magenta advisory - establishing successful direct-to-consumer online sales operations

Magenta Advisory Research


Durable Goods Manufacturers Online:

Establishing SuccessfulDirect-to-Consumer Online Sales Operations

Magenta Advisory 2011

2 1Internet Retai ler, Top 500 Guide, 2010

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.

FIGURE 1 Top 20 onl ine retai ler s in the

United States measured by total onl ine sales revenues in 2009

Top 20 online retailers in the United States measured by total online sales revenues in 2009

Magenta Advisory’s point of view on how to successfully manage a direct-to-consumer online sales entry

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2Internet Retai ler, Jun 20103Crocs Annual Repor t 2010; Deckers Annual Repor t 2010

4Company annual repor ts; Internet Retai ler ; Magenta Advisor y analysis

FIGURE 2 Selected durable goods

manufacturers’ retai l store and onl ine net sales in 2010

(for Apple 2009 f igures)4

Durable goods manufacturers bypassing traditional retailers online are no longer found solely within the consumer electronics market. As an example, Nike’s direct-to-consumer online channel generated $260 mil l ion in revenues in 20102 and shoe manufacturers Crocs and Deckers (owners of the Ugg brand) both run direct-to-consumer online channels that contribute already nearly 10% of the total net sales of these companies3.

This trend has also been picked up by Finnish durable goods manufacturers. Companies ranging from Nokia to Fiskars and Amer Sports have all established their own direct-to-consumer online stores with the topic being a recurring agenda item in company management teams. In this paper, we will investigate the business reasoning behind this trend and provide our point of view on how to manage this strategic transformation successfully 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.

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5Apple Annual Repor t 2009; Nike Annual Repor t 20096“Pr ivate Label Strategy: How to meet the store brand chal lenge”, Nirmalya Kumar & Jan-Benedict Steenkamp, Har vard Business Review Press , 2007

7The Nielsen Company, Press release, Dec 20088Stockmann Group Annual Repor t 2010

9BIA/Kelsey Group, User V iew Wave VII study, Mar 201010 “The Who, When, And Why Of V is its To Manufacturer Web Sites”, For rester, Sep 2010

While each durable goods manufacturer has its own reasons for establishing a direct-to-consumer online retail channel, when working with our clients we have found three key categories under which the rationale can be typically grouped:

1. Durable goods manufacturers defend against retailers’ increasing negotiation power

2. Durable goods manufacturers look for new growth by following shoppers online

3. Durable goods manufacturers seek direct consumer contact

Durable goods manufacturers defend against retai lers’ increasing negotiation power

Globally, the retail market is consolidating meaning that retailers have increased bargaining power over manufacturers. Large retailers constitute a large proportion of durable goods manufacturers’ annual revenues. For example, in 2009 Apple’s largest customer accounted for 11% of the company’s total revenues and Nike’s three largest customers accounted for 25% of the company’s revenues in the US5.

Fur thermore, retailers are launching their own private label brands resulting in durable goods manufacturer’s products receiving less marketing effor t and shelf space and in some examples even losing their entire business with the given retailer. As an example, Gap has moved from being Levi’s largest customer to its biggest competitor by focusing sales of jeans on its own private label brand6.

For the world’s largest retailers, Wal-mart and Tesco sales from private label brands constitute already more than one third of these companies’ total revenues. In addition,

some private labels have been even able to break away from their traditional price positioning. 70% of UK consumers believe that Mark’s & Spencer’s private label products are better quality than other private label brands’ products, which enables the setting of a higher price point for the products.

Although in Finland private label net sales out of retailers’ total net sales have been much lower, accounting for 14% in 20087, Finnish retailers such as Stockmann Group state that private labels are an important area of future development. Stockmann’s private label products already include a variety of items such as food (e.g. Stockmann Delikatess, Stockmann Gourmet), clothing (e.g. Global, Zoye M) and home decoration (e.g. Stockmann Casa)8.

Clearly, the major threat in this for durable goods manufacturers is that they are being forced to increasingly compete on price. In an effor t to regain leverage, durable goods manufacturers are using direct-to-consumer online retail as a tool to find new ways to compete.

