CREATE MARGIN
Tangible Cost Savings in a Profit-Pressured Environment
One of the most common challenges we heard from Brandrunners™ at The Big Gear Show (and more broadly over the last 6-12 months) is the new level of profit pressures emerging in businesses. Costs are increasing in nearly every part of the business, from raw materials and packaging to labor and transportation, and more. Furthermore, as ecommerce penetration rose over the last two years, oftentimes total brand margins took a subsequent step down as many brands recognize a lower margin profile for ecommerce compared to B&M.
These cost pressures must be addressed to regain the levels of growth organizations are seeking. At Netrush, we have been working diligently with our brand partners to identify cost saving opportunities. Our scaled supply chain and technology, as well as our in-house niche experts, have helped Brandrunners build margin back into the P&L during this pressured time, and we’re here to share those key learnings and opportunities.
We’ll focus on two of the most prominently pressured parts of the ecommerce business—supply chain and advertising.
SUPPLY CHAIN: BUILDING MORE AGILITY AND EFFICIENCY
THE SITUATION
The COVID-19 pandemic brewed a perfect storm of impacts to the supply chain:
Unexpected and unprecedented demand spikes
Factory and warehouse shut downs
Labor shortages
Amazon’s prioritization of essential items
This perfect storm yielded inventory shortages, delivery delays, and meaningful increases in costs throughout the supply chain. Some of these implications still linger today for many brands—most prominently, higher costs, which we believe will remain elevated well into 2023.
“While we’ve seen a recent improvement in some LTL carrier capacities, we believe LTL pricing pressure will remain with many carriers through 1H 2023. In order to minimize the impact these costs have on profitability, it will be critical for brands to expand their access to carriers, build strong partnerships, and better align the right carrier with the right freight at the right price.”
- Sean Dougherty, Netrush Sr. Director of Transportation
We’ve seen and helped best-in-class Brandrunners take action over the last two years to build more resilient, flexible, and efficient supply chains, rather than simply waiting for the storm to pass. Below are some of those actions taken and key learnings.
THE FIX: KEY OPPORTUNITIES FOR BRANDRUNNERS
Refine “endless aisle” thinking: While we hope the worst is over in regards to extreme supply constraints, these challenges required brands to think more intentionally about their assortments to make the most of their limited capacity and leading brands are maintaining this intentionality today.
Rather than adopting the mentality that ecommerce is an endless aisle, this approach treats each product as its own business—evaluating its value to the customer, requirements for success, sales opportunity, and ultimate profitability. In many cases, this has meant shifting focus away from unprofitable SKUs and the slow-moving long tail, as well as the supply chain complexity and greater resource requirements that come with it. In doing so, brands have enjoyed a number of benefits:
Base level profitability improvement by focusing on top money-making products
Better rates across the supply chain on the highest-volume products
More focused resources across catalog, content, and more, to maximize sales and profit on those top products
Higher ROI on emerging and alternative fulfillment investments like direct-to-consumer (DTC) and retail drop ship
Higher injection thresholds for FBA in times of limited fulfillment center capacity
One overarching theme of many of these benefits is an important cost that often goes unacknowledged—the cost of sitting product. Sitting product locks up cash and can lead to incremental costs like long-term storage fees through Amazon FBA, as well as opportunity costs. For example, slow-moving inventory occupies space that could otherwise be used for more productive products. Amazon’s algorithm and fulfillment center logistics also favor fast-moving products, so efforts to move more product can result in greater growth compared to a disproportionate investment into slow-moving ASINs.
2. Supply chain control and flexibility: Supply chain woes brought on by the pandemic showed brands the value in vertical integration and/or moving more of the supply chain closer to the end consumer.
These actions allow for:
Greater control
Lower transportation costs if avoiding overseas shipping
More agility in a volatile supply and demand environment
Reduction in out-of-stocks
Reduction in the time it takes to get product to market
“Nearshoring or onshoring sourcing has become a focus for many brands to supplement any offshore sourcing disruptions. We’re seeing brands look at a 70/30 or 80/20 split in offshore vs. nearshore sourcing to alleviate out of stocks.”
- Michael Smith, Netrush Sr. Director of Supply Chain
The final benefit—reduction in the time it takes to get product to market—is especially true for Sports & Outdoors brands. Traditional manufacturing cycles create long lead times that are not suited for the current choppy supply chain environment, nor the dynamic demand trends that we see in ecommerce (which we’re currently seeing across broader retail as well).
This is why digitally-native upstarts often grow market share quickly on Amazon. By using an agile supply chain strategy and acute attention paid to real-time Amazon demand trends, these companies are quickest to get products to market and start building history and fueling growth on the product listing. Mature brands that can learn from that success—and invest in a supply chain optimized for ecommerce—will be well-positioned over the long term.
