Magenta Advisory - Establishing successful direct-to-consumer online sales operations


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Brand manufacturers have launched their own direct-to-consumer online retail stores as logical continuation of their overall direct retail efforts. This paper presents the drivers and best practices for branded manufacturers when entering direct-to-consumer online retail. The research is based on Magenta Advisory's experience with some of the world's largest consumer brands.

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Magenta Advisory - Establishing successful direct-to-consumer online sales operations

  1. 1. Magenta Advisory ResearchMagenta Advisory ResearchDurable Goods Manufacturers Online:Establishing SuccessfulDirect-to-ConsumerOnline Sales Operations Magenta Advisory 2011
  2. 2. Magenta Advisory’s point of view on how to successfully manage a direct-to-consumer online sales entry Introduction Following their establishment of branded retail stores, durable goods manufacturers have increasingly star ted to establish direct-to- consumer sales in the online world. This direct online sales trend was star ted in the early 2000’s by leading consumer electronics brands such as Dell, Apple, Sony and HP who all belong to the top 20 online retailers in the United States1. Top 20 online retailers in the United States measured by total online sales revenues in 2009 FIGURE 1 Top 20 online retailer s in the United States measured by total online sales revenues in 20092 1 Inter net Retailer, Top 500 Guide, 2010
  3. 3. Magenta Advisory ResearchDurable goods manufacturers bypassing This trend has also been picked up by Finnishtraditional retailers online are no longer found durable goods manufacturers. Companies rangingsolely within the consumer electronics market. from Nokia to Fiskars and Amer Spor ts have allAs an example, Nike’s direct-to-consumer online established their own direct-to-consumer onlinechannel generated $260 million in revenues in stores with the topic being a recurring agenda item20102 and shoe manufacturers Crocs and Deckers in company management teams. In this paper, we(owners of the Ugg brand) both run direct- will investigate the business reasoning behind thisto-consumer online channels that contribute trend and provide our point of view on how toalready nearly 10% of the total net sales of these manage this strategic transformation successfullycompanies3. with a special emphasis on Finnish durable goods manufacturers. We base our analysis on client and industry experiences as well as interviews with Finnish durable goods manufacturer executives. FIGURE 2 Selected durable goods manufacturer s’ retail store and online net sales in 2010 (for Apple 2009 figures) 4 2 Inter net Retailer, Jun 2010 3 Crocs Annual Repor t 2010; Decker s Annual Repor t 2010 3 4 Company annual repor ts; Inter net Retailer ; Magenta Advisor y analysis
  4. 4. some private labels have been even able Why are durable goods to break away from their traditional price positioning. 70% of UK consumers believe manufacturers entering that Mark’s & Spencer’s private label products are better quality than other private label direct online retail? brands’ products, which enables the setting of a higher price point for the products. While each durable goods manufacturer has its own reasons for establishing a direct-to- Although in Finland private label net sales out consumer online retail channel, when working of retailers’ total net sales have been much with our clients we have found three key lower, accounting for 14% in 20087, Finnish categories under which the rationale can be retailers such as Stockmann Group state typically grouped: that private labels are an impor tant area of future development. Stockmann’s private label products already include a variety of items such 1. Durable goods manufacturers as food (e.g. Stockmann Delikatess, Stockmann defend against retailers’ Gourmet), clothing (e.g. Global, Zoye M) and increasing negotiation power home decoration (e.g. Stockmann Casa)8. 2. Durable goods manufacturers Clearly, the major threat in this for durable goods manufacturers is that they are being look for new growth by forced to increasingly compete on price. In following shoppers online an effor t to regain leverage, durable goods manufacturers are using direct-to-consumer 3. Durable goods manufacturers online retail as a tool to find new ways to seek direct consumer contact compete. Durable goods manufacturers What Finnish durable goods manufacturer executives say: defend against retailers’ in creasing negotiation power “Until a little over a year ago we were in a defensive position against the discount retailers, Globally, the retail market is consolidating but as we realized the strength of the industry meaning that retailers have increased bargaining transformation, we decided that it’s better to ride power over manufacturers. Large retailers the wave and be among the industry shapers constitute a large propor tion of durable goods than drown with the tidal wave of change.” manufacturers’ annual revenues. For example, in 2009 Apple’s largest customer accounted for 11% of the company’s total revenues and Durable goods manufacturers Nike’s three largest customers accounted for look for new