Durable goods manufacturers look for new growth by fol lowing shoppers online

Internet gives unparalleled opportunities for consumers to research products they are looking to buy – and this is exactly what they do. In the US in 2010, 97% of consumers are searching for products and future purchases online9 and 9% of consumers star ted their search on manufacturer sites (up 3% from 2009)10.

Whilst a majority of consumers who research products online still end up purchasing the goods in traditional retail outlets, online retail is witnessing significant growth. During the last half a decade Internet retailing has been the main driver of retail growth in Western

What Finnish durable goods manufacturer executives say:

“Until a little over a year ago we were in a defensive position against the discount retailers, but as we realized the strength of the industry transformation, we decided that it’s better to ride the wave and be among the industry shapers than drown with the tidal wave of change.”

Why are durable goods manufacturers entering direct online retail?

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10 “The Who, When, And Why Of V is its To Manufacturer Web Sites”, For rester, Sep 2010 11Euromonitor from trade sources/national statist ics , Euromonitor International 2010

12”Verkkokauppa Suomessa 2010”, Federation of Finnish Commerce and TNS Gallup, Mar 2011

Europe. While physical store retail growth has been in total $10.6 billion between 2006 and 2009, at the same time, Internet retailing growth rate has been more than double the amount of physical stores at $28.7 billion11. Similarly, Finnish consumers are buying products and services increasingly over the Internet with the total money spent on the web rising to 9.4 billion in 201012.

Combining these two trends, durable goods manufacturers have a unique opportunity to turn consumers visiting their online sites for product research into buying customers purchasing directly from them. This proposition is fur ther strengthened by knowing that consumers visiting durable goods manufacturer sites have a high intention to buy the researched product and are more brand than price focused creating additional cross-sell opportunities10.

The hard business benefit of this is an increase in unit price for the durable goods manufacturer leading to increased revenue and improved profit margins.

Durable goods manufacturers seek direct consumer contact

Direct relationship to consumers gives durable goods manufacturers control over their brand experience and access to customer data that can be leveraged in product development, marketing, sales and care.

Within our clients we have seen the direct relationship with consumers to be one of the main drivers for building a direct-to-consumer online channel. Durable goods manufacturers’ strengths to address consumers directly include strong brand, possibilities to personalize products to consumers, trustworthy company image and possibility to leverage organic search traffic thanks to their well-known brand sites.

For many durable goods manufacturers, entering direct-to-consumer online retail is a strategic necessity as discussed earlier. For them, the billion-dollar question is how to do this successfully.

Our experience has shown that if direct-to-consumer online sales entry is treated solely as a technology project to build an online store, it is doomed to fail. A successful transformation requires a business driven approach star ting from formulating a clear strategy, managing the transformation holistically not focusing on technology only, and finally understanding that real rewards come from relentless continuous performance improvements.

In the following, we discuss some of the most common issues we have found durable goods manufacturers struggling to address when taking these steps.

Creating a winning strategyLike any major business development initiative, establishing direct-to-consumer online sales needs a clear business driven strategy with defined objectives and targets, means of reaching those targets, and an execution plan supporting it. In creating such strategies for direct-to-consumer 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.


“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.”

How can durable goods manufacturers successfully enter direct-to-consumeronline retail?

613The New York Times , Feb 7 2010

14Dell and Nike onl ine sites

Defining a customer value proposition

Defining a customer value proposition that is at the same time attractive to consumers and aligned with a durable goods manufacturers’ overall distribution strategy is a recurring challenge raised by durable goods manufacturers whom we talk with.

The common myth in online retail is that price is the only relevant customer value proposition and the other traditional value proposition elements of product, service and experience are rendered obsolete. We believe following a price only value proposition can be a treacherous path for durable goods manufacturers, who should in our view focus on creating an online value proposition that is best aligned with their overall value propositions.

