solve some of these problems and transform eCommerce P&Ls? This is where the PxL methodology can be applied to boost brand profitability.

PxL Methodology

The ProfitXL (PxL) framework focuses on three categories of customers: the top 20% Best customers, the 80% Rest customers, and then the Next acquisitions. This is a categorization which can work across eCommerce companies. Key to this is segmenting customers by their lifetime value.

Best Customers: The eCommerce business’s marketing team must focus on these customers. They can drive 60% of revenues and 200% of profits. A dedicated team (SBU) must be created to look at how to create differentiated experiences for these customers. Every friction point that prevents completion of a transaction for these customers must be eliminated. If only a limited quantity of a new product is available, that product must be first offered to the Best customers. Velvet Rope Marketing (VRM) is a strategy that emphasises creating highly personalised and exclusive experiences for a company’s top-tier customers. It’s akin to giving these customers a VIP pass that allows them access to perks, privileges, and experiences not available to the majority of customers. Here are some essays which discuss the Velvet Rope Marketing in greater depth:

Rest Customers: These are customers who while they generate some revenue could negatively impact profitability because of the marketing and servicing costs. This is where a brand should consider outsourcing management of these customers to a “Progency” (product-led agency) whose focus should be activate them, engage with them, and get them to create carts ready for checkout using the breakthrough innovation of Email Shops. As I wrote in Email 2.0: The Rise of the New Super App: “What Email 2.0 does is convert every email into a mini-app. So, while there may not be a single app with access to multiple services, the email inbox with support for AMP can provide a gateway to every conceivable service. Every brand can build its own mini-app in the emails they send. From search to browsing to chat, from cart management to making payments, from tracking deliveries to providing feedback – the possibilities of Email 2.0 are endless. AMP makes static emails come to life – thus elevating the power and potential of the inbox. The biggest boon is for eCommerce companies: by bringing the conversion funnel closer to the customer, it reduces friction and increases transactions.” The Progency should be given the list of users (email IDs) and incentivized on transactions or cart value created by these users. Additional reading:

Next Customers: This is where the biggest AdWaste is happening. Marketers are overspending on new customers because they are not focused on building deep relationships with existing customers. Marketers need to think of themselves as Chief Profitability Officers rather than as collection agents for Big Adtech. Referrals combined with Best Customer Genome-influenced targeted acquisition can bring down CAC substantially and free up 50% of marketing budgets to move to EBIDTA. More reading:

This then is the PxL plan: create 3 teams to focus on each of the Best-Rest-Next segments. The one-word missions for the three teams: Maximise (Best), Energise (Rest), Minimise (Next). Done right, there is no reason why eCommerce companies should not be able to drive an additional 10% upside on revenue (and gross margin), and a halving of spending on new customer acquisition costs. This will address the twin problems of low conversions and rising CAC, thus having a multiplier impact on EBIDTA, supersizing profits, and transforming the brand’s P&L.

Tomorrow’s World

In “Constructing the µniverse”, I had introduced Arun and Jeni. Arun is a consumer, and Jeni is a marketing manager at A1 Books. Let’s look at the impact the PxL program will have on their lives. We will assume Arun is one of the Rest customers of A1 Books and Jeni has outsourced to Progency the work of ‘energising’ Arun and making him transact. Let’s look at a few days in Arun’s life as he goes from a dormant customer to doing a purchase on A1 Books’ website.

Arun opens his Gmail inbox on his mobile and sees something interesting amongst the dozens of emails that stream in through the day. He notices the µ in the Subject of the email – he has not seen that before. And an interesting Subject line: “Open this for a never before email experience.” It is from A1 Books – a brand he has not interacted with in a long time because he was tired of seeing posters telling him to clickthrough for great deals. He opens the A1 Books email – and is it different! There is a Search box right at the top – he hasn’t seen that before in an email. There is a quiz about books – how can he resist that. He starts with that, answering the three questions that come one after another right in the email. And he notices the µ count increase as he answers correctly. Quite an experience – answering a quiz right inside the email.

Arun scrolls down further. There is a list of ten bestsellers with an “Add to Cart” option for each book. He likes a couple and adds them to the cart – which is being created as he watches right inside the email. He then notices something interesting – the list of books has changed – they are now recommendations based on the two items he has added to cart. Wow, this is cool, thinks Arun. He adds another book to his cart, and then remembers the title of a book a friend had recommended to him. He scrolls up to the search box, types in the name, and gets the book info right below – once again, all in the email. He adds it to the cart, which has now expanded to four books.

This is so exciting, feels Arun. He can search, browse, play, add to cart – all inside the email, without having to clickthrough to the website or open the app. And what is even more thrilling is how the email evolves as he does his cart additions – he starts to think of it as a “living email”.

He then decides it is time to checkout – it’s the first time in many years he will be buying something from A1 Books. He sees two options – go to the website to checkout or pay inside the email. He takes up the second option – he wants to see what all can be done within the email. Right below his cart, a form opens up for him to enter his address which he does. He is then asked for his credit card details which he enters (a message assures him of the security). And he is done! A message tells him that he will receive another email which will let him track the delivery right inside the email once again.

A few days later, Arun gets an email from A1 Books telling him about the delivery of his books, with a request for rating the service (in return for 20 µ). It also asks him for his preferences in books – all he has to do is to just tap on the categories he likes. Three taps, and he is done! So quick, so frictionless. He is delighted with the entire experience.

Jeni, the marketing manager at A1 Books, gets an alert that yet another customer has moved from the “dormant” category to “active.” She hopes Arun will become a Best customer soon! It has just been a few weeks since she went live with the Progency and Email Shops for the Rest Customers and she is already seeing a sharp spike in revenues from customers who hadn’t come to A1 Books in months or even years. She is already planning her own use of Email Shops for her Best Customers.

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