growth by following 25% of the company’s revenues in the US5. shoppers online Fur thermore, retailers are launching their Internet gives unparalleled oppor tunities for own private label brands resulting in durable consumers to research products they are goods manufacturer’s products receiving less looking to buy – and this is exactly what they marketing effor t and shelf space and in some do. In the US in 2010, 97% of consumers are examples even losing their entire business searching for products and future purchases with the given retailer. As an example, Gap online9 and 9% of consumers star ted their search has moved from being Levi’s largest customer on manufacturer sites (up 3% from 2009)10. to its biggest competitor by focusing sales of jeans on its own private label brand6. Whilst a majority of consumers who research products online still end up purchasing the For the world’s largest retailers, Wal-mar t goods in traditional retail outlets, online retail and Tesco sales from private label brands is witnessing significant growth. During the constitute already more than one third of last half a decade Internet retailing has been these companies’ total revenues. In addition, the main driver of retail growth in Western 5 Apple Annual Repor t 2009; Nike Annual Report 2009 6 “Private Label Strategy: How to meet the store brand challenge”, Nir malya Kumar & Jan-Benedict Steenkamp, Har vard Business Review Press , 2007 74 The Nielsen Company, Press release, Dec 8 2008 Stockmann Group Annual Repor t 2010 9 BIA/Kelsey Group, User View Wave VII study, Mar 2010 10 “The Who, When, And Why Of Visits To Manufacturer Web Sites”, For rester, Sep 2010
  5. 5. Magenta Advisory ResearchEurope. While physical store retail growth hasbeen in total $10.6 billion between 2006 and How can durable goods2009, at the same time, Internet retailing growthrate has been more than double the amount of manufacturers successfullyphysical stores at $28.7 billion11. Similarly, Finnishconsumers are buying products and services enter direct-to-consumerincreasingly over the Internet with the total moneyspent on the web rising to 9.4 billion in 201012. online retail?Combining these two trends, durable goodsmanufacturers have a unique oppor tunity to turn For many durable goods manufacturers, enteringconsumers visiting their online sites for product direct-to-consumer online retail is a strategicresearch into buying customers purchasing necessity as discussed earlier. For them, the billion-directly from them. This proposition is fur ther dollar question is how to do this successfully.strengthened by knowing that consumersvisiting durable goods manufacturer sites Our experience has shown that if direct-to-have a high intention to buy the researched consumer online sales entry is treated solely asproduct and are more brand than price focused a technology project to build an online store, itcreating additional cross-sell oppor tunities10. is doomed to fail. A successful transformation requires a business driven approach star tingThe hard business benefit of this is an increase from formulating a clear strategy, managingin unit price for the durable goods manufacturer the transformation holistically not focusing onleading to increased revenue and improved profit technology only, and finally understanding thatmargins. real rewards come from relentless continuous performance improvements.Durable goods manufacturers seekdirect consumer contact In the following, we discuss some of the most common issues we have found durable goodsDirect relationship to consumers gives durable manufacturers struggling to address when takinggoods manufacturers control over their brand these steps.experience and access to customer data that canbe leveraged in product development, marketing,sales and care. Creating aWithin our clients we have seen the direct winning strategyrelationship with consumers to be one of themain drivers for building a direct-to-consumer Like any major business development initiative,online channel. Durable goods manufacturers’ establishing direct-to-consumer online salesstrengths to address consumers directly include needs a clear business driven strategy withstrong brand, possibilities to personalize products defined objectives and targets, means of reachingto consumers, trustwor thy company image and those targets, and an execution plan suppor ting it.possibility to leverage organic search traffic thanks In creating such strategies for direct-to-consumerto their well-known brand sites. online retail, we have often seen durable goods manufacturers struggle with two major topics: customer value propositions and channel conflict. In the following, we will dive deeper into these specific questions to provide our views on how to tackle them. What Finnish durable goods manufacturer executives say: “For us it wasn’t even up for discussion whether we want a direct contact to consumers or not, it was a clear strategic necessity. The direct relationship to consumers gives us a completely new level of understanding of consumer behavior. We have been able to, for example, pilot new product offerings in our own online channel before rolling them out to other channels.” 10 “The Who, When, And Why Of Visits To Manufacturer Web Sites”, For rester, Sep 2010 11 Euromonitor from trade sources/national statistics, Euromonitor Inter national 2010 5 12 ”Ver kkokauppa Suomessa 2010”, Federation of Finnish Commerce and TNS Gallup, Mar 2011
