The Trading

Contents
• Welcome 03

Intelligence
• Making money online 04-08

• How are we measuring  09-14

online profitability?

• Google: priorities 15-17

Quarterly
to maximise online profit

• Spotlight on Amazon: 18-19

Is Zappos broken?

October 2010
Issue 2

Balancing the
online highwire:
how to grow
and make
money.

eCommera
eCommera is a specialist
retail-focused ecommerce
product and services
business.

We deliver robust and

flexible technology to
enable you to trade online,
combined with insight to
help you focus on profitable
action. It’s our blueprint for
your success.

We call it trading intelligence.

For further information –
Email simon.niesler@ecommera.com
or ben.mercer@ecommera.com

Call us on +44(0)20 7291 5800

Or visit www.ecommera.com

eCommera

Welcome to the second edition
of The Trading Intelligence
Quarterly
Online profits will become an
important aspect of a retailer’s
performance over the next few
years.
Overall retail growth is predicted to slow, so
growing online sales while optimising the profit
opportunity will become increasingly critical.
So far all the hype around online retail, and
customers’ growing appetite and sophistication
in purchasing online, has failed to materialise in
strong profits. Indeed for many standalone online
retailers profit remains an elusive target. While a
few such as ASOS and Net-a-Porter have shown
it can be done, most profit announcements are a
low key event and something of a disappointment.
Multichannel retailers rarely break out their
online profits but our experience indicates a real
lack of confidence in how to maximise profits.
The industry is so new that there are few models
of success to emulate and no real sense yet of best
practice.
We have seen three different types of retailer
uncertainty:
• The profitable who are not sure about how to
grow and stay profitable;
• The unprofitable who do measure their profit,
but are not sure how to turn it around; and
• The large number of retailers who fail to
properly measure their online profitability.
www.ecommera.com
03
It is this lack of awareness of profitability that
is most worrying to future online growth and
success. To realise that goal of strong, profitable
growth online, retailers must enforce rigorous and
sophisticated measurement of marketing, products
and customers.
This edition of The Trading Intelligence Quarterly
gives some answers to the crucial question ‘How
Can We Make Money Online?’ We offer this
advice based on our experience of working with
hundreds of online retailers. This is backed up by
our recent survey findings of over 100 ecommerce
directors which gives a fascinating look at what
measurements are being used… and, even more
importantly, not used.
We also assess the long term profitability of
Zappos, getting underneath its initial strong
profits to question their long term strategy. And
we are delighted to include insights on how to
make money from one of the great online success
stories - Google.
I hope you will find it an invaluable guide to
exploring how you can improve your online
profitability.
Andrew McGregor –
CEO and co-founder, eCommera
andrew.mcgregor@ecommera.com
How to make money online
Michael Ross, Co-founder and Director, eCommera
michael.ross@ecommera.com

Highlights
• Online retailers need to rethink their models of growth and
profit - the economics of physical retail cannot be successfully
replicated online.
• Data is critical to profits - properly gather and leverage data on
profits, customers, products and marketing.

Offline retailing has long been a lucrative and
profitable sector. As ecommerce gathers pace,
many retailers have assumed that they can apply
the same principles and make the same high profits
online. The numbers tell a very different story.
Many online retailers took a long time to get to
profitability (Amazon, Overstock, Zappos), others
are still trading but not yet profitably (Bluefly,
Figleaves, Ocado), many went bust without ever
making a penny (etoys, webvan, boo, pets.com).
It is increasingly clear that there are real differences
in how to make money from online retail
compared to physical retail. For retailers this is a
hard adjustment - the economics of physical retail
are well understood and the route to success tried
and tested but cannot simply be replicated online.
This article assesses how the three core economic
fundamentals of retail profitability differ between
online and offline:
• Store economics: The P&L of an individual focus on orders as the variable unit, rather than
store.
We then offer suggestions on how to crack the
illusive code to growing a profitable online
business.
1. Store Economics
Physical retail: Store economics in physical retail
means the relationship between gross margin,
rent and staff that drives an individual store’s
profitability - a formula known by every
successful retailer that makes their format(s) work.
Vs.
Online retail: The order is king - “store”
economics in the online world are driven by profit
per order and volume of orders.
In the offline world, the critical costs of rent
and staff are variable per store but fixed per sale.
Online, the critical costs are either variable per
order (picking, packing, packaging, postage)
or are crystallised per order (marketing,
promotions). Online profitability requires a
thinking of online as just another store.

