Polytab Analytics Blog

Do unsustainable customer acquisition costs make e-commerce profit-proof?

Steve Dennis made an incendiary remark that the e-commerce divisions of many major omnichannel retailers run at a loss and that only a handful of pure plays have, or will ever, make money. There are digitally native brands like Gilt, Warby Parker, Bonobos and others who went from nothing to multi-million dollar brands; then there are major flameouts like One Kings Lane and Blue Apron who soared before ultimately losing money for their investors. I buy into Steve’s argument that many of the pure-play retailers cannot scale their customer acquisition costs in a sustainable fashion.

Many online brands attract their first tranche of customers relatively inexpensively, through word of mouth or other low cost strategies. Where things start to get ugly is when these brands have to get more aggressive about finding new and somewhat different customers. – Steve Dennis 

There is other factual proof. Even Amazon arguably ran up billions in cumulative losses before beginning a streak of strong operating cash flow on the strength of Amazon Web Services.

But why do even well-funded merchants fail? And what’s the average mid-market retailer to do to stay solvent?

How to make money in e-commerce

There are two factors that make most e-commerce profit-proof:

  • Growing marketing costs. Contemporary thinking favors digital marketing over traditional media, stating greater measurability as a selling point. The problem is that a lot of these measurements are channeled through the advertising vendors themselves – Google, Facebook, the agencies, etc. The measurements are biased towards the “last touch”, are prone to fraud and do not give any credence to traditional media. Furthering the pain is the feeling by many merchants that they are the equivalent of gambling addicts sitting at a slot machine – compelled to add money to Google and Facebook’s advertising machine and afraid of getting up out of fear of missing out.

many merchants … are the equivalent of gambling addicts sitting at a slot machine – compelled to add money to Google and Facebook’s advertising machines and afraid of getting up out of fear of missing out.

  • Declining customer lifetime value. Customer interactions and messaging with the merchants are dominated by promotions and discounts. There is also the expectation for free returns, free shipping and handling, free exchanges and then some. All these affect the profitability of the business. Even if a merchant starts out with a niche following with a loyal customer base, the relationships devolve to a discount-based relationship which is fundamentally a losing proposition. The sweet spot in commerce is the intersection of a great customer experience and a superior product“. If a merchant has neither, it is going to falter and fail in the long term. 

The sweet spot … is the intersection of a great customer experience and a superior product. If a merchant has neither, it is going to falter and fail.

Getting over FOMO (fear of missing out)

If a merchant has solid fundamentals (vis-a-vis product and customer experience), it has to keep a check on customer acquisition costs (CAC). Marketers are waking up to the bloat in their spending. Tellingly, Marc Pritchard of P&G cut $140M in marketing spending in Q4 and still saw sales growth of 2% over the previous quarter. One of the root causes is poor transparency by agencies and vendors on the true effectiveness of their efforts. Without transparency, marketers succumb to FOMO and make poor investment choices. Typical leakage areas:

  • Marketing vehicles where the vendor supplies the attribution report. The influence of the vendor is not in doubt, but the incremental contribution of the vendor is negligible. See example below. The $1097 purchase would be claimed by the display vendor although the incremental contribution of the channel to the sale is negligible (if any). The channels particularly prone to this type of leakage are display and affiliates.long tail keyword
  • PLAs or Display ads where shoppers use the ads as shortcuts to your website. You can prune bids or the impression frequency for shoppers who have already clicked on the ad 2+ times.
  • Non-branded paid search ads can be effective in building brand awareness, but they have to be measurably leading to a boost in organic or direct traffic.
  • Bottom of the funnel marketing with a negligible boost to shopping intent.

E-commerce is hard but it isn’t impossible. One of the tools at a merchant’s disposal is data analytics to unlock profits.

Getting Started

Display marketing is a common weak spot for many merchants. The Display Benchmark Report below has the benchmarks for critical display marketing metrics. 

Cropped image by Jeff Kubina of Slot Machine used under Attribution-ShareAlike 2.0 Generic (CC BY-SA 2.0).

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