In ecommerce, as in gambling, there is one rule never to forget: the odds are always with the house.
In the world of a casino, the house sets the rules, structuring them in a way that always has a long-term edge over the players.
And in ecommerce? Those rules are set by market conditions and a market dynamic called “perfect competition”, a term familiar from Economics 101 that plays out in real time when you sell online.
The difference? In casino gambling, you can never come out ahead in the long run.
Unlike casino gambling, you can beat the odds and make ecommerce profitable now and in the future
In ecommerce?
The key to beating the market’s “rules” and navigating intense competition lies in optimizing fulfillment operations. Because become super profitable in ecommerce, it's not just about the products you sell, but how efficiently and effectively you can deliver them.
That's because, in a market defined by perfect competition, it's operational efficiencies that can set a brand apart, turning logistical challenges into opportunities for competitive advantage, profitability and growth.
Econ 101 Meets Ecommerce
Welcome to a world of perfect competition.
Assuming you stayed awake during your Ecom 101 class, recall the concept of “Perfect Competition”.
"Perfect competition" is a term used in economics to describe a market structure characterized by several specific conditions, creating an environment where no single participant has the power to influence the market price for a good or service.
The key features of perfect competition include:
- Many buyers and sellers
- Similar products that can substitute for each other
- No barriers to sellers entering the market
- Perfect information about products where buyers know all the alternatives available
Why worry about “perfect competition”? Because in a market exhibiting perfect competition, it’s really, really tough to even become profitable much less increase profitability.
Let’s take a look at why that’s the case in the context of selling online:
Many Sellers and Buyers: Ecommerce platforms attract millions of buyers (that’s the good news for sellers and brands) and host thousands of sellers (that’s the bad news for other sellers and brands). You are no longer competing with the store across the street or the brand alongside you on the retail shelf. You’re competing with the world.
Similar Products: Many products sold online, especially in commoditized categories, are virtually identical, regardless of the seller. For buyers looking for a specific item – running shoes, for example – many brands from many sellers will meet their needs. For buyers looking for a specific brand – say, Adidas – many sellers are offering that specific brand. Again, good news for buyers, but tough for sellers trying to grow revenue and margins.
Low Barriers to Entry: Setting up an online shop is relatively easy and inexpensive, encouraging new – and hungry – sellers to enter the market.
Perfect Information About Products: This is the killer in increasing ecommerce profitability from the standpoint of perfect competition. Lots of similar products from lots of similar sellers wouldn’t be a problem if the buyer didn’t know about them.
But buyers do know.
On Amazon and other marketplaces, similar products from similar sellers appear right next to your product listings – with complete information including price.
And even if they don’t head straight to Amazon or another marketplace to shop, a majority of potential buyers begin their purchase decision with a Google search. So Google helpfully returns product searches with sponsored and suggested results – including the seller and pricing.
And perfect competition isn’t the only challenge sellers face in improving profitability:
- Marketplaces like Amazon, Etsy and eBay charge fees for listing and selling products, which eat into margins. For example, Amazon's seller fees can range anywhere from 6% to 45%, depending on the product category. Plus additional selling fees for monthly subscriptions, listings, fulfillment and storage, and additional services can add up fast.
- High (and growing) customer expectations for fast and free shipping, easy returns and high-quality customer service can be challenging and expensive to meet.
- About 20% of total online sales end up being returned. That number gets even worse during the holidays when two out of three customers return a gift or purchase. Ecommerce returns are a huge drain on profitability, with each return costing the business about 66% of the original item's price to process and resolve.
- Sellers face competition from international sellers and new marketplaces such as Temu, where similar products can often be produced and sold at lower prices.
Meeting Challenges to Ecommerce Profitability
In a market characterized by perfect competition, where products are similar and lots of sellers compete on price, increasing profitability is challenging. However, there are three broad strategies sellers can adopt to improve their market position and increase profitability.
Build a Strong Brand
A strong brand can stoke shopper interest, create customer loyalty and allow for more pricing power. You can use branding to create a perception of value that goes beyond just the product. Offer unique product features, better quality, personalized services or a distinctive customer experience.
But from a profitability standpoint, the problem with brand building is that it doesn’t work if no one knows about you. And that’s getting more and more expensive. The cost of acquiring customers through digital advertising is increasing, as platforms like Google and Facebook become more competitive. Investment in content marketing and social media marketing is necessary but can also be costly and take a long time to show results.
