In this article we will:
- Explore the critical shift from growth at all costs to a balanced focus on profitability and sustainability in digital sales and ecommerce.
- Analyze the key competitive strategies that drive profitable growth and how to align your technology choices accordingly.
- Dive into four distinct growth strategies and learn how to apply them effectively for sustained, profitable growth in digital commerce.
Rethinking priorities: shifting from growth at all costs to sustainable, profitable digital sales strategies
Focus on daily issues, interesting technologies and new trends lead many to forget the most simple and necessary things to address in business.
For years, growth was the only imperative that mattered. But in recent years both profitability and sustainability has become even more important – whether it is looking at the value gained from your online sales for the whole company or how the true value of pureplay ecommerce companies are perceived. This radical change has particularly hit retail and companies where the digital commerce experience has grown to be a significant part of the overall business.
We have already witnessed several promising ecommerce companies in Europe facing financial difficulties, including bankruptcy or refinancing. Simultaneously, growth and profitability has declined or vanished. This has led to digital sales and ecommerce re-entering the agenda at CEO offices of major brands – this time for different reasons. Companies are now questioning why this is happening, whether they should continue to invest digitally at the same levels, and if they are doing the right things.
The question for many CEOs and their boards is therefore: How sure are you that you are doing the right things in your digital sales efforts, what should be corrected and what is next?
Having seen, helped, and worked to develop many digital businesses both from a tech and a business perspective, there is one very important question and answer that is a prerequisite for answering the strategic question of what to to as a CEO and Board. Ad that is: “How do I actually drive profitable growth in my business?”
This article is a guide to understanding most businesses, and how they should deliver profitable growth from their online driven revenue in the coming years. It is an attempt to install a strategic founded operational playbook and mindset for companies to drive profitable growth from digital sales and ecommerce space – and for some to stop driving “empty revenue”.
Where is the competitive mindset in your company?
It all starts with Michael Porter. Either you compete on cost, and you standardize everything, or you compete by differentiation. Otherwise, you end being stuck in the middle (or make a strong niche player).
It’s a simple question that help understanding the overall competitive view of your business.
- Companies with a significant digital footprint and a strong focus on cost need to scale with low margins and a tightly rigged cost budget in order to deliver in the cheapest possible way to the customers.
- Companies that solely focus on differentiation need to develop a strong brand narrative, a distinct product and service range and ways of working in order to create more perceived value to customers.
- Niche players have established themselves in a market as leaders by a clear focus on width and depth in a particular segment, and therefore manage to stay relevant to that niche.
So, which of the three competitive strategies are you pursuing?
Unfortunately, in our experience, many do not have a clear answer to this, and therefore end up being stuck in the middle while trying to compete – but not being able to – due to focus on expensive technologies to solve non-technology issues and/or self-inflicted complexity.
Let us just take the area of choosing technology as an example. It’s rather important to understand that your competitive choice dictates and will have massive implications on your tech costs – but very few really gets this. If you compete on cost, then buy a standard platform, use standard functionality, and stick to this. Avoid customization. If you, on the other hand, compete on differentiation, you might need a unique check out function or customer experiences that’s not standard – but then recognize this and build it custom from the get-go rather than buy a standard platform and customize it afterwards.
Enough about this , let’s focus on how to drive growth – specifically profitable growth.
How to drive growth
There are fundamentally four important and distinct growth strategies when looking at growth from a strategic point of view (Igor Ansoff) that are still highly relevant and highly applicable today – particularly for digital driven businesses. The growth matrix simply looks at growth from two perspectives:
- Existing and New Products/Services
- Existing and New Markets
In the following, this article will dive deep on the 4 distinct growth strategies and give our view on how to apply these to generate profitable growth.
A) Existing Products/Services and Existing Markets – Market Penetration
Market Penetration is a simple, yet extremely difficult growth strategy. Here, companies are playing with existing products and services in an existing market. Market conditions today are extremely fierce, and most companies are fighting hard for even the smallest inch. The revenue growth models drive a race towards the bottom and drain profits. So key question is how to drive profitable growth?
The short answer is an extreme focus on analytics and details.
Here’s a couple of examples of solid growth pockets to look into within this area:
- POAS
- Basket/order
- Customer lifetime value
POAS is the low hanging fruit that more companies need to investigate further. Today, many companies still buy ads on Meta & Google based on ROAS, but that’s a profit eroding strategy that often just drive “empty revenue” or even loss when all cost are taken into consideration. POAS, on the other hand, will deliver a more balanced view of your ad strategy and only buy profitable ads. It might drive negative growth on your revenue, but it builds a stronger business foundation. And in the end, salaries are paid by the profits not by the revenue.
Basket/order analysis is crucial to drive profit growth, and we rarely meet companies that really has this in-depth knowledge on what drives basket profitability.
The key questions you should be able to answer for a good basket analysis are:
- Which items are driving more items in the basket?
