Opportunity abounds for high-growth ecommerce brands, but it can be difficult to determine how to best scale for profitability. Ongoing macroeconomic fluctuations add to the challenge. As McKinsey puts it, achieving online profitability requires ecommerce brands to integrate “margin-focused thinking into their strategic and operational planning.”
Much of this comes down to off-setting logistics costs—particularly when seeking balance across ecommerce and brick-and-mortar retail channels—using optimized fulfillment operations and real-time, data-driven insights. Here are four key benchmarks to optimize in order to support profitability at scale.
1. Balance the ratio between fulfillment costs and average order volume
No pressure, but a brand must achieve unit-level economic profitability early on, because an unprofitable dynamic worsens exponentially at scale.
This means ensuring that fulfillment costs are in proportion to average order value (AOV). These costs include every cent it takes to fulfill an order: picking, packing, materials, and shipping, which is often the priciest item on a brand’s balance sheet, second only to the cost of the products themselves. In fact, for every $100 spent online, brands spend $20 on fulfillment and logistics—much of it on shipping—to get the product to the end customer. Put another way, fulfillment costs can eat into up to 20% of revenues for e-commerce brands.
Ideally, the ratio between fulfillment costs and AOV should be no more than 20%. Anything more is untenable for long-term success because it squeezes margins. A company fulfilling 99-cent eyeliners that cost $2.50 to ship, for example, will never see scale.
To achieve the right balance, ecommerce brands must optimize fulfillment operations, storing and shipping inventory close to the customer to reduce both shipping costs and time to delivery, as well as properly merchandising products to increase basket size. A connected, distributed fulfillment network that offers inventory allocation and network optimization insights will help to ensure that your operations, and economics, are balanced.
2. Ensure click to deliver accuracy and communication
This metric is all about customer experience: once a shopper clicks “purchase,” how long does it take the item to get to their doorstep? And as your customer base grows, how can you ensure optimal—and cost-effective—delivery times?
Per McKinsey, more than 90% of consumers view two- to three-day delivery as a baseline expectation. What’s more, 85% of consumers report that they will not shop with a retailer again after an inferior delivery experience. It’s safe to say that a long delivery window, poorly (or not at all) communicated to the customer, leads to customer churn and the loss of recurring revenue.
Most brands need at least three fulfillment centers to offer two-day delivery via ground shipping to all customers. To offer next-day shipping, they need 10 locations. A flexible, distributed fulfillment network helps you optimize inventory based on geographical demand to determine the fastest, cheapest shipping distance and more accurately communicate the estimated time in transit to customers.
3. Master an understanding of SKU affinity and reporting
As a product catalog expands, it’s beneficial to understand SKU affinity – which products most often sell together – in order to properly optimize allocation.
Sellers often start struggling with SKU management as their business scales and more items are added to their product catalog. Brand operators need to understand and consider SKU performance alongside data about order sources, costs, and details to combat SKU complexity.
SKU affinity helps brands uncover which products are working and which are not, products most often ordered together, and other patterns that inform inventory allocation decisions and reduce holding and storage costs.
Flowspace’s omnichannel SKU Product Performance Report offers a comprehensive analysis of product-level performance metrics across sales channels. It includes product-level data on SKU activity, average fulfillment and transportation costs, and transportation transit times. You can use this intel to determine if you need to adjust pricing to achieve profitability, if you’ve properly allocated inventory for fast fulfillment, and if transportation and fulfillment costs are at an order level for easy optimization.
4. Learn from LTV to cultivate retention and repurchase
Customer lifetime value (LTV) and customer acquisition cost (CAC) are key considerations when scaling your ecommerce business to profitability.
DTC customers are often brand loyalists. An understanding of their habits and patterns helps determine product offerings across channels and more accurately predict LTV. As CAC skyrockets across digital channels, rising more than 200% in the last decade per some reports, retention and repurchase from an existing customer base can be more valuable than constantly working to fill your funnel.
A brand’s loyalists are its biggest advocates, but as discussed above, a poor fulfillment experience can turn a customer off before they’ve even opened the product, let alone had the chance to suggest it to their peers. Shoppers should expect the same level of quality and commitment throughout the checkout, communication, and delivery processes, no matter where an order was placed.
In order to retain the customers they’ve worked hard to acquire, brands must figure out how to get a product to a doorstep as quickly and efficiently as possible. Omnichannel, one-stop-shop software becomes critical for achieving real-time visibility into customers’ needs, interests, shopping habits, and shopping modes and locations. A seamless fulfillment offering that is consistent across sales channels is essential for delivering on customer expectations.
If you’re an ecommerce brand looking to scale, get in touch with Flowspace to streamline fulfillment and access critical insights that lead to more strategic decision-making.