How to turn online sales into a profit

What a beautiful thing online retail is. A growing customer base, soaring sales even during the bleakest times on the UK high street… ecommerce is a virtual, halcyon world of opportunity. It’s a sure thing, right?

Well no, actually. Looks can be deceiving. Stellar online retailers such as Amazon, Asos and Net a Porter are in a minority. Turning clicks into a decent profit is surprisingly difficult, and many of those that are profitable are unsure of how to grow and stay that way.

However, research published next Monday by online services supplier eCommera - Balancing the online highwire: how to grow and make money - highlights the reasons why many retailers are struggling to make cash from - and, equally crucially - grow their ecommerce businesses.

Michael Ross, eCommera co-founder, says the importance of online growth is being overlooked by many of the larger brands in particular. Many, he says, are flattered by their volume of sales and overlook profitability. As such some big retailers’ online businesses are simply maintaining the equilibrium. If you’re a household name then it’s reasonably easy to achieve a steady stream of online traffic and maintain decent sales figures. The hard work is constantly looking at ways to boost trade.

The online challenge

Part of the challenge lies in the adolescence of online compared with the centuries-old tradition of good old-fashioned bricks-and -mortar shopkeeping. Ross says: “With physical retail, the model is mature, but with online it’s very early days. There aren’t any benchmarks and you end up with a huge divergence in what people are doing.”

The way in which retailers make money also differs vastly between online and offline. In the latter, it’s about the relationship between gross margin, rent and staff that drive an individual store’s profitability. Online economics are driven by profit per order and the volume of orders. Spend more on driving people to your site to buy a product than the gross margin that product makes, and it’s easy to see how quickly your profitability can disappear in a puff of smoke.

But the world of trading online is vastly complicated. If you think of a physical store portfolio, a retailer will know precisely from one week to another which stores are performing and which are not. From there you can drill a little deeper and find out why.

No such luck in cyberspace. As TM Lewin home shopping director Andrew Mossman says: “It’s challenging. Compare it to a shop - for me online, I have to spend all my money upfront to get people through the equivalent of our door. You have to have good data and know exactly what is happening and when.”

Tim Woollias, ecommerce and marketing director at online photographic retailer Warehouse Express, agrees:

“It is getting more complex and there is an increasing requirement to be sharp on analysing performance in as broad a way as you can.” Another issue is the sheer amount of information that etailers have at their fingertips. “The availability of data has probably developed faster than people’s ability to best use that data,” says Woollias.

A question of profit

To understand how to be profitable, retailers really need to get down into the detail. Space NK head of ecommerce Nadine Sharara says: “The challenges are about using all those pieces of information to give you a holistic view of how your business is performing. We believe in doing the basics right down to product level. We get down to the nuts and bolts of the marketing costs per channels and this helps inform where we go for customer acquisition.”

Woollias says that Warehouse Express focuses on four key areas of data at once: site analytics, competitor price and availability, marketing cost data and in-house data on sales and margin. By tying in multiple sources of data into one view, the business can make vital decisions quickly and efficiently. “For instance we know when and if we don’t need to react, if we see that a competitor hasn’t got a product in stock,” he explains.

Proper measurement is critical to drive profitability and growth online. Part of eCommera’s report comprises research results from interviews with 101 ecommerce directors. The results showed a surprising lack of awareness from some about the importance of measurement - be it marketing performance, marketing channel profitability, product profitability, customer profitability or even overall online profitability.

Of those surveyed, 16% never review customer satisfaction and 18% do not analyse marketing performance. In terms of overall profitability, 12% only reviewed it annually while 6% never reviewed it at all. Ross says: “You need to understand on a weekly basis what is making you money.”

Made to measure

But even among those who do measure profitability regularly and across their online businesses, there is still a lack of certainty about exactly what should be measured and what the best overall indicators of online profitability are.

“Measurement needs to be done in a way that drives action,” explains Ross. “There is a lot of measurement for the sake of it.” He advises retailers to distinguish between the “inputs” - those factors that can be controlled such as price competitiveness, availability and so on - and the “outputs” - those factors that are consequences, such as the conversion rate or the order value. “You need to be clear about what you can influence and measure that rather than sit around talking about the stuff you can’t,” says Ross.

Equally important in boosting overall ecommerce profitability is to understand how customers are behaving. What are they buying? How often are they visiting without buying? What is their average spend? How many times do they view a product before buying?

PricewaterhouseCoopers retail and consumer leader Mark Hudson says online success has a lot to do with customer targeting. “The more successful online retailers are doing more of that and those are the ones that are growing sales. There is a correlation between those who are growing online sales the fastest and those that are investing in understanding how to reduce the cost of getting customers to their sites and increasing conversion rates when they get there.”

That’s not to say any of this is easy. Woollias says that despite the work the retailer has done on RFM (a marketing analysis technique that analyses customers’ specific activities when they shop online), “we still have work to do in understanding customer behaviour within specific segments”.

A dark art

The trouble is, those with the very best practice are inclined - unsurprisingly - to keep their art to themselves. “People do keep quiet about it,” says Hudson. “It’s a bit of a black art and a source of competitive advantage.” Ross agrees: “You would need to be Hercule Poirot to be able to unpick what Asos are really doing.”

Asos is one of a handful of retailers that are taking the online world by storm. When asked to pinpoint what it is that makes this particular brand so successful, Ross refers to three key points: “Firstly it has a real command of profit and loss and what drives it. Secondly, it understands factors that drive growth such as continuous customer acquisition and retention and range expansion, and thirdly, it’s about trading; it’s an expert on the day-to-day turning of stock into cash and how to make money and grow without ending up on the stockpile.”

But it’s also important to remember the significant progress that has been made throughout the online sector in a comparatively short space of time. Woollias thinks back to as recently as five years ago in his previous role at Comet. “Back then we weren’t looking at product level profitability with a full data set. The ability to tie in multiple sources of data into one view has been the biggest development.”

Sharara agrees: “Traditionally, information came from different systems. You had different departments with different KPIs and different metrics. Now the tools we have mean it is becoming easier.”

Despite this and countless other examples of how online has developed, Ross warns there are still many retailers that are trundling along, blinded by the strong sales ecommerce has enjoyed to date. “It’s time for a wake-up call. Those with a lazy proposition without a clear point of difference will start disappearing and we will see a real reshaping of the landscape,” he warns.