The pandemic has forced a large portion of our population to sit at home for months on end, forced to spend excessive amounts of time in front of computers, tablets and on their phones. Has this resulted in a change in consumer behaviour? The outcome has been a boom in online retail. But who actually benefits from this massive shift to online spending? Are you a business owner eager to get a slice of the digital pie? There quite are a lot of nuances in e-commerce and success in the digital realm is often not as straightforward and simple as it looks.
The Pandemic Effect will lead to Permanent Change
If anyone was still apprehensive about online shopping prior to the pandemic, those people are definitely converted by now. The dark days of being paranoid about entering credit card details on a website or singing up to PayPal are truly behind us. And if anyone is still not on the bandwagon, they will probably never will be. Online shopping is now completely mainstream and there is no going back.
Consumers are now buying everything online. The trends have definitely shifted from buying specific niche and rare products (e.g. hard-to-find car parts, PC components, out of reach goods sold overseas, unique Christmas presents) to the mainstream (the average person is now shopping online for basics like shoes, shirts and weekly groceries).
This is definitely a big development and a very serious issue for Brick-and-Mortar retailers that rely on foot traffic for their earnings.
It's probably in our best (business) interest to assume that people will stick to this new way of shopping and continue buying things online en masse even after the pandemic passes. Once consumers had the taste of convenience, they are not going back to their old ways.
Selling Goods vs Services Online
To keep this article simple, I would like to focus solely on businesses that sell tangible goods. Building a business that sells services online is a whole different (and a much more difficult) game altogether and requires a very targeted and specific approach to be successful.
The Two Kinds of e-Retailers
Businesses that sell goods online likely fit into one of these two categories:
- A traditional Brick-and-Mortar retailer with online retail capabilities added on as an extension
- A dedicated online retailer that wholly operates in the digital space and does not rely on physical interaction with customers apart from order collections.
These two groups have completely different business models and are virtually nothing alike - even if they stock and offer the same goods.
Traditional Brick-and-Mortar retailers open and run their businesses with an expectation of foot traffic.
These types of retailers have a long list of variables that determine input costs, expenses and profit margins.
Some of the key variables include:
- Commercial/Retail Leases and associated costs (Fitouts, Outgoings, etc.)
- Commercial Lease renewal arrangements
- Physical location and expected foot traffic
- Level and standard of customer service
- Staff wages
- Expected RRP
- Presence of nearby competitors offering similar products
- Presence of a nearby "anchor tenant"
- COVID-19 movement restrictions, isolation and entry requirements
- Presence of online competitors that do not have typical Brick-and-Mortar expenses
This is by no means a complete list - there are many more factors at play for traditional goods retailers.
All of the variables listed above create or take away competitive advantage.
With so many different factors that can influence a typical retailer, it is easy to see a situation where a particular retailer may be quickly disadvantaged by a competitor that has an ace up their sleeve. If a competitor has an advantage in an area that is a key input cost, the retailer in question can be in serious trouble if said competitor can offer goods at a lower price.
- A competitor that is able to purchase a commercial property outright. If your business has to pay rent on a monthly basis, this is a severe disadvantage that is further amplified for smaller businesses where rent is often a major expense;
- A competitor relying on free labour from their family members or paying cash-in-hand below the minimum wage;
- Your competitors' business is physically closer to an "anchor tenant" and enjoys a significant increase in traffic.
One can quickly see how a business with predominantly online operations can get away from a quite a few overheads, such as ongoing expenses and other complexities.
A major factor for Brick-and-Mortar stores is the relationship with the landlord. For example, the landlord may choose not to renew the lease - and as a consequence, a retailer can easily loose their entire business and customer base.
Dedicated Online Retailer
A dedicated online retailer has a considerable advantage to having a much smaller number of variables that can negatively impact the business.
Furthermore, there is more flexibility with these variables as compared to a traditional Brick-and-Mortar store. While you may not have the leverage and will not be able to easily bring your retail landlord to the negotiation table, the same can't be said in respect to your web hosting company or a digital marketing agency. Business operators in the digital space have a considerable advantage of not having to suffer real estate issues, with the exception to warehousing for goods, which is a much simpler and flexible affair than retail premises.
Some of the variables that affect online retailers are:
- Warehousing costs
- Costs associated with fulfilment and shipment
- Search engine rankings and online authority of your e-store
- Social media presence or lack thereof
- Level of customer service
- Malicious chargebacks
- Maintenance requirements and development costs applicable to your e-store
- Transaction fees
As you can see, the variables that affect dedicated online retailers are more of the types that one can control.