  6. 6. Defining a customer selection or maintain price parity with retailers. value proposition To suppor t a price parity strategy, in the US durable goods manufacturers have been able Defining a customer value proposition to limit channel par tners’ rights to adver tise that is at the same time attractive to lower prices than a price defined by the consumers and aligned with a durable goods manufacturer13. However, local legislations for manufacturers’ overall distribution strategy this type of price fixing varies widely and for is a recurring challenge raised by durable example the Finnish Competition Authority goods manufacturers whom we talk with. has pressed charges to fine durable goods manufacturers for fixing retail prices. The common myth in online retail is that price is the only relevant customer value As a more readily available source of proposition and the other traditional value differentiation, examples of durable goods proposition elements of product, service and manufacturers’ differentiating online value experience are rendered obsolete. We believe propositions on product dimension can be following a price only value proposition can found in product customization and selection. be a treacherous path for durable goods Dell’s value proposition is based on full product manufacturers, who should in our view focus on customization on its direct-to-consumer online creating an online value proposition that is best store where all Dell products are available aligned with their overall value propositions. for purchasing, whereas Nike offers product customization and exclusive products in its Not downplaying the impor tance of pricing, it online store. is often the most sensitive area in defining the online value proposition. A purely price based value proposition is often not possible for What Finnish durable goods manufacturer executives say: durable goods manufacturers as this would lead to major conflicts with the existing distribution “While we seek to be on par with other channels channel. We have found a typical pricing in pricing, our core value proposition is based on an strategy for a durable goods manufacturer exclusive product range.” online to either maintain a slightly higher price than retailers but competing on service and FIGURE 3 Dell and Nike offer examples of online differentiation based on product customization 14 13 The New Yor k Times , Feb 7 20106 14 Dell and Nike online sites
  7. 7. Magenta Advisory ResearchRetailers have traditionally been forerunners in price is a good star ting point. This approach isdifferentiating their online value propositions with equivalent to durable goods manufacturers’service elements. The most famous example in own branded retail that typically differentiatesthis area is the now Amazon owned, itself on product, service and experiencewho offers free delivery, free 365 day return and dimensions and as such has been accepted by24/7 phone customer service. As an example durable goods manufacturers’ channel par tners.of a durable goods manufacturer differentiatingon service, Nokia is giving its most committed Another way to address channel conflict withcustomers a possibility to pre-order new par tners is finding new ways of collaboration.phones to make sure they will be the first Building on the practice of linking traffic fromones to get the new products. However, in durable goods manufacturer marketing site toaddition to free shipping, service differentiation retailer sites, some durable goods manufacturersis relatively little used by manufacturers and capture leads or orders in their sites, but let theircould provide oppor tunity for differentiation. par tners fulfil the orders and provide add-on services. Some companies, like General Motors’ What Finnish durable goods manufacturer UK brand Vauxhall, have taken this approach executives say: fur ther and offer exclusively lower prices on their website, but then forward the orders to “Our value proposition is definitely based on their par tners for fulfilment. We have found some service. We will not compete on price.” also paying a commission on online sales to their physical retailer par tners for customers makingSeeking to differentiate through experience is online orders in their sales area.natural for manufacturers, as good online productexperience will also suppor t sales through all What Finnish durable goods manufacturerchannels. One alternative is to focus on simplicity executives say:and ease-of-use, like Apple. Another alternativeis to offer highly engaging and experiential “The fear of channel conflict has significantly slowedfeatures, like vir tual test drives piloted by many down our [direct-to-consumer online sales]car manufacturers. development. However, the reality is that the vast majority of our customers learn about our productsManaging channel conflict online and purchase them from physical retail outlets which we help them find – and in fact our onlineAs a majority of durable goods manufacturers’ channel is supporting our channel partners’ business.”revenue is derived from their existing distributionchannels, a plan to manage channel conflict