There is one ray of sunshine for Operations folks. Research has shown that a shopper’s fulfillment experience has a huge impact on their perception of the brand. That makes sense – the shipping and delivery experience is often the final touchpoint with the brand during the purchasing process. It’s much more expensive to acquire new customers than to sell to repeat customers, so investments in improving the customer’s fulfillment experience pay off quickly.
Increase Product Visibility
From a purchase decision standpoint, it usually doesn’t matter if there are hundreds of alternatives available – just as long as your product is one of the first handful that the consumer sees and has a chance to consider.
However, the cost of improving your product’s SEO and product placement online and in site listings is not free; it takes highly skilled people sometimes months to produce results – which all can be wiped out instantly with a change in a search algorithm.
And like other forms of digital advertising, sponsored listings are getting increasingly expensive, are dominated by sellers with large budgets, and are becoming less effective due to marketplace clutter.
Create Cost Leadership
As we’ve seen, selling in markets marked by perfect competition often means intense price competition. It makes sense that the low-cost producers will be in the best position to compete on price – and still have the margins to fund customer acquisition and branding efforts while being profitable.
But ecommerce is a unique channel because the cost of fulfilling products can be a huge part of the total product cost as compared to traditional retail distribution.
Lowering costs - especially fulfillment costs - is the key to making ecommerce operations your competitive advantage
That makes achieving cost leadership in fulfillment essential.
This strategy involves minimizing warehousing and logistics expenses through economies of scale, streamlined operations, strategic partnerships and advanced technologies. But beware, these cost-cutting measures must not compromise service quality. Effective cost leadership in ecommerce fulfillment means delivering products swiftly and reliably at lower costs, attracting price-sensitive customers while maintaining high service standards. So this approach not only provides the opportunity for competitive pricing but also grows customer loyalty through consistent, quality brand experiences.
Ecommerce Fulfillment as a Competitive Advantage
The journey to increasing ecommerce profitability is no straight line.
It's a path paved with strategic brand building, smart visibility tactics, and mastering the high-wire act of balanced cost leadership in fulfillment of consumer expectations and brand experiences.
In this journey, your fulfillment operations aren't just about getting products out the door; they're the key to unlocking new levels of profitability and customer satisfaction.
Let’s explore how to make your ecommerce operations not just a part of your business, but the heart of your competitive advantage.
Centralizing Fulfillment Operations in an Ecommerce Control Tower
Imagine all your fulfillment activities streamlined under one roof – an ecommerce control tower.
This centralized approach provides a bird’s-eye view of your entire operation, enabling real-time problem-solving, omnichannel coordination and centralized command and control of ecommerce fulfillment operations.
Etail’s control tower approach, for example, centralizes and coordinates listings and catalog management across channels, dynamic pricing, order and inventory management, shipping and fulfillment, and data collection and analysis all from a single centralized platform.
Data is collected from throughout the system – including sales channels, your operations, and 3PLs and other partners in whatever format they provide. Then the data is then normalized to present your entire ecommerce operations under a “single pane of glass”.
By having this single source of truth, you can swiftly adapt to changes in demand, manage orders and inventory more effectively, and ensure consistent customer experiences.
And that helps control costs while maintaining a quality brand experience.
Streamlining and Automating Fulfillment Operations
In business, time is money; by streamlining and automating your fulfillment processes can save both.
Automation in warehousing - from sorting to packing to packing - not only speeds up the process but also reduces the margin of error.
Implementing automated workflows for order processing and inventory management can further streamline operations to improve the efficiency, speed and accuracy of order processing, fulfillment and inventory replenishment. It can cut errors and overhead associated with human order processing. That can also result in fewer returns and exchanges – a huge drag on ecommerce profitability.
Controlling Shipping Costs
Shipping costs can make or break your ecommerce profitability. Mastering this aspect of ecommerce cost control involves several shipping cost reduction strategies:
- Carrier Partnerships: Build relationships with multiple shipping carriers. This not only provides you with more options but also gives you leverage to negotiate better rates based on your shipping volume
- Regional Shipping Templates: Customize your shipping strategies based on regional inventory availability and fulfillment costs. This approach helps in negotiating better rates with carriers and optimizing delivery times. The Etail platform, for example, lets you adjust listing content and pricing shown to individual shoppers based on regional inventory availability and shipping costs. So you won’t take an order you can’t profitability fulfill.
