As the retail world continues to adapt to the new circumstance of the pandemic, ecommerce has become a major asset for many companies and consumers. Retailers who already had a robust online selling strategy are reaping the rewards, with more and more consumers shifting their in-person spending habits to the digital sphere. While this pivot has been pronounced in recent months, it’s important to remember that this was a trend already well on its way in a pre-pandemic world. And even with the growing popularity of ecommerce—and the influx of new online shoppers over the past four months—there are still important questions about the profitability of the online sales model that should be considered.
More People Are Shopping Online
The enduring growth of ecommerce spending has been clear across a lot of consumer research as of late. In a survey of 2,000 consumers, Wunderman Thompson Commerce found that 62% of purchases happened online during the lockdown—compared to just 43% before. The latest data from McKinsey affirmed this shift as well, finding that "most product categories have seen a 15% to 30% increase in online channel user growth.” It’s not just for shopping purposes either. According to data from PYMNTS, 42% of US consumers “had transitioned to using digital channels to engage in activities more often than they did before the pandemic.”
And while behavioral trends are sure to shift again as stores re-open and more information about the virus comes out, the shoppers surveyed by Wunderman Thompson Commerce reported that they expect online shopping will make up 51% of their buying moving forward. Per PYMNTS, “the digital transition appears to be fairly sticky for those who made the switch. The data indicated that the majority of those who had brought their pre-pandemic routines online plan to keep them there even after the crisis ends.”
As a result of these stark changes in buying behavior, many online brands have actually seen increased sales during the pandemic months. Casper reported a 26% year-over-year increase to its first quarter net sales this year, hitting $113 million—while Wayfair’s direct retail net revenue logged a 20% increase to hit $2.3 billion.
But higher sales does not always equal higher profits. In fact, in the first quarter, Casper’s profit loss also grew by 98% (to $35 million) and Wayfair’s by 43% (to $286 million). While these stats may seem contradictory, they underscore one of the larger concerns about the ecommerce business model: the rising costs of customer acquisition. How much does a brand have to pay in advertising in order to make one sale?
Challenges Of The Online Sales Model
Though many online DTC brands often tout the fact that they have “cut out the middleman” of the retailer in order to keep costs low, that usually doesn’t account for the increased digital spend required to connect with new customers. In the absence of retail partnerships, digital-first brands often need to invest more heavily into customer acquisition through paid digital, social and podcast advertising placements.
At the same time, the online market has also been associated with lower prices than traditional mattress offerings. This puts many companies in a bind: either find ways to lower the cost of manufacturing, or operate at a deficit in terms of profit.
As ecommerce has grown in popularity, these issues have been exacerbated. With an increasing number of online-only players, not to mention more and more traditional sellers looking to market online as well, the price of digital advertising has gone up. As the competition grows, there are simply more brands trying to vie for the same number of consumer eyeballs. So while it was once seen as the more affordable alternative to TV and print advertising, it now takes more money to make a meaningful impact through online marketing.
According to this article from RetailDive, Casper spent 33% of its total revenue on advertising in the first quarter of this year—totaling $38 million. This was an increase from its $30 million spend during Q1 of last year. Wayfair spent 12% of its direct retail net revenue during this time—accounting for $276 million, up from $244 million in 2019.
Unfortunately, for the mattress category in particular, attracting a new customer is often just the first hurdle. In order to sweeten the deal against the ever-growing list of competitors, many brands offer steep promotional discounts. This can help them effectively grab market share—but it can also make it more of a challenge to keep that customer coming back for more. Getting a consumer to make a one-time purchase does not immediately transform them into life-long customers.
"A lot of the customers they acquire are going to make one purchase and then not come back," Seth Basham, analyst for Wedbush, told RetailDive. "So you don't really make money on those customers.” This is especially true for the mattress category, which has an inherently longer purchasing cycle than most other product segments.
In recent years, many online DTC brands have turned back to brick-and-mortar retail as a solution to these challenges. Partnering with third-party channels can help lower the cost of customer acquisition, as many of chain retailers have built-in customer bases. Other companies have opted to open their own branded stores as well, which allows them to flex their experiential marketing prowess—hosting events and experiences that foster greater relationships with consumers. Of course, the realities of the pandemic have complicated both of these physical retail strategies.
So where do we go from here?
While the growth of online shopping has been vital for the retail industry during this difficult time, it is not a silver bullet that will solve all of its problems. In some ways, the migration of in-person selling to online ramps up issues that have long existed within the ecommerce space. But this shouldn’t dissuade any company from enhancing their digital sales opportunities. Rather, it should help them see a clearer picture of what needs to be done moving forward. As more retailers and brands invest in their own ecommerce infrastructure and strategy, companies will need to get more creative about attracting and retaining new customers.
Optimize Your Existing Acquisition Strategies
As more and more brands invest in ecommerce, the cost of customer acquisition will likely continue to rise—there’s no way around it. But that just means brands will need to be smarter about their online marketing. "There's room to improve their online acquisition strategies, by being more efficient on the channels in which they're spending,” Barsham told RetailDive. This includes ensuring more careful targeting on your paid placements—and optimizing your SEO to make it easier for consumers to find your webpage organically.
Diversify Your Digital Advertising
Social media advertising can be effective, but it’s not the only way to promote your products online. Rather than jockeying for visibility on Facebook and Instagram, consider more traditional digital marketing avenues. When deployed correctly, affiliate marketing partnerships, sponsored content and banner advertising can help connect you to niche audiences with higher engagement.
Give Your Customers A Reason To Come Back
Experts recommend that consumers replace their mattress every eight years or so, which can create a serious lag in sales for some retailers. Rather than constantly trying to find new customers, it is often more effective—and affordable—to engage your existing ones. Offering accessory products like sheets and pillows can help create a more steady stream of sales, as can more outside-the-box products like nightlights, candles and CBD oils. A robust digital content program can also help lure consumers back to your site more regularly, increasing the chances they may peruse your new products.
Over-Deliver When It Comes To The Online Shopping Experience
Another thing retailers can do to off-set customer acquisition costs is ensure that they’re offering the best ecommerce experience possible. By creating an online shopping process that is seamless, memorable and convenient, retailers can help build greater trust and loyalty with consumers. This includes an easy-to-navigate web page, meaningful customer support (both during the shopping experience and after) and transparency throughout the entire transaction.
"This new emphasis on innovation and service needs to extend to the digital customer experience as well,” Denise Lee Yohn explained in this article for the Harvard Business Review. “Most retailers with roots in brick-and-mortar simply try to replicate their in-store experience online, but such efforts are fruitless and misguided.”
Thankfully, there are plenty of new innovations and tools that can help retailers enhance the online shopping experience. Instant chat features make it easy to answer shoppers’ questions in real-time, while Artificial Intelligence and predictive analytics can enable more personalized product recommendations. Even simply making sure your site is optimized for mobile can do wonders for improving the online shopping experience.
This story originally appeared in eNews. Click here to get Sleep Retailer eNews delivered straight to your inbox.