By Eli Schragenheim and Henry Camp
E-Commerce offers real added value to many different market segments. The value of the new technology has been analyzed in a previous post: “Applying the six questions of technology to digital stores.” This added value changes the whole business of retail. But, it is not just a disruptive technology; there is a risk of being self-destructive, because digital stores face a huge threat to their own survival.
The main question every single digital stores faces is:
What added value can we offer relative to other digital stores?
The question targets a huge and sinister obstacle, which becomes more and more dangerous with time. From the point of view of potential customers, what is the difference between buying from one digital store and another? As long as delivery logistics are in place, location has no relevance, unlike traditional brick and mortar stores.
Dr. Goldratt coined the term “decisive competitive edge” (DCE), as being superior to any significant competitor in a given market segment. He also defined the conditions for gaining such a DCE.
- Answering a need that no other competitor is able or willing to.
- Competitors refuse or are slow to follow, usually because delivering equal value contradicts a common business paradigm, such as operating efficiently or containing costs.
- In other parameters important to the segment, the company is on par with the competition.
The direct consequence of lacking a strong DCE is that customers are left with no clear means to differentiate, except based on price. The reality of the internet has encouraged services that compare prices between different digital stores. Thus, it is quick and easy for customers identify the cheapest digital store for any desired product.
Many on-line shoppers make spontaneous purchases once they see a product they fancy and its price. This is where the vast majority digital stores compete, but without truly gaining any advantage over each other. They commonly offer a broad variety of products at very low prices and send emails in volume to past customers with the hope of capturing or keeping mindshare. On top of that, artificial intelligence is deployed to speculate what any potential customer desires. Could this be a DCE? Yes, if you are far better than your rivals. The problem is, since competition is so hot, any gaps close very fast.
When the only reliable competitive differentiator is price, then the Throughput percentage (Margin/Sales) drops, forcing the digital store to look for some combination of two alternatives:
One approach is cutting expenses, seeking profitability at current volumes. Unfortunately, the main expenses of digital stores support marketing as well as being quick and reliable in delivery.
If cutting expenses seems like an obviously bad idea, you will understand why most digital stores choose the opposite approach, spending more and slashing prices in the hope of driving sales growth. Driving OE up while cutting Throughput % typically results in current losses but maybe, just maybe, with enough more sales … someday the digital store will gain enough economies of scale to become profitable. The required relentless increases in the quantities of items sold, becomes more and more difficult to accomplish, because the cost of entry for new competitors flush with investors’ cash is very low. Should one digital store fail, then the remainder feel like there is no alternative to spending lavishly on marketing to attract the customers who used to buy from their now defunct competitor. Furthermore, the survivors try to draw in ever more new clients by dropping prices some more. This is the vicious cycle of the digital marketplace.
How can a digital store gain a Decisive Competitive Edge that is not price?
First let’s state the obvious: currently the only true DCE for digital-stores is being very big! So, Amazon and AliBaba have already gained that position but how can others become that big? There are three separate types of added value that big successful stores deliver to their customers:
- Confidence that nothing will go wrong
- A broad variety of products
- The ability to succeed while delivering at low prices
Is there anything that a smaller digital store can do to gain a customer base that loyally buys from them? This is the most critical question for any digital store facing the grim reality of global and open competition on price.
There are several directions where breaking the vicious cycle is possible:
Building a strong loyalty program for customers
It has been proven by the airlines that loyalty programs work! It demonstrates not only the impact of getting things for free, but also that giving special VIP treatment to people makes an impact. Translating the concept of a loyalty program to digital stores is far from being trivial but it also brings a new opportunity. The common paradigm is stuck with investing money to give away value to customers who bought something without being certain of future purchases from those customers. This paradigm makes such a loyalty program tough to imitate, especially in the current environment of lack of profits among digital stores.
The real challenge of pursuing this direction is not only the free gifts and price reductions but providing special VIP treatment to loyal customers. It could be a certain top product mix sold only to the members of the club, giving high priority in the shipping, free delivery – like Amazon Prime, free returns – like Zappos or any other generic idea for a DCE.
Still, loyalty programs have been copied. What airline doesn’t have one? The “D” in DCE stands for decisive. This means others won’t copy the edge, at least for long enough for the developer to gain enough of an advantage, like accumulated profits, to make another leap ahead of the competition that they can’t or won’t afford – again, at least for many years. For a digital store’s loyalty program to remain exclusive, it must either address a problem caused by digital stores by their very design or an issue that is unresolved by all stores.
One comment about a neglected market segment: the high socioeconomic sector is not actively sought by digital stores who speak the language of low price. While relatively rich people still hate to pay more just because they can afford to, those people are willing to pay more for higher value. A loyalty program that treats the members specially is something they look for. If digital stores are able to find its way into this sector – they’ll become antifragile, and that is worth a lot.
Choosing the right product mix
Regular stores carry and display physical items. Virtual stores can only display a picture of an item. This allows the digital stores to display and sell very wide variety of similar items, without the need to choose the preferred product mix. On the other hand, even if offering more is virtually free, studies have confirmed what shoppers already feel – having to sort through the haystack to find the desired needle makes what could be easy and fun a boring chore.
What does it mean that a store shows a picture of a certain product? Actually, it only means that the product is for sale. There is no implied formal recommendation by the store. “Some people buy it. So, we have it.”
What if the store took a stand on what it considers good and worthy products? Consumers are rightfully suspicious that stores recommend those items that bring the store the most margin. If that expectation for self-serving behavior can be overcome, then truly assisting individual buyers choose well for themselves specifically is a significant added value. Big retail already relinquished all the responsibility of choice to the customer. The need for help making the right choice is still real for many buyers of many products. So, being able to identify the right product mix and then directing the consumer to what truly fits his or her needs while clearly projecting pure intentions is a Decisive Competitive Edge.
Assisting customers can be partially by virtual means, displaying relevant information that helps them realize which needs the product meets or by means of real-time texting or even speaking with a shopper live. Such services add complexity and costs to operations, which is seen as problematic, but could also establish a unique value that makes the specific digital store unique and it attracts high level customers.
Making the delivery a special experience
It is true that customers of digital stores have a somewhat elastic tolerance to the time of the delivery. If they didn’t, they would be forced to buy from a local store that holds stock of those products for which they prefer not to wait. This does not mean they don’t care how the item finds its way to their home or workplace. Most digital stores partner with delivery companies to handle shipments. This means the delivery company treats the item(s) that are delivered just like all other items. It is enough that they get there reliably.
What if, for the upscale segment, the carrier truly represents the digital store? When this is feasible, the delivery could easily answer a need: allowing the customer to physically check the product and only then decide whether to keep or return it. It could solve the problem of fitting clothing, by including in the delivery two or three sizes out of which the customer would choose the best fit. The buyer could decide by actual inspection which of two competing brands is preferred.
Is this too expensive to do?
This is the wrong question, even though this is the most common one managers of digital stores probably ask themselves. The real question is whether some customers are ready to pay for such a service? If there are customers for whom this service is what they desire, then the price is not the only issue. What a relief!
The internet created a sea change, the ramifications of which we are still struggling to understand. There are some destructive aspects to the internet economy. The belief that the number of customers and detailed information about them are enough for making a successful exit are probably over but the damage from making customers expect to getting value for free still exists. It is time for deep cause-and-effect analysis to outline a way to draw true value, value that answers our needs from the internet. E-commerce in general and individual digital stores in particular are ripe areas in which to start such an analysis. Those who do it well and soon will deploy their DCE to earn not just sales but disproportionate profits.