Three Strategies for E-commerce Success: Margins, Pack Sizes and Consumer Preferences
One of the most common mistakes that a brand manufacturer can make is thinking that the success they’ve achieved in a physical store can be directly and easily translated into online success. They make an existing offline product available online for sale, packaged for the in-store experience, without any modification to their strategy and without considering for the buying habits of online consumers. This often results in major problems in both margin and customer experience, and disappoints the manufacturer, the consumer and the buyer.
Brands that have had both online and offline success realize that: 1) not all buyers are the same; 2) online consumers’ shopping preferences differ from those of in-store consumers; and 3) third-party sales reveal the balance needed to achieve success for a brand manufacturer selling on Amazon. To determine optimal e-commerce product offerings, we've looked at some of Amazon's first-party and third-party sellers to come away with three key strategies.
1. Mind your Margins
What buyers care most about is margin. The margin they care about differs, however. A buyer for Walmart, for example, looks for “% margin” while their Amazon counterpart measures “penny profit per unit” or “$/unit margin”.
The difference comes down to cost centers. For Walmart all costs are in-store, while for Amazon it’s all about “outbound shipping” to the end customer. So what does this mean for $1 pack of gum with 40% margin? Walmart can sell that pack of gum with a healthy profit margin since they can spread the store costs on a percentage basis across thousands of items. Amazon, on the other hand, must spend another $2 to ship that same pack of gum to the customer, instantaneously kissing any profitability goodbye.
Why should a brand manufacturer care whether Amazon makes a profit on their product? In short, if the world’s number one e-commerce platform can’t make a profit off of an item they’re selling, they won’t bother selling it. So, if a brand manufacturer wants to succeed simultaneously in e-commerce and in stores, they need to always be looking at both the dollar margin online and the percentage margin offline.
One of the easiest ways for a brand manufacturer to increase $/unit margin is to sell more quantity per sellable unit. This allows the “outbound shipping” cost with online retailers like Amazon to be spread across a higher Average Selling Price (ASP). In other words, the shipping cost of one pack of gum is $2, but if it's sold in a pack of 15, the shipping cost decreases to only $0.17 per unit.
2. Match the Pack Size to Your Customer’s Preference
Online sales are predisposed to larger pack sizes, selling “club” size packs rather than “grocery store” units (single item or small pack sizes). Online shoppers want to stock up and don’t have to worry about carrying heavy loads home. But when is it too much? While every new parent can’t do without enough diapers, new parents are also focused on upfront space and cost – buying in bulk requires the space to store the items bought as well as the disposable income to make the higher initial investment.
Over the past six months, the top 100 Disposable Diaper items on Amazon collected a total sales volume of nearly $200 million. These 100 ASINs (or Amazon-specific SKUs) contained an average of 135 diapers, with 1 in 6 of these ASINs being marketed as a "One Month Supply". Online shoppers are overwhelmingly opting to buy diapers in bulk, and larger pack sizes allow both consumers and brands to save money on the transaction.
It makes sense for consumers to purchase large pack sizes for items that are consumed relatively quickly. It makes sense (and more cents) for brands selling online to realize how often their consumers use their products. Very large pack sizes work for diaper manufacturers selling online, but not so much for other categories that have a lower usage rate per product.
Diapers aren’t the only category that has figured this out – the most successful selling products on Amazon like grocery, office products, sports nutrition and paper products average well above their offline in-store counterparts. Larger pack sizes for certain high-consumption items provide both consumers and manufacturers more bang for their buck.
3. Benchmark 1P Slumps against 3P Wins
Another way to gauge successful pack sizes is to look at what's being offered by 3rd party sellers and which of their items are the most successful. Unlike diapers that have a very high consumption rate, toilet bowl cleansers represent a moderate rate of consumer consumption but require a longer-term commitment for storage.
When the 4-pack of a leading toilet bowl cleanser, which was averaging $13,000 in weekly 1P sales on Amazon, became unprofitable for Amazon and hit the CRaP List, third-party sales of the 4-pack product (priced at $2 more!) took over sales, even though a 12-pack 1P option was available at a lower cost per unit.
It’s a fact: consumers shop differently online than in stores:
1. Amazon customers who found the 4-pack of toilet bowl cleanser unavailable as a 1P item were unlikely to purchase a single bottle, but opted instead for either the 12-pack or a 4-pack from a third-party seller.
2. Bulk is not always best. Most consumers are willing to pay a higher per-unit cost for their preferred pack size.
3. The discontinuation of the 4-pack toilet bowl cleanser as a 1P item suggests that pack sizes of 4 or smaller of toiler bowl cleanser are not profitable enough for 1P sellers.
Amazon started with books for many reasons: optimal pack size and price. Books have: 1) a high $/unit margin; 2) a good pack size / price versus ship cost; and 3) a great 3P seller group to gauge correct price point. All brand manufacturers selling on Amazon and other e-commerce retailers can accelerate their e-commerce profits by looking at categories like Diapers, Toilet Bowl Cleansers and Books — all have achieved e-commerce success because they understand that what works for their customers in stores doesn’t translate automatically to e-commerce success.
Steven Austin is an associate account manager at One Click Retail, a company in e-commerce data measurement, sales analytics and search optimization for brand manufacturers in North America, Europe and Asia. Steven works with clients to maximize e-commerce opportunities in the consumables, cookware and consumer electronics industries.