• Growth: The dynamics and strategies for Cracking the code: store economics
profitable growth. The challenge is to get the right cost structure per
order: but there is no one right answer. Average
• Trading: The day to day dynamics of sales, order values for successful retailers can be £10
stock and margin. or £1000; some retailers charge for delivery and

eCommera
The Trading Intelligence Quarterly. How to make money online 04–05

returns, others do not; many retailers have Figure 1: The drivers of online profit
aggressive promotional campaigns and are
generous with vouchers, others never discount; Average
order value

I’ve seen very successful retailers with 1% Gross profit

per order
x

-
conversion rates, and unprofitable ones with 4% Delivery
revenue/cost
Gross margin

conversion rates. Trading profit -

per order
per order
Promotion
Marketing cost
cost per order
per visit
We advocate a 4-step approach to getting to the Gross trading
profit
x
-
Marketing cost
÷
right store economics: per order

Number of Conversion
x rate
orders

• Understand where you are today: many Online visitors

retailers simply don’t even look at an

ecommerce P&L, let alone one structured
around the underlying drivers (figure 1). 2. Growth

• Understand what happens to profit when Physical retail: Growth is driven by two
you pull different levers: for example, a free dynamics - (i) growth in square footage (i.e.,
delivery over £50 promotion will increase new stores or store expansion) and (ii) same
average order value, increase conversion rate store sales (like-for-likes). Once a retailer has a
and reduce delivery revenue. However, the successful format, growth is simply a matter of
key question is what it does to profit per order finding more locations.
and volume of orders. Understand the impact Vs.
of a voucher for new customers vs. increasing Online retail: Growth online is a new paradigm,
marketing spend per order. Understand the driven by building and nurturing a customer
impact of reducing retail prices vs. a targeted base.
promotion.

• Be prepared to make bold decisions to get to Zara has opened, on average, a store a day for
the right P&L structure for growth. Limit the last few years. Each store brings new footfall
vouchers, increase delivery charges, prune and new customers. The strategy may be hard
marketing spend. I’ve met a number of online to execute but is simple to conceive. Footfall - a
retailers who lose money on every order and given of the physical world where rent equals
then try to make it up in volume! guaranteed visitors - needs to be sought and
bought online. Retailers with offline brands
• Keep optimising: improvements to the site clearly get a base level of traffic “for free” but if
funnel, new payment methods, better on-site they don’t play in the online marketing world,
search, improved navigation, personalisation, they are simply leaving prospective customers for
recommendations will often have little impact their competitors.
individually but nudge conversion up over
time, with consequent impact on both volume
and profit per order.

www.ecommera.com
The Trading Intelligence Quarterly. How to make money online

Growth online is driven by three very different • Customer-product economics: understanding

dynamics: the roles of products in the customer lifecycle is
also critical. Products may have low sales but
• Customer acquisition - the number of new could be key to acquiring high value customers.
customers acquired in a period. Other products may look unprofitable but are
great add-on purchases. Mine on-site and off-
• Customer retention - the percentage of site search to identify adjacent categories which
customers who repurchase, their order can drive customer acquisition and retention.
frequency and spending pattern.

• Range expansion (unconstrained by shelf space) Using this analysis, retailers can understand their
which widens the customer acquisition net, optimal “zone of growth” - too high and it’s either
fuels repeat customer activity and drives higher unprofitable or unsustainable, too low and you are
basket values. leaving customers for your competitors. Again
there is no right answer but the smart retailers are
Cracking the code: growth clear about whether they are trying to drive cash,
Driving profitable growth online requires medium-term profit or long-term growth and can
sophisticated marketing optimisation: how much to then adjust their path accordingly. Too many
spend acquiring and retaining a customer, how retailers make the mistakes of benchmarking
much to spend overall on marketing and how best growth rates against retail like-for-likes, creating
to allocate this spend across various marketing unrealistic top-down targets, extrapolating from
touch points. historical rates or focusing too much on top-line
sales.
Building on the order economics above, we
advocate a 3-step process to cracking growth: Optimal retailer growth rate

• Marketing profitability: understand the Annual

growth
profitability of each keyword, affiliate, banner %
Too fast
and email, as well as the sensitivity of profitability (unsustainable)

to different attribution windows. In addition, Optimal zone

of growth
understand the incrementality of each marketing Too slow
event - just because someone clicked on your (under-
potentialised)
advert, doesn’t mean that they wouldn’t have
purchased anyway. All this is critical to
understanding the relationship between
marketing spend and new customer acquisition Actual Forecast

(the “supply curve” of customers).