Not downplaying the importance of pricing, it is often the most sensitive area in defining the online value proposition. A purely price based value proposition is often not possible for durable goods manufacturers as this would lead to major conflicts with the existing distribution channel. We have found a typical pricing strategy for a durable goods manufacturer online to either maintain a slightly higher price than retailers but competing on service and

selection or maintain price parity with retailers. To support a price parity strategy, in the US durable goods manufacturers have been able to limit channel par tners’ rights to adver tise lower prices than a price defined by the manufacturer13. However, local legislations for this type of price fixing varies widely and for example the Finnish Competition Authority has pressed charges to fine durable goods manufacturers for fixing retail prices.

As a more readily available source of differentiation, examples of durable goods manufacturers’ differentiating online value propositions on product dimension can be found in product customization and selection. Dell’s value proposition is based on full product customization on its direct-to-consumer online store where all Dell products are available for purchasing, whereas Nike offers product customization and exclusive products in its online store.

FIGURE 3 Dell and Nike offer examples of onl ine differentiation based on product customization14


“While we seek to be on par with other channels in pricing, our core value proposition is based on an exclusive product range.”

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15Vauxhall onl ine site

Retailers have traditionally been forerunners in differentiating their online value propositions with service elements. The most famous example in this area is the now Amazon owned Zappos.com, who offers free delivery, free 365 day return and 24/7 phone customer service. As an example of a durable goods manufacturer differentiating on service, Nokia is giving its most committed customers a possibility to pre-order new phones to make sure they will be the first ones to get the new products. However, in addition to free shipping, service differentiation is relatively little used by manufacturers and could provide opportunity for differentiation.

Seeking to differentiate through experience is natural for manufacturers, as good online product experience will also support sales through all channels. One alternative is to focus on simplicity and ease-of-use, like Apple. Another alternative is to offer highly engaging and experiential features, like vir tual test drives piloted by many car manufacturers.

Managing channel confl ict

As a majority of durable goods manufacturers’ revenue is derived from their existing distribution channels, a plan to manage channel conflict with them is an absolute necessity. While some durable goods manufacturers with strong positions vis-à-vis their distributors challenge the distribution network in a head-on competition, many more will have to come up with a credible answer to their distribution par tners questioning the durable goods manufacturer competing directly with them.

One major tool to evade channel conflict is to differentiate the durable goods manufacturers’ online value proposition from the key channel par tners’ value propositions as discussed previously. Most often the point of friction is pricing and thus differentiation based on product, service or experience aspects rather than

price is a good star ting point. This approach is equivalent to durable goods manufacturers’ own branded retail that typically differentiates itself on product, service and experience dimensions and as such has been accepted by durable goods manufacturers’ channel par tners.

Another way to address channel conflict with par tners is finding new ways of collaboration. Building on the practice of linking traffic from durable goods manufacturer marketing site to retailer sites, some durable goods manufacturers capture leads or orders in their sites, but let their par tners fulfil the orders and provide add-on services. Some companies, like General Motors’ UK brand Vauxhall, have taken this approach fur ther and offer exclusively lower prices on their website, but then forward the orders to their par tners for fulfilment. We have found some also paying a commission on online sales to their physical retailer par tners for customers making online orders in their sales area.

FIGURE 4On the Vauxhal l website , consumers can leave their contact detai ls to be contacted by Vauxhal l ’s retai l

par tners in order to be entit led to a special Vauxhal l Internet pr ice15


“Our value proposition is definitely based on service. We will not compete on price.”


“The fear of channel conflict has significantly slowed down our [direct-to-consumer online sales] development. However, the reality is that the vast majority of our customers learn about our products online and purchase them from physical retail outlets which we help them find – and in fact our online channel is supporting our channel partners’ business.”

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Every manufacturer should naturally seek to create win-win situations with channel par tners to avoid channel conflict. However, regardless of all best effor ts to manage channel conflict, issues with par tners will come up. To successfully deal with these, the single most important success factor is top management support and willingness to support the migration of customers to direct channels and risking par tner retaliation.

Successful ly executing the strategic transformation

A durable goods manufacturer thinking that their most important tasks in executing their direct-to-consumer online sales strategy is selecting a technology vendor and building an online store need to revisit their plans.

