Operational Efficiencies: The Underrated Driver Of E-commerce Profit Margins

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In the world of e-commerce, the fast-paced industry dynamics are impacting investor criteria, transforming them as companies adapt and compete in an increasingly competitive global environment. VC firms focused on e-commerce look at more than traditional yardsticks like top-line revenues. Instead, they are evaluating less conspicuous areas. As the industry moves forward, the focus is shifting towards efficiency and understanding the nuances of operations. 

Investors review how founders navigate the intricacies of operations to project sustainability in the long term. Some of these operational checklists include checkout processes and logistics optimization. 

As a result of competition and maturation, the industry is looking to balance growth with sustained profitability. VCs are scrutinizing e-commerce companies with an increasingly specialized lens, and founders must bear this in mind when they raise funds and seek to grow their companies. 

According to Allied Market Research, global e-commerce is expected to grow to a $63.8 trillion industry in 2032. VCs and founders must consider the levers that give e-commerce companies a competitive edge.

Beyond the Revenue-Centric Lens

The e-commerce landscape is changing from being revenue-centric—focusing on top-line revenues and transaction volumes—to recognizing operational efficiency as a driver of long-term success. The global e-commerce industry is still in an accelerated growth phase, with a remarkable projected CAGR of 15.3% from 2023 to 2032, having witnessed a $15.7 trillion revenue in 2022. 

There is accelerated growth potential stemming from increased internet penetration, the continued rise of smartphones and mobile technology, and social media platforms as a means to generate viral marketing. 

Despite these well-known opportunities, the industry is plagued with problems such as security and trust issues and loopholes in payment methods and technologies. In addition, inefficiencies throughout the e-commerce process, like disputes in infrastructure and logistical bottlenecks, limit the potential for expansion. 

The industry presents lucrative opportunities for disruption and innovation. However, founders and executives can exploit the less-known gears that make e-commerce operations thrive and thus differentiate the successful from the merely promising.

For a better understanding, it helps to see revenue as a vanity metric. It removes focus from the cost of doing business and other valuable aspects of e-commerce, like operations, fulfillment, marketing, and customer acquisition. In other words, revenue is not an indicator of true profitability. 

How To Boost ECommerce Margins Beyond Driving Transaction Volumes

High transaction volume is not the only measure of success among e-commerce companies. Venture capitalists or VCs are looking into more criteria that indicate leadership in the sector and mastery of the ins and outs of the business. 

Historically, players have employed various tactics, such as geographical expansion, collaboration, partnership agreements, and new products, to capture market share. However, more is needed to achieve sustainable growth in e-commerce. Moreover, if we've learned anything from Allbirds and Warby Parker, revenue growth doesn't equate to profitable growth. 

The following metrics can be considered as levers that founders can use to attract VCs and acquire an edge over their competition:

Customer retention

At the start of an e-commerce business, customer acquisition is critical. With time, customer retention becomes just as important. Repeat customers are a vital source of steady revenue. They also drastically reduce the cost of customer acquisition. 

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Today, investors look at customer lifetime value or CLV. This business metric determines how much your customers spend on your services or products over time—greater brand loyalty results in higher CLV. 

E-commerce executives and founders need to understand CLV as it helps ensure consistent profitability over extended periods. A company heavily focused on new deals and new customer acquisition needs to take advantage of the opportunity of repeat customers, who help sustain profitability during slow seasons. 

A high CLV means you have enough customers to support your business throughout different seasons of the year.

The increased revenues resulting from better CLV help you invest in business growth. The increased profit is also a positive indicator that heightens investor confidence in the business's ability to survive downturns and lower acquisition costs over time. 

Inventory turnover

Inventory turnover is a financial ratio. It shows the number of times an e-commerce company turns over its inventory relative to its COGS or cost of goods sold within a given period. To project the average time for inventory turnover, the company can divide the days within the period—usually a fiscal year—by the inventory turnover ratio. 

This metric can help a business decide better on marketing, purchasing, pricing, and manufacturing strategies. It is also a way to gauge the efficiency of the use of assets. Optimizing inventory turnover is key in e-commerce operations. It boosts cash flow and profitability.