Lowering shipping costs is a top strategy for making fulfillment a competitive advantage
- Packaging Design: Optimizing package design is a crucial yet often overlooked strategy for minimizing fulfillment costs in ecommerce. Effective package design goes beyond aesthetics; it involves selecting the right size, material and structure to ensure products are protected while minimizing waste and shipping costs. By using the right-sized packaging, ecommerce businesses can reduce the amount of void fill needed, lowering material costs and decreasing package weight. Other options could include consolidating packaging around fewer sizes to improve your buying power with carton vendors, using carrier-supplied packaging, switching to envelopes rather than cartons, and shipping products in their retail packaging with no additional outer cartons. Also, consider eco-friendly materials. Lighter, eco-friendly packaging materials can reduce shipping weight and appeal to environmentally-conscious consumers
- Cartonization: Workers on the pick-and-pack lines don’t have the time or expertise to choose the right packaging for every order. Platforms like Etail use cartonization algorithms to determine the most efficient way to pack orders, protecting the contents while also reducing shipping costs and material waste.
- Distributed Order Management: Distributed order management (DOM) systems select the best shipping location based on various factors like proximity to the customer and inventory levels, further cutting down on delivery times and costs. Etail was a pioneer in designing high-powered, affordable DOM platforms for ecommerce retailers and brands. Click here to learn more about choosing a distributed order management platform that's right for you.
Continuous Data-Driven Margin Improvement
Data is the gold mine of ecommerce. Profitable ecommerce sellers and brands know that continuous analysis of data related to sales, returns, shipping and customer feedback can unveil patterns and areas for improvement.
Etail recently introduced Ideal Order, a breakthrough in how sellers can monitor and proactively improve ecommerce profitability.
Etail's Ideal Order technology pinpoints exactly where your operations are leaking margin and the profit gained by plugging the leak
Ideal Order measures every order against several factors that comprise an “ideal order” – which is an order where all the factors work together to fulfill the order while both meeting the customer’s expectations but also delivering the highest margin possible for that specific order.
Etail also simulates every possible combination of factors to best fulfill the order. If the order was not “ideal” – let’s say for example that inventory was not available at the location nearest the customer or the wrong carton was used – Etail compares the actual cost of fulfilling the order to the “ideal” cost to determine the margin lost.
Etail then collects and aggregates the data across these factors in total and by fulfillment location so you can pinpoint exactly which factors at which locations are causing margin to leak from your fulfillment operations – along with an exact dollar estimate of the margin improvement to be gained by fixing the problem.
The result – you’ll know exactly where to address profitability issues and the profitability gained by fixing those issues. Ideal Order also provides the basis for quantitative, margin-focused KPIs for use internally or with suppliers to measure and proactively improve ecommerce profitability.
Maintaining Flexibility and Optionality
The ecommerce landscape is always changing. Maintaining flexibility in your operations allows you to swiftly capitalize on market opportunities or mitigate risks. This could mean diversifying your supplier base to avoid disruptions, exploring new shipping methods or fulfillment partners, or adapting to emerging consumer trends. The key is to stay agile and open to change.
Platforms like Etail are designed to make it easy to integrate with new channels, new partners and new suppliers – helping to ensure your hard-won profitability gains aren’t lost to unforeseen circumstances or changing market conditions.
Creating Competitive Advantage
By focusing on these five areas - centralizing operations, streamlining and automating processes, controlling shipping costs, continuously improving margins through data, and maintaining operational flexibility - ecommerce brands and sellers can transform their fulfillment operations into a significant competitive advantage. Remember, in a market characterized by perfect competition, it's the efficiency, responsiveness, and adaptability of your operations that can set you apart. Embrace these strategies and watch your ecommerce business reach new heights of profitability.
Additional resources
MARGIN AND PROFITABILITY IMPROVEMENT
Six Tools to Maximize Ecommerce Margins [Infographic]
Five Steps Proven to Boost Ecommerce Net Income (Blog Post)
STREAMLINING AND AUTOMATING FULFILLMENT OPERATIONS
Ecommerce Fulfillment: Meeting the 1-2 Day Delivery Challenge (White Paper)
Seven Steps to Scale D2C Fulfillment (White Paper)
The Ultimate Guide to Order Management (Blog Post)
ECOMMERCE CONTROL TOWERS
Understanding Ecommerce Control Towers (Blog Post)
What’s an Ecommerce Control Tower [Infographic]
CONTROLLING SHIPPING COSTS
Shipping Cost Reduction (White Paper)
Shipping Cost Reduction [Infographic]
What is Cartonization? (Blog Post)
Distributed Order Management Solutions Overview (White Paper)