LEARN FROM THE BEST
PEET Dryer expanded its logistics partnership with Netrush to centralize more of its inventory across retail channels. The benefits? Significant cost savings and the ability to quickly and seamlessly move inventory across the ecosystem, keeping PEET’s customers covered no matter where they choose to shop.
For Amazon, we prep-and-inject into FBA while keeping additional inventory in our own facility—this allows us to quickly replenish FBA or turn on seller-fulfilled Prime to avoid out-of-stocks.
For PEET direct-to-consumer, we’ve been able to identify cost savings across processing, picking, packing, and shipping, while shortening fulfillment times for the customer.
PEET keeps inventory in our Netrush facility to fulfill the Walmart business.
3. Don’t underestimate small margin wins: Leading Brandrunners have learned to pursue meaningful cost savings (like the larger initiatives listed above) while also searching for smaller margin wins that can make a big difference in the long-term. In such a cost-pressured environment, any margin improvement should be welcomed, especially per-unit improvements that can add up to have large impacts that continue to grow as the business grows.
Here are a few potential margin wins as it relates to the supply chain:
Closely monitor carrier costs: Carriers continue to make small tweaks to their published rates, accessorial charges, and service offerings. These small changes can add up to big impacts on a brand’s margins, and often go unnoticed.
Revisit ecommerce packaging: Products packaged for the B&M shelf are not always functional or cost-effective to ship through ecommerce channels. Engineering ecommerce-specific packaging can lower costs via reduced packaging materials, with a number of other potential benefits as well such as a better customer unboxing experience, improved sustainability, and better visibility on the digital shelf.
Even more meaningful margin improvements can be found by identifying transportation savings through packaging adjustments. Shipping classifications are based on volume, as well as length/width/depth dimensions. Brandrunners should be searching for opportunities to reduce one or more of those inputs, dropping the product to a lower shipping classification and resulting in substantial savings, even for fractional reductions in size or weight.
Actively manage chargeback fees: If you’re using FBA, you’re likely experiencing some level of FBA discrepancies—such as lost or damaged inventory during receiving, incorrect dimensions, incorrect labeling, and more—that ultimately end up costing you. GETIDA suggests brands face discrepancies on 1-3% of products sent into Amazon, FBA, which can equate to a significant dollar impact if not addressed. Actively auditing your FBA transactions and disputing discrepancies can help bring those dollars back to your bottom line.
4. Clear communication between supply chain and sales: As mentioned in Part 1, the interconnected nature of the Amazon and ecommerce business requires regular communication, both cross-functionally within your organization and with external partners. In today’s volatile supply and demand environment, this type of communication is especially important between supply chain and sales teams. Enhanced communication was another by-product of the pandemic that leading Brandrunners plan to maintain longer term as well.
LEARN HOW NETRUSH CAN HELP YOU SAVE ON SUPPLY CHAIN
Use Netrush’s scaled supply chain to get your products to your customers cheaper and faster. We are experts on Amazon FBA prep-and-inject, but we don’t stop there—our 3PL solutions have your entire business covered, from B2B shipping, Amazon FBA and merchant-fulfilled, all the way to direct-to-consumer.
Want to save 15-25% on logistics? Email michele.flamer-powell@netrush.com to learn more.
ADVERTISING: DO MORE WITH LESS
THE SITUATION
Having a prominent presence on Amazon is becoming increasingly expensive as competition increases and Amazon continues to monetize its digital real estate and consumer traffic. Our research shows steady 20%+ year-over-year increases, on average, on the cost-per-click brands are paying through paid search on Amazon.
Source: Marketplace Pulse
These large increases have come at a time where Amazon has also meaningfully increased the advertising inventory available on its site. For example, a few years ago shoppers may have seen a Sponsored Brands headline banner and a handful of Sponsored Products, at most. Today, any given search engine results page (SERP) today is most likely filled with a collection of ads—a Sponsored Brands banner, multiple rows of Sponsored Products, Sponsored Brand Videos, editorial recommendations, “highly rated” products, and more—all part of the pay-to-play model. Only after all of these advertisements do shoppers see the organic search results that used to account for the majority of the SERP.
We believe paid placements are nearing full saturation, meaning Amazon is unlikely to continue to grow advertising inventory at the same rate going forward. If growth in supply (i.e. advertising inventory) slows, yet growth in the demand for Amazon’s advertising placements (from brands) continues to rise, we may begin to see even larger increases to brands’ total advertising costs on the platform.
We’re also observing increasing customer fragmentation across the retail landscape as consumers’ shopping options—from discovery all the way to fulfillment—proliferate. This fragmentation can make customer loyalty more challenging, with a recent McKinsey study suggesting brand switching is at an all-time high. This decreasing loyalty, mixed with rising customer acquisition costs, is contributing to the profit squeeze. Thus, we believe Brandrunners’ ultimate objective for marketing and advertising is to create the most loyalty at the lowest cost.