A lower barrier of entry
With no huge upfront costs or commitments associated with becoming a dedicated online retailer as compared to establishing a Bricks-and-Mortar store (such as singing commercial leases and hiring staff) the barrier of entry is significantly lowered.
Which brings us to the next issue.
The American Heavyweights are often the Winners
A lower barrier of entry means that virtually every business operator can start selling online.
This is both a good and a bad thing.
As a consequence of so much interest to online retailing in the business community, there are many shortcuts provided by a selection of large providers.
e-Commerce as a service
A number of cloud platforms already exist that offer e-commerce as a service - instead of paying a developer to create an online store that your business will actually own outright, you will need to sign up to a contract to pay a monthly fee and sales commission to a provider. You will then get access to a digital toolkit that allows you to create your online store with minimal technical expertise. The catch is that there is no leaving the platform and you are completely bound by provider terms & conditions, fees and available technical capabilities.
These cloud providers generally only offer the ability to create and operate your online store - driving web traffic and customers is usually outside their scope of services. You will still need to hire a digital marketing agency to drive traffic to your e-store.
Another option is to use an established online marketplace to sell your products. If your business does not have a fully fledged e-store yet, this could be a good testing ground to see how your products fare in the market. These marketplaces can also serve as additional places online where your products can continue to be sold after your e-store is up and running.
There are two well-known online marketplaces in Australia. They are run by huge American conglomerates - one was founded in 1994 and the other in 1995, at the time when the Internet was not yet taken seriously and still considered a toy for university geeks.
As a showcase of the power these online marketplaces wield, one can check their performances during the latest lockdown. One of them showed a staggering 310% increase in sales during the period, and the other an increase of 122% 1.
While using these platforms offers the advantage of gaining immediate access to potential clients and ability to quickly dip your toes into the market, this comes with some disadvantages:
- Sale commissions per transaction eat into profit margins
- Monthly fees
- Lack of bargaining power for retailers that utilise these platforms
- Poor protection for sellers from unscrupulous buyers and chargebacks
- Extreme competition
- Price wars and "race to the bottom" affecting some products
- Some products in competitive sectors appear to be sold below cost
- Competitors from international sellers that offer free shipping to Australia
What do all these providers have in common?
Most of these cloud providers, aggregators and online market places share one thing in common: they are foreign-owned entities and operate for maximum profit. They change their algorithms, terms & conditions and fees on a whim.
Changes to their operations are completely out of your control and can easily make or break your business overnight.
If you want your business to succeed online long-term, you will need to invest into building your own online store. One where you set the rules.
So, how do I "dominate the digital space"?
The first point that needs to be addressed is that in order to get placed as a competitor in online goods retailing space, you will need to hire a web developer that can work on your dedicated e-store. You will need a competitive edge online - and that comes with experience and knowledge of how things work.
But, before diving head first into building your e-store, a feasibility study into the project needs to be conducted. You need to make an assessment whether you will actually be able to compete in your market niche.
The key issue to consider is that unless your particular business is in a market segment with few competitors, it is most likely that the field already has quite a few strong players. If your business is in the former category - you have a much easier road. If it's the latter case - you will need to go above and beyond with a sophisticated digital marketing strategy.
You can start by knowing what to look for by entering a well known and popular product category for a key location (e.g. "mens watches sydney") in a search engine. You will find that there will be a few dedicated players at the top that have spent a lot of resources on Search Engine Optimisation (SEO) to get them there. You will also often find results from online marketplaces for matching products, as well as big retailers that have such products in their catalogue.
"If you are planning to compete for 'mens watches sydney' online, good luck!"
If, unfortunately, your business sells a popular and mainstream product like in the example above, you are not in a good spot. Those companies that show up in the top results have often been around for a long time (aged domains), have excellent reputation in search engines, lots of backlinks and big marketing budgets. Yes, you can build a sophisticated e-store and throw money at SEO to try to come out on top, but you might just as well be chasing a Ferrari in an old Holden.
You will need to think outside the box and get really creative. That means using a complex strategy of building landing pages to match "Long-Tail Keywords". Using techniques to target less-popular suburbs and locations. You may even do better to use traditional (non-digital) marketing services to advertise your online store!
The list of techniques that can be done is quite long. Stay put for my article in the next issue to find out more.
If you are interested to discuss how to make your business work online, please get in touch with us. We have plenty of experience running a variety of online projects and have the necessary technical expertise to build a custom digital solution for your business.