An e-commerce company with slow-moving inventory increases carrying costs and ties up capital. On the other hand, rapid turnover ensures a dependable cash flow. Investors review this metric to see how efficiently an e-commerce company manages its business. Such businesses must balance having enough stocks to meet demand and avoiding too much inventory that inevitably leads to markdowns and losses.

You can use the inventory turnover ratio (ITR) as a litmus test to gauge your business's financial health. An optimal ITR reflects a balance between inventory management and sales performance. Achieving an optimal ITR can lead to enhanced cash flow, reduced holding costs, and minimized dead stock—all critical to sustaining an e-commerce operation. 

You can also use ITR to benchmark against competitors. Privately-held e-commerce companies typically range between four and six, while publicly traded companies’ data from financial statements provide you the basis for calculating and comparing ITRs. 

Logistics optimization

Logistics optimization is an often overlooked metric. It leads to an efficient supply chain and impacts customer satisfaction and overall cost. To achieve highly optimized logistics, e-commerce companies should use real-time tracking, predictive analytics, and route optimization algorithms that require accurate geolocation. 

A prime example of operational efficiency through geolocation tools like those offered by Radar.com could cut your business’s Google Maps bill in half. Besides reducing operational costs, companies that invest in supply chain optimization ensure timely deliveries and improve customer satisfaction. 

Streamlining of checkout processes

Keen investors look into e-commerce businesses' checkout processes to assess their customer experience. E-commerce businesses should perfect their interfaces to lower cart abandonment rates, increase payment efficiency, and reduce friction. 

The UX goal is to minimize the steps it takes to get from product discovery to purchase completion. Consider this a litmus test: The process should be as simple as possible so that even a senior citizen on a Grandpad tablet can easily purchase your products online.

A leading e-commerce platform, Shopify, is known for its user-friendly and intuitive checkout process—merchants on Shopify benefit from improved conversion rates and reduced cart abandonment rates. 

Advanced Operational Levers: Innovative Strategies To Increase Efficiency

E-commerce companies are moving into smart warehousing and leveraging technology to boost operations efficiency and improve margins. The following are examples of using technology to transform the supply chain landscape radically:

Robotics and automation

E-commerce operations benefit from the integration of robotics into various processes. The rising popularity of e-commerce means a heightened demand for faster handling of orders and shipping. 

At the same time, warehouses and fulfillment centers have struggled with budgets to meet the increased volume. The time it takes to pick products from their slots and get them to the loading dock is critical to efficiency and customer satisfaction.

Warehouse robotics presents a unique solution to the demand surge and speed dilemma. These systems use software and hardware to improve operations. Consider a scenario where data syncs seamlessly with fulfillment. 

Any time the data changes, the data-driven WMS or warehouse management system reports spikes in orders and points to specific products. To improve operations, the WMS could direct the warehouse robots to re-slot the high-demand items to an area closer to the loading dock. 

This simple change makes a massive difference in fulfillment speed and is a boon to human workers, who exert less effort picking orders and moving back and forth between areas. 

Types of warehouse robotics include aerial drones, unmanned aerial vehicles (UAV), automated guided carts (AGC), collaborative robots or cobots, articulated robotic arms, goods-to-person (G2P), and automated guided vehicles (AGV). 

Benefits of warehouse robotics

E-commerce companies that use warehouse robotics infrastructure enjoy a competitive edge over those that don’t. The key benefits include optimized storage, wherein robots store and retrieve inventory by moving shelves in areas humans can’t reach, thus reducing space requirements by packing shelves closer together. 

Another benefit of warehouse robotics systems is increased productivity. Robots can speed up inventory movement to a centralized area for picking. This movement makes it easier to assemble individual orders or pallets.

Warehouse robots also handle repetitive work, moving inventory from buffer stock areas to warehouse slots. Workers do these tasks less and can reserve time for other duties like packing orders and picking items. 

Big companies like Walmart have decisively moved forward with automation. It brought warehouse robotics to 25 of its distribution and fulfillment centers. Moreover, the deal with Symbotic systems has expanded. Walmart announced the installation of warehouse robotics in all of its distribution centers in the US in 2022, part of an eight-year rollout. 