• Customer economics: understand lifetime value

economics through mining the repeat purchase
dynamics. Translate this into a customer-driven
business plan which exposes the trade-off of
growth vs. profitability - i.e., what percentage of
lifetime value should be invested in customer
acquisition.

eCommera
The Trading Intelligence Quarterly. How to make money online 06–07

3. Trading Cracking the code: trading

Every category has its own trading dynamic - the
Physical retail: Trading offline means how to levers you pull day to day to optimise the trade-
make the day-to-day trade-offs between sales, off of sales, stock and margin. The dynamics
stock and margin. vary depending on the supply chain, lead time,
Vs. margin, minimum order quantities and product
Online retail: Trading online has the additional lifespan.
challenges of efficient buying and routing of
traffic, and managing product just in time. Some examples show how

Applying the trading dogma of physical retail Characteristics Trading New online
to online is guaranteed to sub-optimise profits. Category
of products challenges challenges
Retailers can make much better trading decisions if Beauty/ Using online
they properly leverage the data available to them: Long life Driving stock
jewellery/ data to
and low turn without
continuity optimise stock
obsolescence losing sales
fashion turn
• New information: retailers can distinguish
Sell-
between products that aren’t selling or aren’t Seasonal life
through i.e.,
Optimising the
Branded with upfront distribution of
viewed, ensure traffic levels are optimised and fashion stock
maximising
traffic to drive
evenly distributed. Retailers can understand cumulative
commitments sell-through
gross margin
price elasticity and product substitutability.
Using online
Data that is expensive or impossible to access Fast Short-life and
Stock turn and data to
(CMT) flexible
offline is typically free and easy to access online. fashion manufacturing
sell through de-risk the
supply chain

• New costs: the online world brings new and Add-on

Low purchases Managing
different costs. The fundamental challenge is Electronics margin and and optimising product
that it is now remarkably easy to lose money on obsolescence promotions or profitability
bundles
a product by spending more money driving
traffic than you generate in gross margin.
The key to online profitability is to leverage the
• New levers: traffic can be turned on and off. new data, understand the new costs and take
Depending on the category (and product advantage of the new levers to make better, faster,
substitutability) traffic can be elegantly rerouted more nuanced trading decisions.
to products that are in-stock, overstocked or
high margin at the click of a button. Products Successful retailers:
can be offered with differing “promises” from
pre-orders to back orders. The reality is that • Understand product profitability: the key is to
customers will commit to products they’ve understand which products make money, which
never touched (from an iPad to a designer bag) lose money and which make nothing.
and will wait for the products they want.
Display is now decoupled from delivery.

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The Trading Intelligence Quarterly. How to make money online

• Identify appropriate actions that distinguish

between different zones of profitability
(figure 2). Marking down product for
clearance can be either pointless (if customers
aren’t viewing it) or expensive (vs. a targeted
marketing campaign).

• Organise to take action: ensure that budgets,

processes and decision making facilitate the
right trading decisions.

***

As retailers increasingly look online to drive both

growth and profit, the pressure to understand the
fundamental drivers increase. We believe this
requires retailers to rethink their model, or risk
systematic underperformance.

Figure 2: Understanding product profitability

High Medium Low Zero Negative

106%.................................................................................................................................................................
100% .................................................................................................................................................................

80%
Cumulative profit

60% Manage Low views, Stock no views Views no sales Products not
availability in stock profitable

40%

20%

0%

Products arranged by profitability (descending)

eCommera
 08–09

Ecommerce research findings: How are

we measuring online profitability?
Barry Wyse, Retail Practice Leader, eCommera
barry.wyse@ecommera.com

Highlights
• High growth online retailers value profitability measurement, using more
sophisticated techniques and focusing their efforts on measuring the
things that really matter. Our survey findings indicate that if the basics of
profitability are done well then growth is underpinned.
• In contrast online laggards do not value measurement at all, in particular
failing to measure customer profitability, customer satisfaction and
marketing performance.
• Even within the high performing retailers, there is a wide discrepancy in
what is being measured, and everyone is still trying to work out what the
best indicators of online profitability are.

