The Trading Intelligence Quarterly

October 2010 Issue 2

• Welcome • Making money online • How are we measuring online profitability? • Google: priorities to maximise online profit • Spotlight on Amazon: Is Zappos broken? 03 04-08 09-14 15-17 18-19

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


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.
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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.


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

How to make money online
Michael Ross, Co-founder and Director, eCommera

• 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, 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 store. • Growth: The dynamics and strategies for profitable growth. • Trading: The day to day dynamics of sales, stock and margin.

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 focus on orders as the variable unit, rather than thinking of online as just another store. Cracking the code: store economics The challenge is to get the right cost structure per order: but there is no one right answer. Average order values for successful retailers can be £10 or £1000; some retailers charge for delivery and


The Trading Intelligence Quarterly. How to make money online


returns, others do not; many retailers have aggressive promotional campaigns and are generous with vouchers, others never discount; I’ve seen very successful retailers with 1% conversion rates, and unprofitable ones with 4% conversion rates. We advocate a 4-step approach to getting to the right store economics: • Understand where you are today: many retailers simply don’t even look at an ecommerce P&L, let alone one structured around the underlying drivers (figure 1). • Understand what happens to profit when you pull different levers: for example, a free delivery over £50 promotion will increase average order value, increase conversion rate and reduce delivery revenue. However, the key question is what it does to profit per order and volume of orders. Understand the impact of a voucher for new customers vs. increasing marketing spend per order. Understand the impact of reducing retail prices vs. a targeted promotion. • Be prepared to make bold decisions to get to the right P&L structure for growth. Limit vouchers, increase delivery charges, prune marketing spend. I’ve met a number of online retailers who lose money on every order and then try to make it up in volume! • Keep optimising: improvements to the site funnel, new payment methods, better on-site search, improved navigation, personalisation, recommendations will often have little impact individually but nudge conversion up over time, with consequent impact on both volume and profit per order.

Figure 1: The drivers of online profit
Average order value Gross profit per order Delivery revenue/cost per order Promotion cost per order Marketing cost per order Number of orders x Online visitors ÷ Conversion rate Marketing cost per visit x Gross margin

Trading profit per order

Gross trading profit


2. Growth Physical retail: Growth is driven by two dynamics - (i) growth in square footage (i.e., new stores or store expansion) and (ii) same store sales (like-for-likes). Once a retailer has a successful format, growth is simply a matter of finding more locations. Vs. Online retail: Growth online is a new paradigm, driven by building and nurturing a customer base. Zara has opened, on average, a store a day for the last few years. Each store brings new footfall and new customers. The strategy may be hard to execute but is simple to conceive. Footfall - a given of the physical world where rent equals guaranteed visitors - needs to be sought and bought online. Retailers with offline brands clearly get a base level of traffic “for free” but if they don’t play in the online marketing world, they are simply leaving prospective customers for their competitors.

The Trading Intelligence Quarterly. How to make money online

Growth online is driven by three very different dynamics: • Customer acquisition - the number of new customers acquired in a period. • Customer retention - the percentage of customers who repurchase, their order frequency and spending pattern. • Range expansion (unconstrained by shelf space) which widens the customer acquisition net, fuels repeat customer activity and drives higher basket values. Cracking the code: growth Driving profitable growth online requires sophisticated marketing optimisation: how much to spend acquiring and retaining a customer, how much to spend overall on marketing and how best to allocate this spend across various marketing touch points. Building on the order economics above, we advocate a 3-step process to cracking growth: • Marketing profitability: understand the profitability of each keyword, affiliate, banner and email, as well as the sensitivity of profitability to different attribution windows. In addition, understand the incrementality of each marketing event - just because someone clicked on your 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 (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.

• Customer-product economics: understanding the roles of products in the customer lifecycle is also critical. Products may have low sales but could be key to acquiring high value customers. Other products may look unprofitable but are great add-on purchases. Mine on-site and offsite search to identify adjacent categories which can drive customer acquisition and retention. Using this analysis, retailers can understand their optimal “zone of growth” - too high and it’s either unprofitable or unsustainable, too low and you are leaving customers for your competitors. Again there is no right answer but the smart retailers are clear about whether they are trying to drive cash, medium-term profit or long-term growth and can then adjust their path accordingly. Too many retailers make the mistakes of benchmarking growth rates against retail like-for-likes, creating unrealistic top-down targets, extrapolating from historical rates or focusing too much on top-line sales. Optimal retailer growth rate
Annual growth % Too fast (unsustainable) Optimal zone of growth Too slow (underpotentialised)