Advanced data analytics

E-commerce companies are increasingly depending on big data as an operational lever. An e-commerce operation can strategically gather data from customer website behavior, including purchase histories, interactions, and other permitted information. 

Using this data, the company can use predictive analytics to anticipate demand, personalize the customer experience, and optimize pricing. 

By harnessing the vast amount of data generated through customer interactions, purchase histories, and website behavior, e-commerce businesses can make informed decisions to optimize various facets of their operations. Predictive analytics, in particular, enables companies to anticipate demand patterns, optimize pricing, and personalize the customer experience.

Amazon is a pioneer in this area. It uses predictive analytics to personalize recommendations and forecast customer demand. This information is also valuable in optimizing warehouse operations. Big data has been the key to significant cost savings and improved customer satisfaction. 

Machine learning (ML) has allowed Amazon to anticipate future demand. This capability reflects on millions of products worldwide and happens in seconds. To execute this, the e-commerce giant reinvented their data infrastructure to automate inventory placement, improve buying systems, and deliver on customer promises. The system is entirely cloud-based.

Learning From E-commerce Giants’ Operations Models

E-commerce giants didn't get to their position by chance. Their operational brilliance exemplifies best practices in the industry and is a handy benchmarking tool. 

The diversified ecosystem: the Alibaba model

One example is Alibaba's ecosystem approach. The company views itself as an ecosystem encompassing not just e-commerce but logistics, cloud computing, and digital entertainment. 

This diversity maximizes Alibaba's ability to capture value at every stage of the customer journey, thus maximizing revenue streams. At the end of the fiscal year wrapping up on March 31, 2023, Alibaba Group's consolidated revenues amounted to $126.49 billion. 

Operational agility: the Zara model

Zara prides itself in its fast supply chain model. This model could work for certain businesses, specifically those in fast fashion. Zara prioritizes speed and responsiveness. With its fast approach to its supply chain, it minimizes static inventory and quickly adapts to changing fashion trends.

Zara's operational agility minimizes holding costs. It also retains customer engagement by swiftly adding new designs or clothing styles. Demonstrating the effectiveness of this strategy, Zara's owner, Inditex, recorded a net profit of $2.7 billion for the first half of the fiscal year of 2022. 

They attribute the 40.1% surge to the strong growth in sales, which reached $18 billion. The company's EBITDA—earnings before interest, taxes, depreciation, and amortization—increased by 15.7% to $5 billion.

Amazon’s hyper-optimized supply chain strategy

The world's leading e-commerce giant, Amazon, needs no introduction. It dominates many aspects of e-commerce. The behemoth is known for its high-performing supply chain. Strict delivery expectations, stiff competition, and the rising demand for quick online purchases put pressure on e-commerce leaders to perform at higher levels than ever. 

Amazon leverages technological innovation and strategy to drive its warehouse configuration and processes. The company prides itself in having among the most advanced supply chains in the world. 

Despite its size, Amazon's logistics network is sailing smoothly overall. The network is a complex labyrinth of third-party logistics businesses, partnerships that increase efficiency and lower cost, and premium services because of Amazon Prime Air's capabilities. 

Appeal to Investors by Optimizing Your E-commerce Company Behind The Scenes

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Founders must look beyond top-line revenue goals and delve into the operating machinery of their companies to discover hidden gems that differentiate them from the competition. E-commerce profitability is dependent on a deep understanding of operational efficiencies. 

The diversity of current e-commerce models demonstrates the innovation, adaptability, and resilience required to improve profit margins by changing the operations model.

When you embrace new metrics that boost your profitability beyond the obvious, you appeal to discerning investors and carve out your space in an increasingly competitive yet continually growing space. 

The e-commerce industry is alive and well, and those prioritizing operational excellence will stand out from mediocrity. Those who master operations and all the hidden optimization strategies have the keys to succeeding in e-commerce.

 

This post was authored by an external contributor and does not represent Benzinga's opinions and has not been edited for content. The information contained above is provided for informational and educational purposes only, and nothing contained herein should be construed as investment advice. Benzinga does not make any recommendation to buy or sell any security or any representation about the financial condition of any company.