Thijmen Kaster

Expert Article: Two ways to fix a broken e-commerce model

Expert Article: Two ways to fix a broken e-commerce model
Thijmen Kaster

Thijmen Kaster

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The past decade were the golden years of e-commerce. During the world-wide COVID pandemic, online shopping rocketed to its absolute peak. More recently, however, it seems like this never ending grow-and-flourish period has come to an end. What drives this sudden decline? What should you do if your once golden and ever-growing e-commerce business now seems to be broken? In this blog post, we’ll discuss two ways to fix this.

Why e-commerce results are under pressure

First things first: let’s dive deeper into why your growth is slowing down, or why your e-commerce sales and profits are even declining. 

Demand for online shopping slowed down

During COVID, online sales exploded. That was mainly due to the simple fact that physical stores were closed and customers had no other option than turning online. Everybody expected consumers to continue shopping online after COVID, but it turns out people love to shop in actual, physical stores. Add to this the increased inflation and more difficult economic conditions - people have less money to spend in general - and you’ll see a decline in demand for online shopping. 

Online has become more competitive and expensive

Other reasons why e-commerce currently does not live up to its expectations have to do with competition and costs. 

Lower entry barriers have increased competition

Back in the days, you needed expensive systems to get your webshop up and running. Nowadays, anyone with a credit card can set up an e-commerce store with platforms like Shopify or WooCommerce. As a result, entry barriers are extremely low, competition is intense, price pressure is high and customers get less loyal: they easily switch from one vendor to another to get the best ‘bang for their buck’.

Marketplaces put pressure on prices

Dominant e-commerce marketplaces like Amazon (as well as local alternatives like here in the Netherlands) have become the default online shopping option for many consumers. Suppliers can’t go around them and live by the credo ‘if you can’t beat them, join them’. Although these marketplaces make it increasingly easy to find, compare and buy products online they create a ‘race to the bottom’ for vendors. To actually sell on marketplaces in times of lower demand they have to offer products at the lowest possible price. This affects prices on webshops outside of these marketplaces as well.

Increased costs of marketing and logistics

Over the past few years, tech giants like Google and Meta (Facebook, Instagram) won the “battle for the consumers’ attention”. They consolidated the online advertising market with their bidding models, and there is no way around them if you want to advertise online. As demand for online advertising increased with the rising number of e-commerce businesses, these tech giants were able to put their prices up. With their stock prices down it seems to be unlikely that it will get cheaper to advertise anytime soon. Last but not least, fuel prices and labor shortages have substantially increased shipping and fulfillment costs. It is more expensive than ever to get your package to your customer (and back!), which again puts pressure on prices and margins.

How it impacts the game

E-commerce players are often playing the so-called ‘CAC<CLV game’. This means that the Customer Acquisition Costs (the marketing costs spent to acquire one customer) should be lower than the Customer Lifetime Value (the profit from all orders this one customer makes). As long as the CAC is smaller than the CLV, it makes sense to spend extra money on marketing to acquire extra customers.

However, when CAC goes up due to increased marketing costs and CLV goes down due to price pressure and decreasing consumer loyalty, the model breaks quickly. As a result, e-commerce businesses can’t profitably scale their number of customers, leading to declining revenues and margins.

Two ways to fix it

Sounds depressing? Do not panic, there is hope! We are discussing two ways for e-commerce businesses to fix your broken model. The first one is suitable for all types of players, the second applies to brands / producers and omni-channel retailers only. 

1. Detox from your performance marketing addiction (all players)

Over the years, e-commerce businesses got addicted to performance marketing to acquire new customers. Now, it’s time to detox. Instead of focusing on performance marketing that allows you to measure results immediately (although recent privacy policies are making this more difficult), reallocate investments into building an online brand, offering value added services and creating true customer loyalty.

Building an online brand allows businesses to build a relationship with customers that exceeds a purely transactional one. As a result, consumers will become more loyal and hence stickier in the future, which increases your Customer Lifetime Value. They will want to do business with you because they like your brand, because they feel connected to you. You can build and nurture these relationships by offering customers loyalty schemes, subscription models or by offering unique, customized assortment online, for example.

A good example of this is an online home furniture business. Apart from selling home furniture, they also offer interior styling advice through Zoom and publish a ton of Youtube tutorials on how to professionally style your home. By investing in online branding, they bring their Customer Acquisition Costs down - marketing costs are less expensive. On the other hand, their Customer Lifetime Value goes up: people buy more per order (due to the styling advice), ánd are ordering more frequently (because they feel more connected to the brand).

This strategy does have its drawbacks, however: it takes a lot of time and it’s not easy. Where performance marketing may seem to work instantly, building an online brand and a loyal customer base is hard work. Moreover, it requires new skill sets in areas such as customer engagement and content marketing. If you want to do this right, you need to have a strong vision, stick to the plan and stay committed in the long term - even if you don’t see results immediately.

2. Prioritize other goals (brands and omni-channel retailers only)

If you are a pure e-commerce player, you need to make your money online. As a brand or omni-channel retailer, however, it is important to remember that sales doesn’t necessarily have to be the main objective of your online presence. In other words, if e-commerce is no longer the cash cow it used to be, it might be worth focusing on other online goals instead of purely on its revenues or margins. 

For example, you can decide to set goals like optimizing ROPO (Research Online, Purchase Offline), you can test new products online before launching them in physical stores, you can choose to view your online presence as opportunities for brand touchpoints instead of as a sales channel, or you can use your online presence as a way to collect consumer data that you wouldn’t have been able to access otherwise. When making a decision, it is important to re-think which role your e-commerce channel plays in your company's strategy. Then redefine its goals and KPIs accordingly.

Set your e-commerce business up for success (again)

E-commerce is here to stay, but the days of the gold rush seem to be over. Demand is slowing down due to decreasing consumer spending power and consumers returning to physical retail stores. On top of that, the market has become much more competitive and expensive. Building a strong online brand, rather than relying on a purely transaction-based model, seems to be the answer. Also, if you’re a manufacturer or omni-channel retailer, don’t forget that there’s more to having a strong online presence than just sales. Even in these more challenging times, e-commerce still has a lot of potential - as long as you are willing to broaden your horizon.

About the author

Thijmen founded Sweav together with Joeri Schouten in 2022. Before founding Sweav, he worked as independent consultant and interim manager working for Otrium on strategic project management and fundraising. Previously, he worked at digital strategy consulting boutique SparkOptimus. Focusing on new venture development and commercial due diligence. Thijmen lives in Amsterdam together with his wife and daughter. Outside of work, he’s a fanatic techno DJ and soccer player. If you’d like to get in touch with him, please fill out the form below.

Thijmen Kaster

Thijmen Kaster

E-commerce expert @ Sweav

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