Actual Forecast


The Trading Intelligence Quarterly. How to make money online


3. Trading Physical retail: Trading offline means how to make the day-to-day trade-offs between sales, stock and margin. Vs. Online retail: Trading online has the additional challenges of efficient buying and routing of traffic, and managing product just in time. Applying the trading dogma of physical retail to online is guaranteed to sub-optimise profits. Retailers can make much better trading decisions if they properly leverage the data available to them: • New information: retailers can distinguish between products that aren’t selling or aren’t viewed, ensure traffic levels are optimised and evenly distributed. Retailers can understand price elasticity and product substitutability. Data that is expensive or impossible to access offline is typically free and easy to access online. • New costs: the online world brings new and different costs. The fundamental challenge is that it is now remarkably easy to lose money on a product by spending more money driving traffic than you generate in gross margin. • New levers: traffic can be turned on and off. Depending on the category (and product substitutability) traffic can be elegantly rerouted to products that are in-stock, overstocked or high margin at the click of a button. Products can be offered with differing “promises” from pre-orders to back orders. The reality is that customers will commit to products they’ve never touched (from an iPad to a designer bag) and will wait for the products they want. Display is now decoupled from delivery.

Cracking the code: trading Every category has its own trading dynamic - the levers you pull day to day to optimise the tradeoff of sales, stock and margin. The dynamics vary depending on the supply chain, lead time, margin, minimum order quantities and product lifespan. Some examples show how
Category Beauty/ jewellery/ continuity fashion Characteristics of products Long life and low obsolescence Seasonal life with upfront stock commitments Short-life and flexible manufacturing Trading challenges Driving stock turn without losing sales Sellthrough i.e., maximising cumulative gross margin Stock turn and sell through Add-on purchases and optimising promotions or bundles New online challenges Using online data to optimise stock turn Optimising the distribution of traffic to drive sell-through Using online data to de-risk the supply chain Managing product profitability

Branded fashion

Fast (CMT) fashion


Low margin and obsolescence

The key to online profitability is to leverage the new data, understand the new costs and take advantage of the new levers to make better, faster, more nuanced trading decisions. Successful retailers: • Understand product profitability: the key is to understand which products make money, which lose money and which make nothing.

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% 40%

Manage availability

Low views, in stock

Stock no views

Views no sales

Products not profitable

20% 0%
Products arranged by profitability (descending)


Ecommerce research findings: How are we measuring online profitability?
Barry Wyse, Retail Practice Leader, eCommera


• 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.

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

Research findings: What Can We Learn About Profit Measurement? 1. Growth Rates What was your year on year growth for ecommerce last quarter?

2. How Regulary To Measure How regularly is profit from your website measured (taking into account margin, marketing and delivery cost/revenue)?
Monthly Quarterly


Growth rate Leaders Players Cruisers Laggards Over 40% 21% - 40% 1% - 20% No growth/decrease

Total % 22 30 35 13





Not at all Daily


5% 0 5 10 15 20 25 30 35 40 45

Insight: Almost half of respondents are growing at a rate of less than 20%. 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.

Insight: Relatively few are measuring web site profitability frequently enough, ideally on a weekly or daily basis. 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.


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


3. Understanding Your Customers (a) How do you measure customer profitability?
By individual customer By recencyfrequencymonetary (RFM) segment Not at all Non recencyfrequencymonetary (RFM) segment Other

• Good practice: insight-driven segmentation (typically individual customer and non-RFM segmentation). • OK practice: RFM segmentation. • Bad practice: not at all. (b) How do you measure customer satisfaction?
We run regular on-site surveys to measure visitor experience We request feedback after every customer interaction




3% 0 5 10 15 20 25 30 35 40 45


Insight: Getting the right customer segmentation is critical and requires deep customer insight. Most online retailers will generate 80% of profits from 20% of customers and for many profit is even more concentrated. Understanding the characteristics of both the high-profit segments (to ensure you retain them) and the low-profit segments (to increase their profit) is critical. 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 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.

We run regular 16% post purchase surveys to measure end to end customer experience We don’t measure customer satisfaction Other

8% 0 5 10 15 20 25 30 35 40 45

Respondents selected one or more options.

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 transaction, where placing the order is only the 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.

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

This deep understanding of customer satisfaction is also a key driver of profitable investments. • Good practice: regular on-site and post purchase surveys. • OK practice: Ad hoc surveys either on-site or post purchase. • Bad practice: not at all. 4. Understanding your marketing effectiveness

The more typical measures being used may be easier to report as they drop out of the marketing system, but they are often misleading indicators of profit. CPO/CPA will systematically sub-optimise, either overinvesting in unprofitable orders/customers, or underinvesting in profitable ones - they may be okay performance indicators but do not necessarily correlate with profitability. ROAS accounts for average order value but not margin, delivery or promotions. • Good practice: fully allocated profit.