- Which items are driving profitable baskets/orders?
- Which items are boosting basket size/order?
- Which items are driving profitable customers?
Once you know the answers to these questions, not by heart but by numbers, you’ll be able to execute your trade/promotion strategy in a much more data driven way. This enables a much more profitable promotion strategy one that drives the right persons to buy from you – which is much healthier in the long term than just having more customers.
B) New Products/Services and Existing Markets – Product & Service Development
Another way to drive growth is Product & Service development. In a digital driven business it’s often referred to as extending assortment. The rationale here is that more SKUs equal more searchability equals more relevance equals more sales. Many companies believe this is a simple way to drive growth, and we do see more and more companies taking large increases of SKUs into the assortment. But the key question: is this profitable growth?
Many companies extend product assortment or services significantly and end up with a long tail of products/services that’s “empty” revenue, stock cost, or even just Google cost. In reality, extending product assortment often ends up being more costly than profitable. Driving a profitable product extension requires companies to take a hard look at what it drives: Better baskets? CLV? Better penetration in attractive segments? In many cases product development’s only target is to drive revenue growth – and instead it drives profit-erosion. More products/services are not just equal to profitable growth.
C) Existing Products/Services and New Markets – Market Development
On the other hand, taking your products/services and winning concept to new markets is also a viable strategy for many companies. If you are successful in Denmark, why shouldn’t you be successful in Norway, Sweden, and Germany?
Taking your assortment to other countries might penetrate larger markets. But the old term: “you can play internationally, but you win locally” is often neglected in growing markets. There are so many parameters that changes every time you move into a new market. Segments, preferences, competitions, and services changes significantly from market to market. Getting established in new markets is tough and often very costly until the right adjustments to your successful operating model is in place. So how to approach this in a profitable way?
Well, to be honest, there are no silver bullet to this. However, using the same skills and analysis as in the market penetration scenario will help a lot. Understanding what key segments, with which product/service, and how they should be served profitably is crucial in driving profitable market development. Too often, companies enter with a 1:1 approach, copying the local winning formula. But in reality, very few are successful – and those who are successful is often either a true niche play or a heavy differentiation strategy (please recall this from the Porter section). So, go after profitable segments with basket/orders that drive sales of products or services that can create frequency in your relation with your customers.
D) New Products and New Markets – Diversification
Diversification is generally a tough and even dangerous path to explore. Usually, companies are only really good at 1 or 2 things. Again, this also applies to digital sales and ecommerce.
The obvious area to explore in this approach is to leverage brand assets to open up new opportunities and revenue streams. Choosing your approach here is key. Only a few pure-players and medium sized companies can pull of a “Zalando” and cover many markets while exploring adjacent business opportunities with media and supply chain plays to bolster the bottom-line. But there’s also a different path – being the best to monetise payments, insurances etc. through well proven processes. This is an approach many have followed successfully to harvest potential profitable growth, whilst acknowledging their limited resources.
For heritage brands who’ve established significant double-digit shares of digital of their total revenues, this is an interesting area to explore. As these companies have expanded their footprint and hunted ambitious online salea targets for many years, many brands realise that they’ve been “sweating their brand asset“ by discounting hero products and losing control of sales in multiple distribution channels. This could be the time for brands to create new products that change the consumer perception of their brand and develop real reasons for consumers to not just start but also close their transactions at the brand.com site moving forward.
Subscription model and increased loyalty efforts can also be explored as opportunities. However, the opportunity to harvest and succeed with this very much depends on fundamental frequency of and need for your products, your width of assortment, and/or brand strength (think Nike – very few has I all – and even Nike doesn’t – despite having pioneered the direct customer relationship for many years)
With all the insights above, the key question is: Which distinct strategy are you pursuing? And have you made a prioritization to focus on one – rather than all these strategies at once?
Operating to be profitable
Now it’s time to do a reality check on profitability. In all of the above and in your daily operations, there are several areas to consider when supporting profitable growth through your operation model and not just through simple cost-cutting exercises.
The matrix below in an inspiration on what to look for – based on dialogues with digital businesses in order to help them identify the best ways to execute profitable growth. We hope this will get you started yourself to draw up a similar cockpit in your business:
Sensible thinking – but then what?
Remember the question from the beginning of this article: How sure are you that you are doing the right things in your digital sales efforts, what should be corrected and what is next?
To answer this there are 3 related questions that you need to answer with a very high degree of precision – something that you have hopefully been empowered to start with based on this article:
- Is your positioning in digital an ecommerce sales crystal clear?
- Do you operate to supporting this position by simplifying and prioritizing execution accordingly?
- Are your selected priorities and activities truly supporting profitable growth and a long term sustainable position?
We recommend you sit down with your internal key stakeholders and go the extra inch to either validate or to re-think your strategy and operational choices from a thinking along the lines of what this article presents. But first and foremost – you need to do the exercise. Don’t just close your eyes, and hope for the best.