Bill Hewlett, the co-founder of Hewlett-Packard,
is reputed to have coined the phrase: “You cannot
manage what you cannot measure.” In online
retail, this is especially true. As discussed before,
underlying the three economic fundamentals of a
profitable online business is the need for rigorous
measurement of profitability - understanding
what happens to profit when you pull different
levers; and understanding customer, marketing
and product profitability in order to allocate
spend to maximise returns.
The focus of this research was to understand how
retailers are currently measuring their profitability
online - from their web site to specific products,
customers and marketing activities.
The industry is too immature to yet know what
best practice measurement should look like.
However, it is clear that higher performing online
retailers are more sophisticated and focused
in their measurement of profitability. We can
therefore suggest the basics of good and bad
profit measurement.
Research methodology
The data for this report is based on independent
research undertaken by Coleman Parkes from
interviews with 101 UK Ecommerce Directors
during September 2010. All companies had
to have annual online turnover in excess of £3
Million, 51 companies had online turnover of
£3-20 Million, and 50 companies had online
turnover of over £20 Million. Respondents were
Ecommerce Directors or the person in charge of
Ecommerce.

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The Trading Intelligence Quarterly. How are we measuring online profitability?

Research findings: What Can We Learn About 2. How Regulary To Measure

Profit Measurement?
How regularly is profit from your website measured
1. Growth Rates (taking into account margin, marketing and delivery
cost/revenue)?
What was your year on year growth for ecommerce
last quarter? Monthly 42%

Quarterly 22%

Growth rate Total

Weekly 13%
%

Leaders Over 40% 22 Annually 12%

Players 21% - 40% 30 Not at all 6%

Daily 5%
Cruisers 1% - 20% 35
0 5 10 15 20 25 30 35 40 45
Laggards No growth/decrease 13

Insight: Relatively few are measuring web site

Insight: Almost half of respondents are growing profitability frequently enough, ideally on a
at a rate of less than 20%. weekly or daily basis.

As online growth has slowed, there is an
increasingly heard industry “wisdom” that
suggests online retailers need to accept lower
growth rates and focus their efforts on customer
retention. This misses a critical industry dynamic.
Whilst the overall market growth has slowed (a
mathematical inevitability), the absolute growth
in £s is still significant. Moreover, for the newer
entrants, they are able to win customers from
competitors - customer loyalty is more nuanced
online and most retail customer journeys start on
a search or quasi-search site.
Most retailers recognise the value of measuring
the true end-to-end profitability of the ecommerce
channel. The challenge is measuring it at the
optimal frequency. This should be driven by
category and scale, and aligned with how often
you need to take action and respond to what’s
happening.
• Good practice: daily/weekly measurement of
profit will ensure that retailers are quickly
aware of any positive and negative trends.
• OK practice: monthly measurement is
acceptable for early stage and small businesses,
or slow-moving categories.

• Bad practice: measuring quarterly/annually/

not at all is a high-risk strategy. Retailers run
the risk of making “local” decisions related
to pricing, marketing or promotions that
sub-optimise profit.

eCommera
The Trading Intelligence Quarterly. How are we measuring online profitability? 10-11

3. Understanding Your Customers • Good practice: insight-driven segmentation

(typically individual customer and non-RFM
(a) How do you measure customer profitability? segmentation).
By individual
37%
customer • OK practice: RFM segmentation.
By recency-
frequency- 32% • Bad practice: not at all.
monetary (RFM)
segment

Not at all
(b) How do you measure customer satisfaction?
15%

Non recency- We run regular

frequency- 48%
on-site surveys to
13%
monetary (RFM) measure visitor
segment experience

We request
Other 3% feedback after 20%
every customer
0 5 10 15 20 25 30 35 40 45 interaction

We run regular
post purchase 16%
surveys to
Insight: Getting the right customer segmentation measure end to end
is critical and requires deep customer insight. customer experience
We don’t
measure customer 16%
Most online retailers will generate 80% of profits satisfaction

from 20% of customers and for many profit Other 8%

is even more concentrated. Understanding the
characteristics of both the high-profit segments 0 5 10 15 20 25 30 35 40 45

(to ensure you retain them) and the low-profit

segments (to increase their profit) is critical. Respondents selected one or more options.

