November 17, 2014

E-Commerce Moving Into Retail

Seldom do you read anything practical. But then you find this article (click here) from The Economist.

An e-commerce brand moving into retail is not proof that retail is the right move. It is, however, a blatant acknowledgement that growing the customer base via an e-commerce-only business model is really, really hard, and has a ceiling for most.

I've mentioned, on numerous occasions, that The Story Of The Fall is the inability of businesses to reactivate lapsed buyers, or to acquire new buyers. Nowhere is this more acute than in e-commerce. Remember this graph?



When comparing catalog and e-commerce business models, I usually observe that the e-commerce business model struggles to convert the first time buyer to a second purchase. Worse, with a low annual repurchase rate (from 1st to 2nd purchase), e-commerce business models churn through customers at a much faster rate than catalog (and retail) business models.

This makes it very hard for most e-commerce businesses to blast through the $100,000,000 hurdle. Ask any cataloger how hard it is to blast through $100,000,000! Now try doing it with 2/3rd the repurchase rate for 1st-to-2nd time buyers.

E-commerce growth is easy up to $10,000,000 ... you can use social and SEO and viral marketing and you can get there. Then you need a diversified merchandise assortment to grow to $30,000,000 ... each new customer you get has a lower repurchase rate than customers acquired in the $0 to $10,000,000 range, so you almost have to bump the repurchase rate via a broader assortment. From $30,000,000 to $100,000,000, you move into a marketing realm where you have to start spending money. As you spend money, you cannot afford to churn customers with low repurchase rates - the math simply doesn't work.

In other words, you run your five year forecast, and you quickly learn you're going to hit a ceiling.

And you run out of easy answers to grow.

And retail is about 85%, +/-, of total sales.

And you start thinking that retail is a good thing.

Conversely, retailers are going to be closing stores right and left in the next five years. Old school retail slowly dies as it is cut off from a younger demographic - while online businesses catering to a younger demographic move into retail. It's retail Darwinism.

Retail is going to look very different a decade from now. Get out in front of the trends, friends.