(a) How do you measure marketing channel profitability?
Cost per customer acquisition (CPA) Return on advertising spend (ROAS) Cost per order (CPO) measure

• OK practice: return on advertising spend, CPO, CPA. • Bad practice: not at all.



Not at all


30 day last click basis




Not at all Fully allocated profit
4% 0 5 10 15 20 25 30 35 40 45


Fractional attribution basis


Sane session basis


Insight: Although most retailers are measuring marketing channel profitability, almost no one is using fully allocated profit as the measure. Most retailers recognise that they need to understand the performance of their marketing channels, the challenge is how best to do it. Average order value, gross margin, promotional spend and marketing cost typically vary significantly by marketing channel. Only by understanding fully allocated profit do the characteristics of the channel become clear.

Customer lifetime value Multiple attribution windows




3% 0 5 10 15 20 25 30 35 40 45 50 55 60


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


(b) How do you measure marketing performance?
30 day last click basis

Thereafter, retailers need to test to understand incrementality (a subject for the next TIQ). • Good practice: multiple attribution windows.

Not at all


• OK practice: single attribution window. • Bad practice: not at all.

Fractional attribution basis


Same session basis Customer lifetime value Multiple attribution windows





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.

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

5. Understanding your products How do you measure product profitabiliy?
Gross margin return on inventory Gross margin acheived Fully allocated profit per product Not at all

6. What is ecommerce focusing on What are your top three ecommerce concerns in order of priority?
Engaging social media channels 1st 2nd 3rd 1st 2nd 5% 3rd



Planning an international strategy


Ecommerce 1st analytics and 2nd 14% understanding 3rd how to optimise Managing ecommerce technology 1st 2nd 3rd 1st 2nd 3rd 1st 2nd 3rd


2% 0 5 10 15 20 25 30 35 40 45 50

Finding the right staff Retaining existing clients

Insight: Fully allocated profit per product is a greatly underused measure of online product profitability. Product profitability online is driven by stock efficiency and marketing efficiency. It is very easy in the online world to spend money on marketing (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 • Bad practice: not at all

Improving 1st online marketing 2nd effectiveness 3rd Attracting new clients to your site 1st 2nd 3rd
0 5 10 15 20 25 30 35 40 45

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, fastgrowing retailers are the ones now more focused on ecommerce analytics and optimisation.


Google: priorities to maximise online profit
Peter Fitzgerald, Industry Director, Google UK


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 amount of disruptive, transformative change has collapsed established boundaries and positioned the internet at the very heart of our daily lives. It no longer makes sense to talk about traditional and new, online and offline. It is simply the real world and marketers are challenged to think beyond just “ecommerce.” The key to becoming a successful online business, maximising profit margins, is to focus on four critical priorities:

• Get the digital basics right and develop a truly integrated multichannel approach. • Combine assets and focus on your international strategy. • Invest in real time testing and insight; and • Embrace mobile and m-commerce.

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

Get the digital basics right and develop a truly integrated multichannel approach Consumers are still buying, but without necessarily considering the difference between your online and offline shop. Your online store is a continuation of your high street brand and users expect the same standards of service and quality. • First and foremost ensure you have the best site usability and speed. Research conducted by Forrester Consulting in the US found that a mere two seconds is the new threshold of an average online shopper’s patience with website loading times. While 40% of shoppers will wait no longer than three seconds before abandoning a retail or travel site. • Secondly, develop a seamless and engaging online offering that resonates with your high street brand and multichannel shoppers become your most loyal and profitable customers. Not only do they spend almost twice as much as their single-channel counterparts but their online relationship with your brand can drive additional in-store sales. Research conducted with French retailer Auchan demonstrated that ROPO (research online, purchase offline) is responsible for 13% of offline sales and each euro invested in paid search delivers more than 20 euros offline in-store.

Combine assets and focus on your international strategy The internet is the fastest growing channel for retail sales. To date, some bricks and mortar retailers have been slow to leverage their assets and exploit the web’s reach to a wider international customer base and incremental sales. Pure-plays such as ASOS are a good exponent of the drive towards a more globally focused strategy with 37% of their total retail sales now coming from international sales. High street retailer House of Fraser has also widened their multichannel strategy to start delivering overseas from £6. Marketers looking to make similar in-roads into this wider marketplace need to do their research first. The most successful businesses have precise models of the worth of each market and assess critical factors such as broadband penetration. When gauging initial demand - and what your realistic fulfilment of deliveries will be - key considerations must include reviewing the competitiveness of your shipping offers and the flexibility of your company’s stock and shipment policies. The ideal model for international sales is a 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.


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.