There is no right answer to segmentation, but it
should be actionable, manageable and aligned to
profitability. Typically, a good segmentation will
be based on deep insight into different customer
motivations. Smart retailers think in terms of an
“optimal segmentation” which evolves with scale.
Beware some of the pitfalls:
RFM is a good starting point but often leads transaction, where placing the order is only the
to blunt action as customers can be loyal but
infrequent - so for example a regular Christmas
gift shopper may be treated the same as a lapsed
customer.
Avoid segments which will not benefit from
homogenous communication, and avoid too
many segments as this can be expensive and
difficult to manage.
Insight: While many retailers are failing to
measure customer satisfaction at all, those that
do tend to focus on the narrow on-site aspect
of the transaction rather than the full customer
experience.
Relentlessly tracking customer satisfaction
is critical to online retailers. It allows a full
understanding of a customer’s end-to-end
start of the experience. The more successful
companies gather customer feedback at all stages
of the process, for every transaction. Too many
focus their customer satisfaction ratings on the
on-site visitor experience only.

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 The Trading Intelligence Quarterly. How are we measuring online profitability?

This deep understanding of customer satisfaction The more typical measures being used may be
is also a key driver of profitable investments. easier to report as they drop out of the marketing
system, but they are often misleading indicators
• Good practice: regular on-site and post of profit.
purchase surveys.
CPO/CPA will systematically sub-optimise, either
• OK practice: Ad hoc surveys either on-site or overinvesting in unprofitable orders/customers,
post purchase. or underinvesting in profitable ones - they may
be okay performance indicators but do not
• Bad practice: not at all. necessarily correlate with profitability. ROAS
accounts for average order value but not margin,
delivery or promotions.
4. Understanding your marketing effectiveness
• Good practice: fully allocated profit.
(a) How do you measure marketing channel
profitability? • OK practice: return on advertising spend,
Cost per customer
CPO, CPA.
40%
acquisition (CPA)
• Bad practice: not at all.
Return on
advertising spend 25%
(ROAS)

Cost per order

19%
(CPO) measure

Not at all 8%
30 day last click
42%
basis

Other 4%

Not at all 18%

Fully allocated
profit 4%
Fractional
12%
attribution basis
0 5 10 15 20 25 30 35 40 45

Sane session basis 10%

Insight: Although most retailers are measuring Customer lifetime

10%
marketing channel profitability, almost no one is value

using fully allocated profit as the measure. Multiple

attribution 6%
windows
Most retailers recognise that they need to
understand the performance of their marketing
Other 3%
channels, the challenge is how best to do it.
Average order value, gross margin, promotional 0 5 10 15 20 25 30 35 40 45 50 55 60
spend and marketing cost typically vary
significantly by marketing channel. Only by
understanding fully allocated profit do the
characteristics of the channel become clear.

eCommera
The Trading Intelligence Quarterly. How are we measuring online profitability? 12-13

(b) How do you measure marketing performance? Thereafter, retailers need to test to understand
incrementality (a subject for the next TIQ).
30 day last click
42%
basis
• Good practice: multiple attribution windows.
Not at all 18%
• OK practice: single attribution window.
Fractional
12%
attribution basis
• Bad practice: not at all.

Same session basis 10%

Customer lifetime
10%
value

Multiple
attribution 6%
windows

Other 2%

0 5 10 15 20 25 30 35 40 45

Insight: A remarkable number of retailers are not

measuring marketing performance at all. Those
that do measure it should be looking at multiple
attribution windows much more than they are.

Most retailers are focusing their measurement

of marketing performance on single attribution
windows. This is a flawed measure, as a typical
order will touch multiple marketing channels.
Using any single attribution window - whether
same session, 30 day last click, fractional or
other - potentially excludes marketing events
that are highly influential either earlier or later
in the customer’s journey. For example, banner
advertising is often early in the purchase journey
whereas paid search is typically later.

We believe marketing performance is best

measured by assessing multiple attribution
windows, specifically to understand the
sensitivity of marketing profitability to different
attribution. The key is to understand which
marketing channels and events are profitable
irrespective of attribution vs. those channels that
are highly sensitive to attribution.

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The Trading Intelligence Quarterly. How are we measuring online profitability?

5. Understanding your products 6. What is ecommerce focusing on

How do you measure product profitabiliy? What are your top three ecommerce concerns in
order of priority?
Gross margin
46%
return on
1st
inventory Engaging social
2nd
media channels
Gross margin 3rd
30%
acheived Planning an 1st
international 2nd 5%
Fully allocated strategy 3rd
profit per 16%
Ecommerce 1st
product
analytics and 2nd 14%
understanding 3rd
Not at all 6% how to optimise
Managing 1st
ecommerce 2nd
Other 2% technology 3rd