withthem is an absolute necessity. While some durablegoods manufacturers with strong positions vis-à-vis their distributors challenge the distributionnetwork in a head-on competition, many morewill have to come up with a credible answer totheir distribution par tners questioning the durablegoods manufacturer competing directly with them.One major tool to evade channel conflict is todifferentiate the durable goods manufacturers’online value proposition from the key channelpar tners’ value propositions as discussedpreviously. Most often the point of friction ispricing and thus differentiation based on product,service or experience aspects rather than FIGURE 4 On the Vauxhall website, consumer s can leave their contact details to be contacted by Vauxhall’s retail par tner s in order to be entitled to a special Vauxhall Inter net pr ice 15 15 Vauxhall online site 7
  8. 8. Every manufacturer should naturally seek Building a winning online to create win-win situations with channel organization par tners to avoid channel conflict. However, regardless of all best effor ts to manage channel We have had numerous discussions with conflict, issues with par tners will come up. To durable goods manufacturers regarding the best successfully deal with these, the single most setup for an online organization. The difficulty impor tant success factor is top management lies in that there is no one single optimal suppor t and willingness to suppor t the setup as the benefits sought vary depending migration of customers to direct channels and on the maturity of a company’s online risking par tner retaliation. operations and thus the organization should be seen as a continuously developing entity. What Finnish durable goods manufacturer Durable goods manufacturers who are testing executives say: their waters online – typically performing some marketing, running a brand site, offering “Our biggest challenge by far is how to find some online product suppor t and maybe the online sales business models through selling products online in one country – have which we can build the best possible often star ted these activities as bottom- customer experience together with our up pilot initiatives led by a specific function channel partners.” within the organization such as logistics, IT, sales or marketing. These initiatives are often entrepreneurial in nature in effect forming small new ventures within the company having Successfully executing the limited alignment between one another. As strategic transformation an example, digital marketing might not be driving traffic to the online store or customer A durable goods manufacturer thinking that service might be managed completely their most impor tant tasks in executing their separately from all other online functions. direct-to-consumer online sales strategy is selecting a technology vendor and building Understanding the drawbacks of this an online store need to revisit their plans. organization, the next step is typically to form an online team overlooking marketing, sales and Durable goods manufacturers’ capabilities to care (or the majority of these functions) and execute on their direct-to-consumer online establish interfaces to other relevant functions sales strategies are often challenged by the fact in the company, like IT, logistics and finance. This that they are traditionally business-to-business enables the efficient coordination of all online companies whose organizations and operational related activities and the creation of a consistent processes are created to suppor t hundreds or online customer experience. It also enables thousands of relatively large customers instead the efficient scaling-up of operations around of millions of consumers. In the following, the centralized team. At this step it is essential we will dive deeper into the challenges of to manage the interfaces towards the other building online organizations and operational functions to ensure online/offline alignment in models for direct-to-consumer online sales. topics such as consumer messaging and pricing. What Finnish durable goods manufacturer executives say: “For us, the major change [in establishing direct-to-consumer online sales] was not to start using the Web as a sales channel rather than the move to direct consumer sales.”8
  9. 9. Magenta Advisory ResearchThe most online mature durable goods strategic impor tance of the online channelmanufacturers who have defined clear multi- and the speed in which the organizationchannel strategies will experience challenges is able to increase its online creating a consistent customer experience Durable goods manufacturers with existing retailacross the different online and offline channels operations can utilize par ts of their offline retailand need to break the silos between them. At operating models for their online operations. :this point, online has become an integral par t of Based on our experience, synergies betweenthe business and online related understanding online and offline retail operating models areand skills have spread around the organization. typically found in the areas of merchandizing,Online can in essence become business as order management, finance, and logistics.usual and can be integrated back to normal However, the rest of the operating model