A focus on Amazon’s omnichannel strategy
Apr 24, 2023
4 min read
Many brands now operate on both the digital and physical shelf, but that omnipresence makes it challenging for them to truly understand their overall profit and loss (P&L) statement.
Ecommerce sales are steadily growing for most companies, so it’s become crucial for brands to pinpoint what factors both drive and influence this sales channel.
“Executive Insights: the Primary Drivers of Ecommerce Profitability Across the Digital Shelf,” a joint report co-created by Bobsled Marketing and the Digital Shelf Institute (DSI), takes a deep dive into what profitability means today for brands.
The report, based on insights from ecommerce leaders at large multinational brands with over $250 million in annual revenue, examines the core ecommerce success metrics they need to track to effectively assess profitability. It also explores why boosting the return on investment (ROI) of their media spend is one of the most powerful P&L levers brands can pull, and how they can better align their internal teams to achieve profitability.
Here are the key things brands can take away from the report to realign their thinking about profitability in today’s omnichannel environment.
The most basic definition of profitability is a company’s financial gains minus its losses. However, many brands view profitability differently and use a range of metrics to calculate it.
Some companies use contribution margin, a combination of their pure profit margin and any additional manufacturer offsets, plus all of their operating costs. Others use net income from operations, which is total revenue minus total expenses.
The problem with both approaches is that ecommerce often gets assigned costs on the P&L that aren’t scaled to the size of this channel. Ecommerce requires a significant upfront investment, but will generate long-term value as consumers increasingly shop online, so using these metrics doesn’t paint the most complete picture.
Another issue is that every internal team focuses on different profitability and ecommerce success metrics. Sales teams may be focused on gross sales, while marketing and ecommerce teams focus on earnings before interest and taxes (EBIT).
The company itself may be focused on other strategic priorities aside from profitability, such as market share and top-line revenue growth. Sometimes these priorities conflict with increasing profits.
Line items factored into the profit metric on the P&L are also highly variable. For example, one ecommerce leader said their company assigns the costs associated with running its customer call center to their department’s budget. The reasoning? Simply because the number to the call center is listed on the company’s website.
This reflects a larger problem with how companies understand the role of digital versus brick-and-mortar channels within their sales ecosystem. Assigning certain costs to digital channels as they’re still growing makes these channels appear less profitable, even though many of these costs should be spread out across different departments’ budgets.
The ecommerce leaders the DSI and Bobsled interviewed are keenly aware of the P&L challenges their organizations face. In the report, they say understanding all the contributing data points in the P&L is the single most important factor for improving profitability.
Focusing on media spend and attribution is one place they can start to gain clarity around what actually drives profit.
Media spend is one of the largest expenses for brands, so it provides an invaluable opportunity for them to boost profitability by reducing costs and improving the ROI of these activities.
It’s crucial for brands to understand that brand and performance media don’t just drive digital sales — they also influence brick-and-mortar sales. Brand and performance media offer other incremental benefits too, such as fueling repeat purchases and delivering social proof that boosts awareness in the marketplace.
Brands will benefit from rationalizing their brand and performance marketing spend to account for this halo effect. Rather than viewing digital media spend as one consolidated line item on the P&L, taking a channel-focused view can give brands greater visibility into their profit and loss by spend activity. For example, allocating expenses to specific channels such as direct-to-consumer (DTC), marketplace, and retailer websites can help brands make more informed decisions about what investments to make and when.
When it comes to paid media, brands also must decide whether their goal is to drive growth or profitability. Whatever strategy they choose can vary by product, channel and stage in the product life cycle. Adopting this granular — yet flexible — approach can help brands maximize the impact of their media spend.
Brands also should consider reallocating media spend to activities and channels that help them better capture ecommerce success metrics.
One ecommerce leader interviewed for the report has shifted money away from retailer co-ops and reinvested this money into Amazon Marketing Services (AMS) and equivalent retailer performance advertising programs that allow their team to more easily measure and assess performance. This leader can calculate to the penny what a million dollars in co-op with a specific retailer will translate to with AMS.
Other brands should consider developing a similar mechanism to calculate the value of moving a portion of co-op dollars to performance marketing.
Brands must proactively manage their P&L, and that means employing creative strategies they may not have even attempted in the past.
Some brands have experienced success by shifting the focus of their vendor negotiations with Amazon to alignment on marketing investment rather than focusing on profitability, pricing, and assortment. One company has reallocated some of its marketing dollars to collaborative spend on the platform in exchange for a broader portfolio on Amazon.
From this standpoint, committing to specific advertising and promotional thresholds might advance vendor negotiations and deliver a win-win for everyone involved. So, it’s worth a shot for brands to try.
Ecommerce is no longer a minor footnote on the P&L — it’s integral to the future of retail and long-term growth and profitability for brands.
As brands try to gain more clarity around what drives profits and what doesn’t, they can hone in on several key areas to achieve a holistic understanding of profitability. Focusing on media spend and attribution can deliver immediate impact, more accurately align spending and costs with various digital activities, and transform this significant expense into a real ecommerce profitability driver.
Download this report to get actionable insights into the most critical profitability drivers and learn how leading brands are taking action on the digital shelf.
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