Omni-Channel Cost Shifting

One of the great benefits customer lifecycle programs bring to the party is unearthing cross-divisional or functional profitability opportunities that otherwise would fall into the cracks between units and not be addressed.  What I think most managers in the omni-channel space may not realize (yet) is how significant many of these issues can be.

To provide some context for those purely interested in the marketing side, this idea joins quite closely to the optimizing for worst customers and sales cannibalization discussions, but is more concerned with downstream operational issues and finance.  Cost shifting scenarios will become a lot more common as omnichannel concepts pick up speed.

Shifty Sales OK, Costs Not?

Why is cost shifting important to understand?  Many corporate cultures can easily tolerate sales shifting between channels because of the view that “any sale is good”.  On the ground, this means sourcing sales accurately in an omni-channel environment requires too much effort relative to the perceived benefits to be gained.  Fair enough; some corporate cultures simply believe any sale is a good sale even if they lose money on it!

Cost shifting  tends to be a different story though, because the outcomes show up as budget variances and have to be explained.  In many ways, cost shifting is also easier to measure, because the source is typically simple to capture once the issue surfaces.  And as a cultural issue, people are used to the concept of dealing with budget variances.

Here’s a common case:

  • Online campaigns are continually optimized against conversion / sales targets
  • These KPI’s typically ignore discounts and returns when measuring success
  • It’s not unusual to find products with high conversion rates that on a net basis, after campaign costs, markdowns, and returns, lose money on every unit sold
  • So as the campaign is “optimized” for conversion and units sold increase, it loses more and more money on a cumulative basis – but has great campaign stats!
  • Finally, when you look at the customers who buy these products, particularly as a first purchase, these customers tend not to purchase again

This last point is ironic, given the usual answer to questions about the financial impact of new customer discounts and returns is “we’ll make up the loss when they purchase again”.

Some companies will view the above from the “any sale is a good sale” perspective; they’re simply not concerned by losing money on every online sale of a product.

And I understand why.

Many of the people responsible for managing online actually come from the offline retail world, where managing against the considerations above is often not practical.  In the typical retail-only scenario, many of these costs are not directly controllable and are simply absorbed into the fixed cost structure of the business, often in the staffing area.

After all, store traffic is what it is, and products that generate poor customer interaction are dealt with in a time honored way – customer service desk, markdowns, liquidation, return to manufacturer.  The added overhead cost generated by dealing with these poorly-performing products is simply absorbed into the fixed cost structure of offline.

That’s the physical store model.  So be it.  Also not surprising: managers from retail would not worry too much about this, since in retail the whole scenario is largely uncontrollable.

What Changes with OmniChannel

When you stir pick-up / return-to store practices into the mix, much of the financial burden in money-losing online campaigns can now be shifted out of the online business model onto the retail store side – and you can measure this shift.  Since best customers tend to shop across all channels, the volume and related impact on profits can be substantial.

Initially this might be OK with the C-Level; just considered a part of doing business, right?

Except for one thing.

Online, the marketing investment in products with negative net margins / high return rates can easily be reduced or shut down.  Not only does this save upfront marketing costs, but also avoids pass-through of service costs to the retail units.  In other words, for online, unlike in retail,  much of this profit waste is controllable.

And that really changes the way this situation should be viewed.  It might be OK to generate profit-less sales, and it might be OK if the stores have to handle online returns.

But to intentionally spend money online knowing this will accelerate service and product handling costs on the retail side seems like it would be a  stretch for most C-Level folks. This would be especially true in privately / private equity held companies, where profits are more of an issue than in start-up and many publicly traded companies.

Think about what the above means in terms of an “omnichannel view”.  Does it make sense to take bad parts of a channel and force the other channel to participate in them?

Not likely.  And I suspect as retail store comps soften in the face of online sales increases, there will be pushback from the offline side on these most controllable issues first.

Going forward, as competition progressively intensifies, omnichannel structures will require a new management approach to grow profits, one that finds and addresses controllable profit-draining issues.  So despite all the progress on the tech / operational side, I think we’re still in the early days of optimizing omni-channel business outcomes.

What do you think?  Have you had any experience with  resolving channel-conflict issues?

Is any sale always a good sale at your company?

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