Tuesday, September 21, 2010

eCommerce Rule #4: Your goal: cheap, fast and free

If there is one thing you can count on, it’s that consumers will always want lower prices. And once a consumer spends money online, she wants immediate gratification. So for an online retailer, there’s nothing more important than price and availability.  This is the core advantage of scale in eCommerce, but also what new eCommerce models like Vente-Privee in Europe and Gilt Groupe in the US have been able to leverage for tremendous success.  In our view, the best e-commerce companies will offer products at low cost and deliver them quickly—and, often, free of charge.

Cheap. It takes just a few clicks for consumers to figure out the market price for any item on the Web. You don’t have to offer the cheapest price on all products all of the time. But you should be rock-bottom on those items your customers will use to judge you. Consumers aren’t dumb; they generally won’t pay more than they have to. Don’t forget this.

Fast. The biggest disadvantage to shopping online, as opposed to in a brick-and-mortar retailer, is the lack of instant satisfaction. Until the moment of delivery, a consumer has spent his or her hard-earned money but has nothing to show for it—no new Jimmy Choos to wear out on the town, no new leaf blower to show off to the neighbors. Not surprisingly, then, quick delivery is key to delighting customers. A recent survey of U.S. consumers conducted by STELLAService confirmed that the leading factor in determining great customer service was delivery speed:

Companies that care about customer service are laser-focused on fast shipping. For example, our portfolio company QuidSi boasts of reaching 70% of US consumers overnight and the rest in two days. To offer your customers the products they want quickly, we believe you need to control the entire customer-fulfillment experience. In the beginning, this may mean using a third-party logistics company (3PL) to own and operate your back end or drop-shippers to fulfill the long tail of SKUs. But once you hit a few million dollars in annualized gross profit, you should keep as many of your SKUs as possible in stock in your own warehouse so you control those products from the moment a consumer clicks “buy” to the moment he or she receives your delivery. Then you can start thinking about fast shipping.

There are two ways to minimize your shipping times. The first is the Amazon approach. If you’re like most retailers and lack the gross margins to afford next-day air delivery, build multiple distribution centers across the US, as Amazon has done, and optimize your delivery from each center to each customer. Amazon has 19 distribution centers in the US alone. You need massive scale to support 19 warehouses, but even splitting into two DCs – to cover each side of the Mississippi – will improve average ship times considerably. And don’t be afraid of regional shippers like OnTrac or LoneStar. They’ll help you reach pockets of the US faster and cheaper than UPS and FedEx. There are also third-party services like Ensenda and Enroute to help manage the complexity.

There’s also the Zappos approach to shipping. The shoe retailer, with its 40+% gross margins, was able to leverage its rich gross margins and standardized shipping boxes to ship all its products via next-day FedEx air delivery and place its sole distribution center in Nevada. This is easy and effective, but few retail categories can afford it.

Free. Unless you have a unique value proposition or are selling the type of product that costs more to ship than to buy, consumers now expect a path to free shipping when they shop online. According to a recent comScore survey, 23% of consumers only purchase items with free shipping, and 51% of consumers are at least “somewhat likely” to cancel their order if they don’t have a free shipping option. It may even make sense to increase your prices slightly to eliminate shipping charges. We’ve seen this tactic actually improve conversion rates for some e-tailers. Run the numbers, and figure out how you can make free shipping an option for your visitors. Avoid losing your shirt by setting a minimum order size before free shipping kicks in.

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