E-commerce profitability is driven directly by digital experience. Many e-commerce operations are not profitable, and the key to profitability comes from repeat customers. To get more repeat customers, we need to fix broken digital customer experiences, especially when crossing channels from social media to the brand site.
The traditional retail pricing and fulfilment model was designed around in-store shopping. There is no need to pick, pack or ship individual orders. No need to track for late goods nor worry about individual shipments getting damaged in transit, and returns are on average only 9%. In contrast, for e-commerce, these tasks are performed by the retailer or brand, at its expense, and returns are typically over 20% — and much higher in some sectors.
As a result, 44% of pure-play e-retailers report they are unprofitable, compared with only 20% of traditional store retailers. This recent research, conducted by Ipsos for Publicis Sapient and Salesforce, mirrors our own analysis and shows that first-time e-commerce purchases run at a loss due to high customer acquisition cost (CAC) and fulfilment. On average, brands are losing $29 for every new customer acquired. Unfortunately, as e-retailers come under increasing pressure, the Ipsos research reports that 69% of e-retailers are struggling to make the investments required to improve profitability, versus 39% for traditional retailers.
However, it is clear that investment is needed. CAC seems to only go up, and current inflationary pressures make many aspects of running an online business more expensive, especially last-mile, individual deliveries. The Ipsos study concludes that retail decision-makers are prioritizing digital customer experience (53%) and omnichannel commerce (50%) as they believe it offers the best chance to increase e-commerce profitability.
And they’re right: The quality of experience directly impacts a customer’s likelihood of returning to purchase again and, in so doing, becoming profitable. This is all the more important because shopping for many consumers has shifted to the edge, especially social, but customers have a clear preference for buying on the brand site. Crossing channels invariably breaks the experience, and crossing from social to the brand’s site is frequently a poor experience.
The implications for brands and retailers are significant:
1. Discovery on social + purchase on brand site is good news for e-retailers.
Almost half of customers like using social media to discover new products, while only 12% think it’s a great place to buy. Our recent free report, “The State of Social Commerce 2022,” also showed that almost three-quarters prefer to shop on the brand site.
This preference is good for brands as it gives the opportunity to focus on collecting first-party data on the brand site. By contrast, where brands elect to use social checkout, the social network retains the rights to the customer data and the consent to market. This makes it very hard to turn a customer acquired via a purchase on a social network into a repeat customer. In fact, you can argue that you didn’t acquire a customer at all — the social network did.
Interestingly, our research reveals that two years on from the launch of Instagram Checkout, one-third of the launch brands (including Prada, Dior and Ouai Hair) have stopped using it and are now referring traffic to the brand site. So it’s not just customers that prefer this pattern of discovery on social and checkout on the brand site, some brands are beginning to reject social checkout.
2. The customer acquisition cost is high and will probably get higher.
As we have highlighted already, CAC is typically higher for online shoppers. It is true that more expensive items with an average selling price (ASP) over $200 can often be more profitable than in-store, but overall, our research clearly shows first-time conversions are not profitable due to the acquisition costs of -23% gross margin. But the profitability of repeat purchases is a completely different picture at +27% margin. This reinforces the importance of capturing personal data (so you can convert a first-time shopper into a repeat customer) and delivering a great digital experience irrespective of where the customer starts and finishes their shopping journey.
3. The never-ending first-time shopper.
Another essential learning for brands is the continuing first-time behavior of social commerce shoppers. If shoppers buy using social checkout, then every time they buy, they are effectively a first-time customer — with the full customer acquisition cost and the associated loss that results. The parallels with selling on marketplaces are striking: volumes but not margins and no ability to market to the customer or rights to use the customer data.
Actions for Brands
The trend for discovering on social and buying on e-commerce sites is good for brands, so to profit from this trend and increase margins, here are our top recommendations:
1. Always have an eye on the repeat sale.
At every relevant opportunity, brands need to capture customer identity and consent data. In particular, capturing an email address is critically important. Retargeted advertising looks to become progressively harder as third-party cookies are phased out, making it difficult to tempt visitors back to your site. Email is a well-proven and cost-effective way of building relationships with customers — and to drive customers back to purchase.
Providing great service is also critical when trying to get the second sale. We know that customers choose to spend again based on price and previous experience. So it’s critical that first-time purchases go off smoothly, and any hiccups are used as opportunities to deliver exceptional and memorable service. These “moments of truth” cement a relationship with your brand and lead to brand advocacy and future purchases. It is also worth remembering that if you let a customer down, you only have a 13% chance of a repeat purchase (Temkin Group).
2. Fix the experience for traffic coming from social.
Our recent “State of Social Commerce 2022” report shows that 81% of customers complain of poor landing experiences when referred by social channels.
Clicking through to the brand site from social is a very hit-and-miss experience. This includes: product inconsistencies, broken links, inventory issues, and also just a disconnected experience as they transfer from a rich social environment to a functional product detail page.
The product detail page, if not properly optimized, is often a major revenue leak for traffic from the edge. Indeed, our research shows that 14% of e-commerce site revenue is lost due to poor landing experiences. To fully optimize the landing page, you need to connect social data, experience data, and inventory data to provide the alerts and insights needed to optimize e-commerce landing pages on the fly.
3. Think carefully about which products to promote on social media.
Don’t promote low-stock, fast-moving items on social media. If you do, you are likely to run into inventory problems. Promotions drive increases in traffic and create knock-on availability issues. Customers have an expectation that promoted products will be available, and when they are not, they are disappointed. This disappointment can transform to outright frustration if the order is completed on social media and then, due to synchronization issues, the order is canceled post purchase.
Clearly, increasing the e-commerce profitability is a key concern for many brands and retailers. The good news is that it’s all fixable, and there are some low-hanging opportunities which can make significant reductions in customer acquisition cost by plugging revenue leaks. It’s time to start thinking about what happens after customers click on a social post or ad and deliver a great experience on the brand site that will have them coming back for more. The link between experience and e-commerce profitability has never been clearer.