Durable goods manufacturers’ capabilities to execute on their direct-to-consumer online sales strategies are often challenged by the fact that they are traditionally business-to-business companies whose organizations and operational processes are created to support hundreds or thousands of relatively large customers instead of millions of consumers. In the following, we will dive deeper into the challenges of building online organizations and operational models for direct-to-consumer online sales.

Building a winning online organization

We have had numerous discussions with durable goods manufacturers regarding the best setup for an online organization. The difficulty lies in that there is no one single optimal setup as the benefits sought vary depending on the maturity of a company’s online operations and thus the organization should be seen as a continuously developing entity.

Durable goods manufacturers who are testing their waters online – typically performing some marketing, running a brand site, offering some online product support and maybe selling products online in one country – have often star ted these activities as bottom-up pilot initiatives led by a specific function 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 limited alignment between one another. As an example, digital marketing might not be driving traffic to the online store or customer service might be managed completely separately from all other online functions.

Understanding the drawbacks of this organization, the next step is typically to form an online team overlooking marketing, sales and care (or the majority of these functions) and establish interfaces to other relevant functions in the company, like IT, logistics and finance. This enables the efficient coordination of all online related activities and the creation of a consistent online customer experience. It also enables the efficient scaling-up of operations around the centralized team. At this step it is essential to manage the interfaces towards the other functions to ensure online/offline alignment in topics such as consumer messaging and pricing.


“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.”


“Our biggest challenge by far is how to find the online sales business models through which we can build the best possible customer experience together with our channel partners.”

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The most online mature durable goods manufacturers who have defined clear multi-channel strategies will experience challenges in creating a consistent customer experience across the different online and offline channels and need to break the silos between them. At this point, online has become an integral par t of the business and online related understanding and skills have spread around the organization. Online can in essence become business as usual and can be integrated back to normal operations of the different functions. To ensure consistency within the online channel, additional coordination and governance structures are required.

In our client projects we have noticed that the pace in which a company moves from one step to the next varies. Some of our clients have experienced all three steps spending a year on each, while others have stayed considerably longer on a single step. The pace that is suitable for each company varies. Some factors affecting this pace include organizational structure, dynamics between functions, the

strategic importance of the online channel and the speed in which the organization is able to increase its online capabilities. Durable goods manufacturers with existing retail operations can utilize par ts of their offline retail operating models for their online operations. : Based on our experience, synergies between online and offline retail operating models are typically found in the areas of merchandizing, order management, finance, and logistics.However, the rest of the operating model is highly online specific needing a tailored approach.

For durable goods manufacturers just entering 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 operating model focusing on selected key markets first before making a global version to work better than trying to reach too many markets simultaneously.

FIGURE 5 Organizations typical ly go through three steps of onl ine

organization evolution


“The markets we are in vary significantly in terms of channel structure, our market position as well as consumer behavior. We need to modify our [online sales] approach for each market.”

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Establishing eff icient online operations

Establishing efficient direct-to-consumer online sales operations is a significant undertaking 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 6General end-to-end processes for onl ine

operations

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16“The State of Retai l ing Online 2009”, Nielsen Online

Continuously improving online business performance

Conducting business online – whether it is about marketing or selling to consumers or providing product support – provides durable goods manufacturers with unprecedented opportunities for continuous business performance improvement based on the vast amounts of available data and fast clock-speed of implementing changes. Having continuously optimized its online store for the last fifteen years, Amazon.com today outperforms average US online retailers in purchase conversion by over sevenfold16

leaving their competitors in a very difficult position to cost effectively compete with them.

We have found two topics to be of extreme importance when our clients have engaged in continuous online business performance improvement: establishing performance management capabilities and creating a culture of continuous optimization.

Establishing performance management capabil it ies

The star ting point of establishing online performance management capabilities is to create 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 Onl ine marketing and sales

funnel for onl ine performance management

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Having defined the data sources and ways to calculate the key performance indicators, establishing a recurring reporting and analysis process to support business decision-making is the necessary next step for realizing business benefits. We typically advice our clients to keep the first set of key performance indicators rather simple and focus their attention on analyzing the effect of their actions on these metrics. Following the most important direct-to-consumer online sales key performance indicators (site traffic, purchase conversion rate, average order value and return rate) provides already the same level of information to online retailers as sophisticated shopper analysis tools give to traditional retailers.

