The desire to be his own boss is still very strong in 2018 due to the continuing hype surrounding the topic of entrepreneurship. In particular, the type of “passive-income-how-do-I-quickly-make-my-first-million-without-where-any-value-added-offer” has met with approval among the advertising promises of the numerous “online marketing experts”. Unfortunately, there is no real place to go to answer the question “What is necessary for me to be successful in eCommerce? The Chamber of Industry and Commerce and the numerous eCommerce conferences/trade fairs do not address this question or they merely provide answers that are usually only feasible for large companies (turnover +200 million).
If you are wondering whether your professional future could lie in eCommerce, then this contribution is something for you. The following points, which I describe in detail in each case, originate from my own train of thought and are intended to give you an initial overview.
Things you should consider when you want to get started in eCommerce
- 1 1. HORIZONTAL TRADING MODELS ARE DEAD!
- 2 2. SUCCESSFUL CUSTOMER RETENTION IS MORE IMPORTANT THAN SUCCESSFUL CUSTOMER ACQUISITION
- 3 3. MARKETPLACE-FIRST STRATEGY (IS AN ONLINE SHOP EVEN NECESSARY?)
- 4 4. THE END OF FREE VISITOR FLOWS
- 5 5. THE CREEPING DEATH OF UNDIFFERENTIATED PRODUCTS (PRICE LEADERSHIP, QUALITY LEADERSHIP)
1. HORIZONTAL TRADING MODELS ARE DEAD!
You wonder what horizontal trading models are? In retail, whether online or stationary, we differentiate between horizontal and vertical trading models. For horizontal trading models, the dealer has a wide range of different product groups, which usually come from third-party brands. MediaMarkt can serve as an example here. MediaMarkt has a broad product range in the “consumer electronics” product group. In addition, the majority of the products MediaMarkt offers come from third-party brands (Sony, HP, etc.). The small number of private labels offered by Mediamarkt/Saturn can certainly be neglected.
With vertical trading models, the retailer focuses specifically on a product range and controls the majority of the supply chain. In this way, the retailer becomes a manufacturer at the same time and can skip the wholesale trade. This leads to higher margins in sales and to faster production adjustments if demand changes.
WHY HAVE HORIZONTAL TRADING MODELS BECOME OBSOLETE?
Of course, there will still be horizontal trading models in the future. Amazon is the perfect example of a successful horizontal trading model. But how many horizontal trading models do we need in a platform economy where customer retention is declining and customer acquisition costs are rising steadily? Certainly no more than current. For this reason, any future eCommerce entrepreneur should be aware that selling third party brands without a clear differentiation from previous competition is a hopeless mission.
I was not aware of this myself in 2014, when I founded my first eCommerce company, also a horizontal trading model. You’d better not make that mistake.
2. SUCCESSFUL CUSTOMER RETENTION IS MORE IMPORTANT THAN SUCCESSFUL CUSTOMER ACQUISITION
For most companies, the acquisition of new customers is given priority over the retention of existing customers. Banks issue credits to attract new customers, for example, or electricity providers use cashback systems to advertise new customers. We can also observe this phenomenon in online trade: “Subscribe to the newsletter now and receive a €10 credit for your first order”. In comparison, existing customers feel disadvantaged, as they hardly enjoy any advantages apart from regular e-mails with purchase requests.
WHY IS SUCCESSFUL CUSTOMER RETENTION THE KEY TO SUCCESS?
Amazon is a prime example of successful and sustainable customer acquisition. This also reflects Amazon’s objective: “Earth’s most Customer-Centric-Company”. This is not just a slogan developed by a “brand agency”, but actually the corporate philosophy of Amazon. For this reason, 70 million Americans and 17 million Germans already have Prime membership.
In my opinion, the problem of the lack of appreciation of existing customers can only be explained by the fact that those responsible underestimate the costs of acquiring new customers. The value of an existing customer ultimately results from the costs of acquiring new customers. The costs of acquiring new customers exceed eleven times the costs of reactivating existing customers. In addition, satisfied existing customers lead to natural customer growth, since friends and family members are naturally more trusted than any “testimonials” from satisfied customers on the website.
But in particular the costs of an acquisition via paid advertising formats are making it increasingly difficult to acquire new customers profitably. Advertising platforms such as Google AdWords and Facebook are among the most important acquisition platforms for online merchants. Due to the increase in advertisers and their advertising budgets, advertising costs on both Google and Facebook will not decline (marketplace dynamics). In the end, this means that the acquisition of new customers becomes unprofitable and companies have to focus on the Customer Lifetime Value (LTV) instead of merely on the Customer Acquisition Costs (CAC).
The most successful companies maximize LTV (Amazon, Apple, etc.), whereas unsuccessful companies only focus on the CAC.