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 online retailer you’ve never heard of. It started life in 2000 as an online shoe retailer but rapidly expanded its range into clothing and accessories. It grew from nothing to c. $1bn in gross revenues in under 9 years.
Zappos has led a charmed existence: evangelised by employees, loved by customers, admired by suppliers and acquired by Amazon for c. $900m (no doubt pleasing investors). Surely this is the model of profitable growth every online retailer should emulate? But beware of assuming the public success story is underpinned by a long term sustainable profit model. In our opinion, Zappos had a broken retail model, was unsustainably funded and was saved by Amazon. Whether Amazon can continue to drive its phenomenal growth and create a sustainably profitable model is a fascinating challenge. This article focuses on the good, bad and ugly of the Zappos model. The good: growth Zappos’s growth was textbook: from 0 to $1bn gross sales in 9 years.
$1,000 $900 $800

Moreover, it drove this growth by nurturing its customer base evidenced by high levels of repeat customer activity. Zappos’s has a repeat purchase runrate of 55% - so 55% of its new customers buy again within 12 months. Compare this to the more typical 20-40% rates seen by other online retailers.
% customers avg # purchases by who buy again repeat customers over within next 12 months next 12 months (repeat customers)

March 2001 March 2002 March 2003 March 2004 March 2005 March 2006 March 2007

20.4% 27.0% 33.5% 44.6% 51.0% 51.3% 54.9%

1.50 1.74 1.96 2.36 2.53 2.66 2.68

The bad: store economics Despite its strong growth, a closer look at its economics shows how precarious Zappos’s model really was. Historically it has been highly secretive about how much money it was really making, despite its appearance of public openness (they offer tours of their offices). As part of Amazon’s acquisition, it had to make a number of filings to the SEC, and the reality of Zappos’s economics became clear. The S-4/A filing made on the 14 September 2009 makes particularly interesting reading: Zappos was barely profitable in 2007 and 2008 (see below). Profitability at this level is clearly precarious. This highlights the stark challenge that offering the things most loved by customers - huge range, free delivery/returns, freephone call centres - also renders the economics unsustainable.

Gross Sales ($ in Ms)

$700 $600 $500 $400 $300 $200 $100 $0 2000A $1.6 20001A $8.6 2002A $31.9 2003A $70.1 2004A $184.4 2005A 2006A 2007A 2008F

Gross Sales

$370.4 $597.0

$840.0 $1,000


The Trading Intelligence Quarterly. Spotlight on Amazon: Is Zappos broken?


Headline figures are below:
2008 Sales, $m Cost of goods, $m GM, $m % OPEX, $m % EBIT, $m % Net Income, $m % Stock, $m Stock turnover Stock days 635,011 411,650 223,361 35.2% 201,588 31.7% 21,773 3.4% 10,772 1.7% 168,131 2.4x 149 2007 526,829 333,884 192,945 36.6% 192,945 36.6% 32,499 6.2% 1,768 0.3% 161,988 2.1x 177

In an article in Inc magazine in June 2010, the CEO - Tony Hsieh - described what was happening behind the scenes: “…. Zappos relied on a revolving line of credit of $100 million to buy inventory. But our lending agreements required us to hit projected revenue and profitability targets each month. If we missed our numbers even by a small amount, the banks had the right to walk away from the loans, creating a possible cash-flow crisis that might theoretically bankrupt us. In early 2009, there weren’t a lot of banks eager to give out $100 million to a business in our situation. That wasn’t our only potential cash-flow problem. Our line of credit was “asset 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 what we’d paid. It was based on the amount of money we could reasonably collect if the company were liquidated. As the economy deteriorated, the appraised value of our inventory began to fall, which meant that even if we hit our numbers, we might eventually find ourselves without enough cash to buy inventory.” *** So how will Amazon continue to grow a business based on such shaky economics? Having resolved their access to capital, they are left with the significant challenge of sustaining growth, getting their economics right and honing the trading model. On top of this, they have to navigate a strategic dichotomy: Amazon’s mantra of competing on price vs Zappos’s mantra not to compete on price. All eyes are on them.

The ugly: trading The mantra of retail trading is turning stock into cash. There is a delicate relationship between gross margin, stock turnover and financing that makes this equation work. Zappos faced the double challenge of too much stock and not enough cash: • 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 Zappos’s centralised stock. Moreover, even a small stock adjustment (c. 6%) would wipe out Zappos’s profits – never a comforting situation. • Not enough cash: Zappos’s stock was financed by a revolving credit line covering c. 60% of its stock at cost.

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

eCommera Limited 1st floor 84-86 Great Portland Street London W1W 7NR Tel: +44 (0)207 2915800 Email:


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