isoperations of the different functions. To ensure highly online specific needing a tailored approach.consistency within the online channel, additionalcoordination and governance structures are For durable goods manufacturers just enteringrequired. direct-to-consumer online sales, we often recommend them to leverage par tners and outsource many of the operational activities to decrease time to market and implementation risks. Typical areas for outsourcing include site operations, order management, logistics, and par ts of site development whereas tight control over planning, marketing, merchandizing and performance review is suggested. Once the operations have been established and experience gathered, fur ther efficiency gains can be realized by insourcing some of the previously par tnered activities. In addition to creating a global operating model, careful consideration is also needed to take into account local market variations that durable goods manufacturers face when opening up online stores in their key markets. Issues related to topics such as local legal requirements, differences in consumer preferences, payment methods and local delivery options are bound to create many unpleasant surprises for the ill- prepared. We have found building a localized FIGURE 5 operating model focusing on selected keyOrganizations typically go through three steps of online markets first before making a global version organization evolution to work better than trying to reach too many markets simultaneously.In our client projects we have noticed thatthe pace in which a company moves from onestep to the next varies. Some of our clientshave experienced all three steps spending What Finnish durable goods manufacturer executives say:a year on each, while others have stayedconsiderably longer on a single step. The pace “The markets we are in vary significantly in termsthat is suitable for each company varies. Some of channel structure, our market position as well asfactors affecting this pace include organizational consumer behavior. We need to modify our [onlinestructure, dynamics between functions, the sales] approach for each market.” 9
  10. 10. Establishing efficient online operations Establishing efficient direct-to-consumer online sales operations is a significant under taking for any durable goods manufacturer regardless of whether or not they already operate a physical retail chain. When doing that, durable goods manufacturers need to consider the whole end-to-end process from business planning to merchandizing, site operations, logistics, and performance reviews as shown in FIGURE 6 . FIGURE 6 General end-to-end processes for online operations10
  11. 11. Magenta Advisory ResearchContinuously improvingonline businessperformanceConducting business online – whether it is We have found two topics to be of extremeabout marketing or selling to consumers or impor tance when our clients have engagedproviding product suppor t – provides durable in continuous online business performancegoods manufacturers with unprecedented improvement: establishing performance managementopportunities for continuous business performance capabilities and creating a culture of continuousimprovement based on the vast amounts of optimization.available data and fast clock-speed of implementingchanges. Having continuously optimized its online Establishing performancestore for the last fifteen years, management capabilitiestoday outperforms average US online retailersin purchase conversion by over sevenfold16 The star ting point of establishing onlineleaving their competitors in a very difficult performance management capabilities is to createposition to cost effectively compete with them. a set of key performance indicators that span the entire consumer funnel from awareness to consideration, conversion and loyalty as shown in FIGURE 7 . FIGURE 7 Online mar keting and sales funnel for online perfor mance management 16 “The State of Retailing Online 2009”, Nielsen Online 11
  12. 12. FIGURE 8 Example of a continuous optimization process proven to be ver y successful for one of our clients Having defined the data sources and ways – a sor t of kaizen mentality for their online to calculate the key performance indicators, operations that can be suppor ted with establishing a recurring repor ting and analysis sophisticated tools such as multi-variate process to suppor t business decision-making is testing. Creating a culture of optimization the necessary next step for realizing business is a combination of training people the benefits. We typically advice our clients to keep required competences for online optimization, the first set of key performance indicators establishing working processes to suppor t rather simple and focus their attention on continuous small changes and creating a flexible analyzing the effect of their actions on these tool platform to enable continuous testing. metrics. Following the most impor tant direct- to-consumer online sales key performance The oppor tunities for optimization are indicators (site traffic, purchase conversion nearly endless. When optimizing marketing rate, average order value and return rate) performance, companies can analyze their provides already the same level of information incoming visitors by traffic source, understand to