THE FIX: TOP TACTICS FROM OUR PERFORMANCE MARKETING TEAM
Brandrunners face an urgent need to find new levels of efficiency and effectiveness with their advertising dollars. We believe this can be done in two main ways: to tactically drive efficiencies, typically through more sophisticated data, technology, and automation; and to approach marketing and advertising spend through a lens of loyalty.
TACTICS FOR AD EFFICIENCY & EFFECTIVENESS
Ensure inventory and advertising are synched: “I’m leveraging Sellozo's ‘days of inventory’ (DOI) reporting to quickly adjust advertising budgets to ensure we don’t accelerate stock-outs. This is critical in today's supply chain environment.” - Jackson Hathaway, Netrush Performance Marketing Director, Sports & Outdoors
Dayparting: Running campaigns only run during peak sales hours—based on product sales history—is a best practice for any campaign. Sellozo’s auto-dayparting feature can do this work for you, automating the process of finding those peak sales hours, as well as the dayparting execution.
3. Incorporate cost of goods sold (COGS) into advertising strategies: Running an ASIN-level profitability report allows you to optimize spend toward higher-margin ASINs, effectively increasing the bottom line to free up additional marketing dollars for growth (or to be invested, or saved, in other ways).
4. Continuous and automated optimizations: “One of my favorite Sellozo features is our Campaign Studio. This tool creates a funnel for keywords based on strategy and performance, so all campaigns are continuously growing, testing, and optimizing on a daily basis.” - Liam Jacobs, Netrush Performance Marketing Manager, Sports & Outdoors
SHIFT STRATEGIES TO FOCUS ON LOYALTY
Using advertising with a focus on driving loyalty and customer lifetime value—rather than just top line sales— will result in more economical advertising spend. A key tool to achieve this goal is the use of first-party transaction data to understand the level of loyalty among their customers and identify products that drive loyalty.
For example, first-party data can share which products most commonly lead to a second purchase (and third purchase, and so on). These are likely the products most worthy of more advertising spend (and other types of focus and investment within the Amazon platform, like inventory management, content, brand protection, etc.). On the flip side, the products that are most common among one-time customers could either be deprioritized from a marketing perspective and/or brands could find opportunities to drive better retention from those products (e.g. through post-purchase offers, product education to increase utilization or improve customer experience, etc.).
“First-party data has never been more valuable, and nobody can act on it the way you can, as a brand.”
- Raj Sapru, Netrush Chief Strategy Officer
LEARN HOW NETRUSH CAN HELP YOU DO MORE WITH LESS
Sellozo, our AI-driven Amazon advertising platform, is engineered to increase sales, lower advertising costs, automate campaign optimization, and increase profits. We analyzed 8 weeks of data - 4 weeks before Sellozo and 4 weeks with Sellozo - and Sellozo customers see an average 70% increase in ad profit.
Through a Netrush partnership, Brandrunners receive access to Sellozo as well as a dedicated performance marketing manager that manages advertising spend daily. We are also working hand-in-hand with Brandrunners to drive greater loyalty and improve customer lifetime value with the help of first-party transaction data and a team of industry veterans across advertising, branding, Amazon, and omnichannel.
To explore advertising efficiencies with Netrush, email michele.flamer-powell@netrush.com.
ONE MORE NOTE WORTH MAKING…
Given the extreme profit pressures brands are facing right now, most Brandrunners will let new-found cost savings flow through to the bottom line. Alternatively, there’s the opportunity to bring the two together, with a model where supply chain cost savings flow into the advertising budget to further fuel business growth. And, the savings could be applied in the other direction as well, leveraging new efficiencies in advertising dollars into future-forward supply chain investments. This approach requires integration and collaboration throughout the organization, rather than supply chain and advertising operating in their own silos. This is one of the key roles of the Brandunner—multidisciplinary knowledge and involvement in the various elements that make up a successful business, and serving as the leader that facilitates the integration of those elements across the organization.
In this week’s GEARING UP edition, it’s supply chain and advertising. In next week’s edition, you’ll hear about content and catalog. While this is a diverse range of topics at face value, they can all be seen as interconnected levers for modern commerce brands. Brandrunners with the deepest understanding of how to utilize the right combination of levers at the right time will be best positioned to drive profitable growth, having the edge in today’s dynamic retail landscape.
ABOUT THE SERIESWe’re keeping up the momentum of The Big Gear Show with a limited series for Sports & Outdoors leaders. At the show, we heard Brandrunners sharing uncertainties and challenges related to recessionary impacts, cost pressures, and more. This series provides tangible tools, data, and perspective to help Brandrunners solve those challenges and subsequently gain control and maximize profits in today’s complex retail landscape.
Visit the content series landing page.
ABOUT THE AUTHORClaire McBride leads research, insights, and education for Netrush. She has spent the last five years helping brands grow and optimize their ecommerce businesses through written research, events, share group discussions, and one-on-one consulting, formerly with Cleveland Research Company before joining the Netrush team.