Thus it can be said that customer lifetime value is the most important KPI in eCommerce!
By maximizing customer value, companies will also be able to pay higher acquisition costs and generate customer value throughout the customer lifecycle. On the other hand, companies that concentrate exclusively on winning new customers and reducing CAC will sooner or later withdraw from the market.
Also this aspect I did not consider during my independence in eCommerce. The acquisition of new customers seemed “cool and sexy”, while the care of existing customers was more of a nuisance. For this reason, a strategy for the care of existing customers should be developed before the customer acquisition is started.
And no, a weekly newsletter with the latest offers is not a measure for a sustainable customer relationship.
3. MARKETPLACE-FIRST STRATEGY (IS AN ONLINE SHOP EVEN NECESSARY?)
Shop software operators and online shop agencies will not like hearing this, but the question of whether an online shop will still be up to date in 2018 should at least be asked. Nowadays, product research is largely carried out directly on specialized platforms (Amazon for General Merchandise, Zalando for Fashion, Notebooks Cheaper for Computer Accessories, ZooPlus for Pet Food, etc.). The use of mobile end devices also promotes the shift of product research towards the respective platforms, since the mobile app is much more convenient for research and purchase than using the shopping process in a mobile browser.
Another reason why the development of an online shop should at least be questioned is the increasing number of language assistants. When the purchase is concluded, they will of course not go through any online shops in order to purchase the desired product. When using Amazon Echo (market share of 76%), for example, the order is then also processed via Amazon.
Basically, I believe that before investing in setting up an online shop, the products to be advertised can be effectively tested via the marketplaces (Amazon, Wish, etc.) to see whether the respective product will meet with approval. Of course, this approach is not universally applicable, as the platforms and touchpoints differ depending on the product category.
4. THE END OF FREE VISITOR FLOWS
There are numerous ways to attract website visitors. For example, visitors can become aware of a project via Google, Facebook or PR. In addition to attracting visitors, who are ultimately also to convert to customers, the question naturally arises as to which visitor sources are particularly suitable for a new online retailer.
The term “SEO” is regularly used here, as the desire for “free visitors” is at the top of the to-do list. SEO largely refers to the Google search engine. In 2018, however, the dream of free streams of visitors via the Google search engine will hardly be possible any more. Of course, the Google search engine can still be a reliable visitor channel, but not without a significant upfront investment in infrastructure and staff. A five-digit euro amount per year is the minimum investment amount and even this does not guarantee success. Especially the presentation of search engine results (feature snippet etc.) has changed more and more recently. Google AdWords ads dominate the mobile search results pages, reducing the space for organic Google results.
Placing your own products via Amazon is also no longer possible today without investments in Amazon SEO and the various ad formats in the Amazon advertising cosmos. Since investments in paid Amazon advertising formats have an impact on the organic Amazon ranking, the placement of Amazon advertisements is a basic requirement in many product categories in order to gain visibility for one’s own products at all.
The same applies to the generation of website visitors via Facebook, which since mid-January has almost only worked via paid advertisements, since the number of visitors reached via fanpage contributions tends towards zero.
What does that mean to me? In the end, you should realistically estimate the required advertising costs. If you are selling in a highly competitive product range, you may well generate a negative contribution margin on a customer’s initial order. This can only be refinanced if you have deep pockets (“VC Money”) or if you are sure that the LTV of the won customer is higher than the paid advertising costs.
5. THE CREEPING DEATH OF UNDIFFERENTIATED PRODUCTS (PRICE LEADERSHIP, QUALITY LEADERSHIP)
What you sell is as important as the how and where of selling. According to Michael Porter, there are three competitive strategies a company can pursue:
1. quality leadership
2. cost leadership
3. niche supplier
In which category do your products fall? Before starting out as an online retailer, this question should be addressed. Because only with a clear initial strategy can the probability of success be assessed. An undifferentiated product strategy will sooner or later lead to misery. In most cases, cost leadership can only be ensured in the long term through synergy effects in production and sales, so that the competitive strategy of price leadership cannot be maintained.
Quality leadership, on the other hand, requires high investments in marketing/branding to justify the price difference to similar products.
The niche strategy is based on a very specific customer segment and attempts to serve the respective customer segment in the best possible way by concentrating resources. In contrast to quality and cost leadership, the niche strategy of the online retailer is a specialist instead of a generalist.
Many online retailers (as I was) do not pursue quality leadership, price leadership or niche strategy, but sell a product range without differentiating features. These dealers are “stucco in the middle” and will therefore sooner or later be out of the business.
What is your strategy? Without a clear differentiation and competitive strategy, one should not become active in online business. In my opinion, online merchants without large budgets should always choose the niche strategy, as the respective target group can be addressed very precisely via the different advertising channels (especially Facebook).