Finding the 1st

0 5 10 15 20 25 30 35 40 45 50 right staff 2nd
3rd
1st
Retaining
2nd
Insight: Fully allocated profit per product is a existing clients
3rd
greatly underused measure of online product Improving 1st
profitability. online marketing 2nd
effectiveness 3rd

Attracting new 1st

Product profitability online is driven by stock clients to your 2nd
3rd
efficiency and marketing efficiency. It is very easy site

in the online world to spend money on marketing 0 5 10 15 20 25 30 35 40 45

(driving visitors to products) which generates

either no revenue or costs more than the gross
margin generated. While gross margin achieved
is a good measure of product profitability in
physical retail, it does not tell the full story online.
We advocate measuring both gross margin return
on inventory (GMROI) to track stock efficiency,
as well as fully allocated profit per product to
track marketing/merchandising efficiency.
• Good practice: fully allocated profit per
product, gross margin return on inventory
• OK practice: gross margin achieved
Insight: Many online retailers are still working
out the basics of growth.
Overall, the large majority of online retailers are
focused on attracting and retaining customers,
and improving their marketing effectiveness.
They are still grappling with getting the right
growth trajectory.
It is interesting to note that the larger, fast-
growing retailers are the ones now more focused
on ecommerce analytics and optimisation.

• Bad practice: not at all

eCommera
 14-15

Google: priorities to maximise online

profit
Peter Fitzgerald, Industry Director, Google UK
peterf@google.com

Highlights
There are four priorities for maximising online profit margins:

• Get the digital basics right, and develop a truly integrated multichannel
approach. Ensure you have the best site usability and the highest speed of
website loading. Multichannel shoppers are the most profitable, so
culture them by developing seamless and engaging online offerings that
connect with your high street brand.
• Combine assets and focus on strategy to increase international sales.
Carefully assess the worth of each market. The ideal model is a fast
and efficient site, incorporating local language and style, plus the timely
fulfilment of orders.
• Invest in real time testing and insight so that marketers can react to
change instantly, and base their decisions on up to the hour information.
Analytics is critical.
• Embrace mobile and m-commerce as part of your online strategy. Ensure
your site can be easily found and used on mobiles, and optimise your
campaigns for m-commerce.

We live in exponential times. An unprecedented • Get the digital basics right and develop a truly
amount of disruptive, transformative change has integrated multichannel approach.
collapsed established boundaries and positioned
the internet at the very heart of our daily lives. It • Combine assets and focus on your international
no longer makes sense to talk about traditional strategy.
and new, online and offline. It is simply the real
world and marketers are challenged to think • Invest in real time testing and insight; and
beyond just “ecommerce.”
• Embrace mobile and m-commerce.
The key to becoming a successful online business,
maximising profit margins, is to focus on four
critical priorities:

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The Trading Intelligence Quarterly. Google: priorities to maximise online profit
to maximise online profit

Get the digital basics right and develop a truly Combine assets and focus on your international
integrated multichannel approach strategy

Consumers are still buying, but without The internet is the fastest growing channel for
necessarily considering the difference between retail sales. To date, some bricks and mortar
your online and offline shop. Your online store is retailers have been slow to leverage their
a continuation of your high street brand and users assets and exploit the web’s reach to a wider
expect the same standards of service and quality. international customer base and incremental
sales.
• First and foremost ensure you have the best
site usability and speed. Research conducted Pure-plays such as ASOS are a good exponent
by Forrester Consulting in the US found that of the drive towards a more globally focused
a mere two seconds is the new threshold of an strategy with 37% of their total retail sales now
average online shopper’s patience with website coming from international sales. High street
loading times. While 40% of shoppers will retailer House of Fraser has also widened their
wait no longer than three seconds before multichannel strategy to start delivering overseas
abandoning a retail or travel site. from £6.

• Secondly, develop a seamless and engaging Marketers looking to make similar in-roads
online offering that resonates with your into this wider marketplace need to do their
high street brand and multichannel shoppers research first. The most successful businesses
become your most loyal and profitable have precise models of the worth of each market
customers. Not only do they spend almost and assess critical factors such as broadband
twice as much as their single-channel penetration. When gauging initial demand - and
counterparts but their online relationship with what your realistic fulfilment of deliveries will be
your brand can drive additional in-store - key considerations must include reviewing the
sales. Research conducted with French retailer competitiveness of your shipping offers and the
Auchan demonstrated that ROPO (research flexibility of your company’s stock and shipment
online, purchase offline) is responsible for 13% policies.
of offline sales and each euro invested in paid
search delivers more than 20 euros offline The ideal model for international sales is a
in-store. site with a fast and efficient user experience,
incorporating local language and style. However,
success is not limited to only local sites. The
simple, timely fulfilment of orders can begin to
firmly establish your international online store.
Amazon demonstrated this with the fulfilment of
orders at first just from the US, without having a
dedicated UK store; an experience that they used
to mould their wider online businesses.