online retailers as sophisticated shopper how these different customers behave in the analysis tools give to traditional retailers. store from browsing to car t additions and purchases, and calculate return on marketing These three fundamental building blocks investment to reallocate media expenditure. – key performance indicators, repor ting capabilities and activity analysis – should then Purchase conversion can be analyzed by be continuously fur ther developed to provide investigating for example customer click- better tools for individuals in the company to stream data and site usage heat maps to create perform continuous business improvement. hypotheses for improvement ideas. These ideas can be turned into real world tests that are Creating a culture of optimization deployed on the site in a controlled manner to find out which of these ideas actually work. When the basic performance management Similarly different cross sales items can be capabilities have been established, we advice tested with purchases of different products durable goods manufacturers operating online to find the combinations that work best – to invest in creating a culture of optimization and then optimized by customer segment.12
  13. 13. Magenta Advisory ResearchSome of these optimizations can be very simple – The week ended by all relevant stakeholderslike when one of our clients increased their online collecting the list of major changes done duringpurchase conversion rate by over 20% by simple the week to be leveraged in next weeks funnelchanges in product page call-to-action. Whether meeting discussions when analyzing how specificsimple or complex optimizations, the key is that key performance indicators had developed.there is a continuous flow of optimization ideas that Leveraging the continuous optimization processare rigidly tested and deployed when successful. allowed swift reactions to identified oppor tunities and was a critical contributor to the formation ofCulture of continuous optimization can be built a continuous optimization culture.around simple ways of working. As an illustrationof this, FIGURE 8 presents a continuous optimizationprocess implemented for one of our clients. What Finnish durable goods manufacturer executives say:The approach was built around a consumer funnel “On the web, the cycle for activities is drasticallykey performance indicator repor ting process and faster than for companies that are used to B2Btwo key weekly meetings: the funnel meeting and business. Instead of looking at a half-a-year marketingthe prioritization meeting. The week star ted with calendar, one needs to operate like the local cornercompiling a weekly funnel repor t, which was then store shopkeeper optimizing sales on a daily basis.“reviewed in the funnel meeting together with allstakeholders with any oppor tunity to affect thekey performance indicators.In this meeting, a list of potential improvement Magenta Advisor y approachideas was created and areas requiring deep-dive analytical investigation identified. The quick We at Magenta Advisory help our client companies’win improvement ideas were implemented top management in their online transformation,immediately after the meeting, whereas the bigger from creating business strategies and concepts toimprovements were prepared and prioritized managing business transformation and achievingtogether with all the backlog items in the regular business excellence. See FIGURE 9 for examples ofprioritization meeting on Wednesdays. typical projects we do for our clients. FIGURE 9 Examples of typical projects we do for our clients 13
  14. 14. We at Magenta Advisory 1. We always start our work from true client needsbelieve in pragmatic and client to find a client contextfocused strategic management appropriate methodology. consulting 2. We work hand-in-hand with our clients to ensure they can continue business development work on their own. 3. We believe delivering quick wins is as important as a sustainable online transformation roadmap. 4. We deliver results — not only reports but concrete and rapid business change. For more information +358-40-3573346 Mikonkatu 8, 9th floor 00100 Helsinki Finland
  15. 15. About the authorsMarkus Huttunen is the Managing Director and aPar tner at Magenta Advisory. Markus is an experienceddigital industry executive with management positionsin consulting, strategy development, sales andmarketing and new business development in Europeand the United States. Prior to co-founding MagentaAdvisory, he worked with global digital industryleaders including Capgemini Consulting and Söderlund is a Par tner at Magenta Advisory.Otto is a seasoned online sales and marketingprofessional with wide experience ranging fromonline strategy creation to actual management ofonline business. Otto has helped major Europeanmanufacturing, mobile, telecom and retail industryplayers internationally in their online effor ts providinghim with a unique 360 degree cross-industry view ofthe online business Maunula is a Senior Consultant at MagentaAdvisory. Antti is a competent online and retailprofessional whose functional exper tise areas includeonline business model creation, online businessconcept development and execution suppor t, andretail performance and master data
  16. 16. magenta Strategic  Online