Privacy laws and the pre-recession are shifting the e-commerce playbook
In the last three years, e-commerce retailers have been on a rollercoaster of economic conditions. After a decade of steadily increasing e-commerce market penetration, retailers saw ten years of e-commerce growth occur in just 90 days in 2020, according to data from McKinsey & Company.
For years, the direct-to-consumer industry was all about growth, a trend that rapidly accelerated once the pandemic hit. With access to inexpensive capital and strong consumer demand, brands could buy their way to a growing customer base.
“That fueled whole generations of new products popping up on Instagram or these smaller accounts, and they would produce to order. They were doing really well because they could get in front of people,” says Devrin Carlson-Smith, COO of Utah-based e-commerce growth platform Finch. “The consumer demand was there.”
Several Utah-based e-commerce brands grew up in this fast-paced environment. HydroJug, an Ogden-based eco-friendly water jug business, opened in 2016. In 2021, Ogden’s Standard-Examiner reported the company had grown 9,032 percent in three years. American Fork-based women’s apparel brand Baltic Born also opened for business in 2016 and hit $70,000 in revenue by 2017. In 2020, the company’s revenue soared to $11 million.
With so many wins for e-commerce entrepreneurs, the strategy for success seemed simple: Get your product in front of customers and wait for the sales to pour in.
But in 2023, the tried-and-true formula for success isn’t as simple as it once was.
“Budgets and cash flow are generally pretty tight right now for a lot of brands, so everyone is being asked to stretch their dollars to preserve profitability,” says Bryson White, Black Diamond’s VP of e-commerce.
At Finch, Carlson-Smith says he sees consistencies in the types of challenges arising among the e-commerce brands he works with.
“[These brands] are now in a situation where they have not hit their sales targets. They have less money—in many cases, 30 to 50 percent less than they spent in the past,” he explains. “And the cost of acquisition has gone very, very high … So now they have less money, and it costs more to reach [potential customers].”
Carlson-Smith says the dominance of major platforms like Google, Amazon and Facebook play a significant role in leading the e-commerce industry into its current state.
“Because the marketplaces are in such a powerful position, they are dictating the online advertising terms,” he explains.
Bailey Carlson, COO at Utah-based e-commerce brand Myostorm, describes the challenges that come with relying on Amazon as a “necessary evil.”
“You have to be there because it’s trusted, but you get zero customer data,” he says. “That can make it difficult to build a relationship with customers.”
“Because the marketplaces are in such a powerful position, they are dictating the online advertising terms. [Brands] are realizing they need to stop accepting the terms of online advertising as dictated by the big players. Instead, they’ve got to start doing their own detective work.”
Understanding customers has become increasingly challenging recently, as the major platforms have changed how they share data with retailers. White explains that because platforms like Facebook and Google have been sharing extensive details about consumers with brands for the past decade, brands were able to know who was buying their products and even the “micro-moment” that influenced their decision the most.
“As data privacy laws have (rightfully) restricted what data can be shared, and platforms like Apple iOS have tightened their own data sharing, the picture has gotten a lot fuzzier,” White says.
While the e-commerce industry’s go-to strategies for success are becoming more difficult, Carlson-Smith says a brand can thrive if it can become less reliant on the major marketplaces.
“Because the marketplaces are in such a powerful position, they are dictating the online advertising terms,” Carlson-Smith says. “[Brands] are realizing they need to stop accepting the terms of online advertising as dictated by the big players. Instead, they’ve got to start doing their own detective work.”
According to Carlson-Smith, major platforms have conditioned retailers to primarily track the metrics that apply to their platforms. While return on ad spend and cost of acquisition have become top metrics to track due to Google’s influence, Carlson-Smith believes these metrics are insufficient for understanding the health of your business.
“Those are great, but they’re only informative inside the Google world. They don’t tell you how much profit you have or if you are actually hitting growth numbers,” he says. “A brand should take ownership of this and not leave it to Google to run their business metrics.”
Carlson-Smith believes brands can succeed in today’s environment by taking a more holistic approach to tracking finances. “We need an aggregated view of all the things we’re doing …There’s a new set of metrics industry-wide that people are migrating to—things like marketing efficiency ratio as opposed to cost per acquisition,” he says.
While the marketing metrics that Google has emphasized over the years looked at certain aspects of a company’s costs versus revenue, the marketing efficiency ratio takes into account the costs and revenue related to all marketing efforts—from paid media to attending trade shows to organic social.
Carlson-Smith says when money is tighter, brands need to improve the efficiency of their marketing spend, and a holistic approach allows that. “Marketing is no longer on its own. It’s now moving and merging into a much more financial engine and having a tighter coupled relationship with the financials,” he says.
Bryson White agrees that marketing must be tied to a brand’s financials. “I think the first step in managing this situation is to pay close attention to your overall P&L health and understand what percentage of revenue you can still profitably invest in marketing and customer acquisition,” he says.
Overall, White believes sticking to the fundamentals will help brands get through the times when budgets are tight. Despite the changing economic landscape, decreasing access to data and the dominance of the major marketplaces, “It still comes down to the right message and the right product to the right customer at the right time,” he says. “We just need to be a bit more patient to actually see the results. Rely on fundamentals and trust the process.”