Simon Wu
E-commerce companies were once considered nearly invincible as they grew unfettered and saw record profits. But of late, they’re braving a new market shaped by three major trends: stunted online shopping growth, the impact of the latest iOS privacy updates on social media customer acquisition strategies (leading to higher costs) and macroeconomic uncertainty.
While these factors are largely out of retailers’ control, we’re seeing a few emerging companies that have adapted by entrenching with existing customers and building their organic brand.
In this post, we’ll dig deeper into the key trends and their impact on e-commerce, as well as with several tactics companies can implement to continue to thrive in this new retail climate.
The new retail challenge
First, e-commerce growth as a percentage of total worldwide sales has not continued to persist as strongly as expected post-pandemic. Statista reports that e-commerce stood at 12.9% of total U.S. retail sales in Q4 of 2021, down from 13.6% in the previous year. It’s likely that a few quarters of growth was pulled forward and is now reverting back to the original course, albeit still elevated.
At the same time, customer acquisition costs have risen due to recent iOS updates as Apple continues to implement and ramp up privacy features. Devices running the new OS have limited third-party tracking capabilities that platforms like Facebook (or Instagram) depend on.
No longer having access to the level of broad audience targeting and optimization capabilities previously available, brands are seeing a drop in performance and higher total acquisition costs, leading many to shift spend away from these platforms.
Finally, there’s a new threat rapidly approaching and clouding the e-commerce landscape: macroeconomic uncertainty with a potential drop in discretionary spending. This is already evident in the lackluster earnings from major retailers such as Target and Walmart, where we’re seeing the mix of non-discretionary revenue accelerate due to inflation while discretionary item sales slow down.
What can be done to combat these threats? There are two primary courses of action e-commerce companies should focus on: (1) entrench — getting existing customers to stay longer and spend more, and (2) build a stronger brand — reducing reliance on social to organically drive better customer acquisition and conversion rates.
Entrench existing customers
The first step is to reduce churn and increase average order value (AOV). This helps brands protect conversion and hit forecasts while balancing profitable acquisitions as conversions drop due to larger industry changes (e.g., increasing acquisition costs and supply chain issues).
Entrenching is all about getting customers to return over and over, long after the first purchase. While fintech continues to be a key tool with built-in commerce features like buy now, pay later (BNPL), these amenities have become table stakes. Now, the priority is to keep customers on the platform.
Some successful programs include:
Subscribe and save
Subscriptions are all the rage, but to be effective, companies need to build product subscriptions with high-utility, frequency and access, plus exclusivity for customers to enjoy. Brands like True Botanicals and Prose Hair treat subscriptions like a membership program, which leads to stronger retention.
Invest in loyalty
Loyalty point systems are back in vogue, but it takes time (usually a year) and investment. A few examples of platforms to build customer loyalty programs include Loyaltylion and Yotpo. Sephora’s Very Important Beauty Insider (VIB) and Target’s Red Circle program have great participation, and allow them to understand customer activity.
Refer-a-friend
Referrals are a good option to reward and grow customers via word-of-mouth. Some of the leading platforms developing referral programs include Friendbuy and Swell. Cash App and Robinhood are examples of refer-a-friend programs that drove improved first-time user conversion.
Refurbish and resell
Companies can differentiate by reselling their own secondhand goods, taking back control of their brand from marketplaces. An emerging player developing the infrastructure layer for this is Reflaunt. Hemster is another tool that can help refurbish returned inventory and enable it to be resold directly or via third parties.
Focus on customer experience
Where is my product? That’s the number one question customers have. If a package is missing, consumers expect the brand to make things right. Tools such as Malomo (tracking), Route (logistics support), Clyde (warranties) and Loop (convert returns to exchanges) are becoming increasingly important.
Outside of programs, it’s critical for brands to be data driven, as conversions and retention are number games. From attribution to the customer journey, tracking metrics and KPIs are more important than ever. There are many dedicated, specialized tools like Unsupervised for finding out why key metrics, like conversions, are up, down or flat; Tresl and Triple Whale for analytics, Elevar for data tagging, Alloy for data integrations, and EnquireLabs for consumer behavior.
Build stronger brands and reduce reliance on social
Companies need to rethink what brands mean to consumers today, and in the future, to determine how to best build organic strength. There is strong emphasis on building a community for customers to rally behind in order to drive positive affinity. With paid social programs losing their edge, tomorrow’s winners will no longer rely on social media advertising alone to build a defensible brand.
Outside of building a community with your organic voice, you can sell your product without hurting your brand on emerging marketplace channels like Walmart, eBay, Target and Amazon. While other social channels, including Snapchat and TikTok, are still young, it will help consumers find your product where they spend their time. However, while many big brands were able to quickly diversify from Facebook after performance dropped, small brands still need to follow suit.
Looking inward, here are a few effective tactics to help retailers build organic strength:
Build a community and increase word-of-mouth
Stay top-of-mind through private Facebook or Reddit groups, or active customer engagement via social channels. Invest in affiliate marketing with influencers. Email and SMS journeys are an inexpensive, high-ROI option to keep engagement and conversion high. Some of the most powerful brands have millions of user-generated content, organic mentions, dedicated forums built by fans, etc.
Build websites that convert
Optimize websites to drive higher average AOVs. A few best practices include: gift with purchase campaigns, free shipping, mini cart progress bars, behavioral sciences, pushing higher AOV sets, best-in-class creatives and videos, ratings and reviews. Tools like Vizit and nFinite enable brands to create more engaging product visuals to drive sales.
Invest in your story and stick to it
Inspire audiences, find a niche and differentiate against competitors by speaking out about the consumer pain point. Some good examples include no-fee bank Chime and wearable fitness coach WHOOP. Both brands have consistent brand messaging and powerful creatives across all channels that drive the story home, allowing them to upsell additional products and own a greater share of wallet.
Be mobile
Build an app or great website that is mobile-first and lightning fast. No-code platforms like Bryj.ai are helping close the app gap. Look into emerging platforms for social commerce such as livestreaming via Instagram, or consultative selling in the form of entertaining product reviews using platforms such as Popshop Live and Shopshops.
Also, next gen interactive voice response (IVR) allows your team to assist in closing a complex sale. AI-based voice assistants like AI Rudder can work 24/7 to serve customers.
Despite challenges, there’s an air of optimism
Most brands will find it tough to spur growth via customer acquisition in 2022. For the majority, paid social media strategies will continue to be an increasingly expensive battle for incremental gains. Diversifying customer acquisition channels and organic growth will take time, but the investment is worth it in the long run to build an enduring brand.
But there’s low-hanging fruit for everyone. This is about driving more customer value in uncertain times. For many brands, relentless focus on increasing revenue quality by maximizing lifetime value of customers will be an avenue for higher returns.
Even with inflation and a potential recession on the horizon, now is the time to reach out to existing customers and stick with them through the ups and downs. When we all reach the other side, we can look forward to even stronger unit economics and a promising future.
Disclaimer: Unsupervised, Chime, Bryj.a and AI Rudder are portfolio companies of Cathay.
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