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Understanding the true cost to serve

The boom in the e-commerce industry over the last 10 years has led to a saturated marketplace, with retailers facing competition from every angle: pureplay, omnichannel and Direct to Consumer.

This saturation has resulted in a fiercely competitive marketplace, and will be worth over €200bn (£178bn) in the UK by the end of this year, as retailers fight doggedly to defend and gain market share. This is harder than ever before though, as millennials become increasingly less loyal.

This has added to the list of woes retailers are already facing. Not content with a struggling high street, political uncertainty and increasing supply chain costs, retailers now have to battle each other online. With high sales targets to meet, many retailers have therefore looked to incentivise shoppers by offering them deals to get sales over the line – be it heavily discounted goods or super-fast delivery.

But while this may placate revenue targets, it eats heavily into profit margins. Whilst a discount benefits the end buyer, it doesn’t benefit the supply chain, which expects its slice of the pie on every sale. So, how can retailers balance the cost to serve, and what do they

need to do to remain profitable in a crowded market?

Understand the supply chain

Before implementing any discount or incentive programme, supply chain costs need to be understood, as too many retailers fall into a trap of cutting prices and then being stung by misjudged margins. You only need to look at ASOS’ profit warning last November to see the damage that a lack of visibility can cause – ASOS’ shares fell 37.5% due to the warning and the company put it down to the number of promotions it offered in a bid to compete with the rest of the market.

As seen above, e-commerce businesses can often work in a siloed environment, meaning marketing, sales, IT are all working independently, yet are adding costs to the supply chain, as PPC, logistics and retargeting all eat into profit margins. If an item or unit is discounted, these costs do not change, which is where profit margins are eroded.

Having a common operating picture that identifies all costs in one place can enable the business to work together to establish a break-even point and reassess any parts of the supply chain where costs can be reduced. Online retailers need to carry out detailed analyses of its e-commerce activity on a regular basis to ensure that it is able to truly understand its true performance of product lines, product types and discount offers.

Think about buyer behaviour

Consumers are fickle. Incentivising people to buy is all well and good but parameters need putting in place before implementing a discount strategy. For example, in order to increase purchases, an e-commerce retailer may offer free delivery, removing the minimum order-value threshold. On the surface, the numbers may look positive showing an increase in orders placed, however, order values will also typically fall through the floor. With no minimum requirement for free delivery, consumers aren’t obliged to consider shipping costs when purchasing. This will result in multiple, spread out impulse orders that don’t cover the cost of fulfilment, as outlined above.

If a shopper orders a packet of AA batteries for £1.99 for example, any e-commerce business would struggle to fulfil this order with a decent profit margin or any profit at all. The cost of picking, packing, logistics and delivery soon add up, and, as well as this the business will struggle to operate efficiently due to a huge spike in the numbers of orders, making it difficult to meet delivery deadlines and obligations  to customers. At the end of the day, the organisations are sacrificing a massive chunk of profit because they are trying to motivate more people to buy as opposed to buying more sensibly.

Online retailers should consider whether there are better mechanisms that could be implemented to commit people to buy that will not have such an impact. In days when loyalty is diminishing, other value-adds, like personalisation and customer experience need to come to the fore, as this intangible value add creates a more pleasurable buying experience, increasing the likelihood of return buys.

Once a business has this insight and understanding, it needs to then put the measures in place that will enable an e-commerce team to identify problems before they happen, stopping margin erosion and ensuring profitability. These reporting tools include AI, machine learning and big data which can pick out trends and behaviours, flagging up opportunities or threats as they’re happening.

Admittedly, more needs to be done to develop software that represents e-commerce trends and issues, but, as seen above, small, manual steps can be taken in the meantime. The breaking down of silos and holistic view of supply chain costs is paramount to this, and without this visibility, retailers will struggle to truly understand the cost to serve.


Gavin Masters, industry principal, Maginus

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