eCommera
The Trading Intelligence Quarterly. Google: priorities to maximise online profit
Invest in real-time testing and insight
Speed is vital to enduring success in online
ecommerce. To drive new revenues marketers
need to be able to react to change in real-time,
and to base decisions on the latest up to the hour
information. A robust web analytics installation
can show you exactly how customers interact
with your site, what their path to purchase is and
where they abandon order baskets.
Simply surveying metrics like bounce rate can
also deliver impactful insights. Recently high
street retailer Next boosted their performance
from paid search, lowering bounce rates by 37%
and increasing per visitor value by 103% by
redirecting traffic from their directory sign-up to
their home page.
Not only can you now more easily look under
the hood of your site performance, but you can
freely access and analyse current search trends
via tools like Insights for Search. Incorporating
these in your creative messaging and keyword
bidding strategy, for example, can help ensure
that you remain ahead of the pack when it comes
to connecting with the latest changes in consumer
demand.
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16–17
Embrace mobile and m-commerce
Computers are moving to a pocket near you in
the form of the latest smart phones. The number
of mobile subscriptions in the world is expected
to pass five billion in 2010, equivalent to 67%
of the world’s population. In the UK, consumers
are also ahead of the curve when it comes to
adopting mobile shopping. Ebay and the Mobile
Marketing Association recently announced that
UK shoppers bought more through Ebay’s
mobile app in one month than French consumers
purchased throughout 2009.
Marketers considering how to increase the
profitability of their web stores must now treat
mobile as an inherent part of their online strategy.
Smart phones with full internet browsers deliver a
host of new services from click to call advertising
to location specific targeting, which further close
the gap between the internet and high street.
Ensure that you can easily be found on mobile by
optimising campaigns for m-commerce. Include
mobile specific messaging in your ad text and
thinking about shorter keyword sets that more
accurately reflect how mobile users search. Also,
make sure that you are mobile ready - your
dedicated site should be easy to use and consider
factors like the purchase funnel and how to
minimize it with one click purchase.
***
In conclusion, the horizons in ecommerce have
never been brighter, nor the freedom to innovate
and maximise profits so apparent or readily
accessible. Those who acquire a competitive lead
now gain a better chance of sustained growth
and enhanced prosperity as e-shopping becomes
ever more natural and popular. Don’t ignore
the importance of your online store being the
centrepiece of your multichannel strategy or the
steps that can better guarantee your relevancy to
today’s digital mass market consumer.
Spotlight on Amazon: Is Zappos broken?

Zappos is probably the biggest Moreover, it drove this growth by nurturing its
online retailer you’ve never customer base evidenced by high levels of repeat
customer activity. Zappos’s has a repeat purchase
heard of. It started life in 2000 runrate of 55% - so 55% of its new customers
as an online shoe retailer but buy again within 12 months. Compare this to the
rapidly expanded its range into more typical 20-40% rates seen by other online
clothing and accessories. It grew retailers.
from nothing to c. $1bn in gross % customers avg # purchases by

revenues in under 9 years. who buy again

within next 12 months
repeat customers over
next 12 months
(repeat customers)

March 2001 20.4% 1.50

Zappos has led a charmed existence: evangelised
March 2002 27.0% 1.74
by employees, loved by customers, admired by
suppliers and acquired by Amazon for c. $900m March 2003 33.5% 1.96
(no doubt pleasing investors). Surely this is the March 2004 44.6% 2.36
model of profitable growth every online retailer
March 2005 51.0% 2.53
should emulate? But beware of assuming the
public success story is underpinned by a long March 2006 51.3% 2.66
term sustainable profit model. March 2007 54.9% 2.68

In our opinion, Zappos had a broken retail

model, was unsustainably funded and was saved The bad: store economics
by Amazon. Whether Amazon can continue Despite its strong growth, a closer look at its
to drive its phenomenal growth and create a economics shows how precarious Zappos’s
sustainably profitable model is a fascinating model really was. Historically it has been highly
challenge. This article focuses on the good, bad secretive about how much money it was really
and ugly of the Zappos model. making, despite its appearance of public openness
(they offer tours of their offices).
The good: growth
Zappos’s growth was textbook: from 0 to $1bn As part of Amazon’s acquisition, it had to make
gross sales in 9 years. a number of filings to the SEC, and the reality
of Zappos’s economics became clear. The S-4/A
$1,000

$900
filing made on the 14 September 2009 makes
$800
particularly interesting reading: Zappos was
barely profitable in 2007 and 2008 (see below).
Gross Sales ($ in Ms)

$700

$600 Profitability at this level is clearly precarious.

$500 This highlights the stark challenge that offering
$400 the things most loved by customers - huge range,
$300 free delivery/returns, freephone call centres - also
$200 renders the economics unsustainable.
$100

$0
2000A 20001A 2002A 2003A 2004A 2005A 2006A 2007A 2008F
Gross Sales $1.6 $8.6 $31.9 $70.1 $184.4 $370.4 $597.0 $840.0 $1,000

eCommera
The Trading Intelligence Quarterly. Spotlight on Amazon: Is Zappos broken? 18-19

Headline figures are below: In an article in Inc magazine in June 2010,

the CEO - Tony Hsieh - described what was
2008 2007 happening behind the scenes:
Sales, $m 635,011 526,829

Cost of goods, $m 411,650 333,884 “…. Zappos relied on a revolving line of credit of
GM, $m 223,361 192,945 $100 million to buy inventory. But our lending
% 35.2% 36.6%
agreements required us to hit projected revenue and
OPEX, $m 201,588 192,945 profitability targets each month. If we missed our
% 31.7% 36.6%
numbers even by a small amount, the banks had
EBIT, $m 21,773 32,499
% 3.4% 6.2% the right to walk away from the loans, creating a
10,772 1,768
possible cash-flow crisis that might theoretically
Net Income, $m
% 1.7% 0.3% bankrupt us. In early 2009, there weren’t a lot of
banks eager to give out $100 million to a business
168,131 161,988
Stock, $m
in our situation. That wasn’t our only potential
Stock turnover 2.4x 2.1x cash-flow problem. Our line of credit was “asset
Stock days 149 177
backed,” meaning that we could borrow between 50
percent and 60 percent of the value of our inventory.
But the value of our inventory wasn’t based on
The ugly: trading what we’d paid. It was based on the amount of
The mantra of retail trading is turning stock into money we could reasonably collect if the company
cash. There is a delicate relationship between were liquidated. As the economy deteriorated,
gross margin, stock turnover and financing that the appraised value of our inventory began to fall,
makes this equation work. Zappos faced the which meant that even if we hit our numbers, we
double challenge of too much stock and not might eventually find ourselves without enough cash
enough cash: to buy inventory.”

• Too much stock: Zappos’s stock turn in 2008 ***

(the last year reported) was 2.4 – too low for
a fashion retailer, and particularly poor given So how will Amazon continue to grow a business
Zappos’s centralised stock. Moreover, even a based on such shaky economics? Having resolved
small stock adjustment (c. 6%) would wipe out their access to capital, they are left with the
Zappos’s profits – never a comforting situation. significant challenge of sustaining growth, getting
their economics right and honing the trading
• Not enough cash: Zappos’s stock was financed model. On top of this, they have to navigate
by a revolving credit line covering c. 60% of its a strategic dichotomy: Amazon’s mantra of
stock at cost. competing on price vs Zappos’s mantra not to
compete on price. All eyes are on them.

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eCommera is a pioneering provider of intelligent
ecommerce trading solutions, enabling brand
owners and retailers to sell efficiently and
intelligently across multiple channels.

A selection of our clients includes Asda Direct,

Hamleys, House of Fraser, Magasin Du Nord,
Horze, the official London 2012 store,
T.M. Lewin and USC.

Take control of your ecommerce business with our

flexible, multichannel ecommerce platform
• Modular and extendable
• Architected for speed and delivered on demand
• Continuously innovated and upgraded

Turn the mass of ecommerce data from across your

business into actionable insight and with our ecommerce
analytics dashboard and decision support tools
• Operational dashboard makes sense of the vast
amount of data
• Instantly identify the risks and opportunities
• Optimise trading performance

Strategy, planning and consulting to accelerate

ecommerce success
• The 10Ps of ecommerce is our strategic framework
for our advice and recommendations
• In-depth and full service ecommerce analytics, using
our Intelligent Trader Dashboard
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www.ecommera.com
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Email: info@ecommera.com

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