These three fundamental building blocks – key performance indicators, reporting capabilities and activity analysis – should then be continuously fur ther developed to provide better tools for individuals in the company to perform continuous business improvement.

Creating a culture of optimization

When the basic performance management capabilities have been established, we advice durable goods manufacturers operating online to invest in creating a culture of optimization

– a sor t of kaizen mentality for their online operations that can be supported with sophisticated tools such as multi-variate testing. Creating a culture of optimization is a combination of training people the required competences for online optimization, establishing working processes to support continuous small changes and creating a flexible tool platform to enable continuous testing.

The opportunities for optimization are nearly endless. When optimizing marketing performance, companies can analyze their incoming visitors by traffic source, understand how these different customers behave in the store from browsing to car t additions and purchases, and calculate return on marketing investment to reallocate media expenditure.

Purchase conversion can be analyzed by investigating for example customer click-stream data and site usage heat maps to create hypotheses for improvement ideas. These ideas can be turned into real world tests that are deployed on the site in a controlled manner to find out which of these ideas actually work. Similarly different cross sales items can be tested with purchases of different products to find the combinations that work best – and then optimized by customer segment.

FIGURE 8 Example of a continuous

optimization process proven to be ver y successful for one of our cl ients

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Some of these optimizations can be very simple – like when one of our clients increased their online purchase conversion rate by over 20% by simple changes in product page call-to-action. Whether simple or complex optimizations, the key is that there is a continuous flow of optimization ideas that are rigidly tested and deployed when successful.

Culture of continuous optimization can be built around simple ways of working. As an illustration of this, FIGURE 8 presents a continuous optimization process implemented for one of our clients.

The approach was built around a consumer funnel key performance indicator reporting process and two key weekly meetings: the funnel meeting and the prioritization meeting. The week star ted with compiling a weekly funnel report, which was then reviewed in the funnel meeting together with all stakeholders with any opportunity to affect the key performance indicators.

In this meeting, a list of potential improvement ideas was created and areas requiring deep-dive analytical investigation identified. The quick win improvement ideas were implemented immediately after the meeting, whereas the bigger improvements were prepared and prioritized together with all the backlog items in the regular prioritization meeting on Wednesdays.

The week ended by all relevant stakeholders collecting the list of major changes done during the week to be leveraged in next weeks funnel meeting discussions when analyzing how specific key performance indicators had developed. Leveraging the continuous optimization process allowed swift reactions to identified opportunities and was a critical contributor to the formation of a continuous optimization culture.

Magenta Advisory approach

We at Magenta Advisory help our client companies’ top management in their online transformation, from creating business strategies and concepts to managing business transformation and achieving business excellence. See FIGURE 9 for examples of typical projects we do for our clients.


“On the web, the cycle for activities is drastically faster than for companies that are used to B2B business. Instead of looking at a half-a-year marketing calendar, one needs to operate like the local corner store shopkeeper optimizing sales on a daily basis.“

FIGURE 9Examples of typical projects

we do for our cl ients

For more information

[email protected] +358-40-3573346Mikonkatu 8, 9th floor00100 HelsinkiFinland

We at Magenta Advisory believe in pragmatic and client focused strategic management

consulting

1. We always start our work from true client needs to find a client context appropriate methodology.

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.

About the authors

Markus Huttunen is the Managing Director and a Par tner at Magenta Advisory. Markus is an experienced digital industry executive with management positions in consulting, strategy development, sales and marketing and new business development in Europe and the United States. Prior to co-founding Magenta Advisory, he worked with global digital industry leaders including Capgemini Consulting and Nokia.

[email protected]+358-40-3573346

Otto Söderlund is a Par tner at Magenta Advisory. Otto is a seasoned online sales and marketing professional with wide experience ranging from online strategy creation to actual management of online business. Otto has helped major European manufacturing, mobile, telecom and retail industry players internationally in their online effor ts providing him with a unique 360 degree cross-industry view of the online business overall.

[email protected] +358-40-5241350

Antti Maunula is a Senior Consultant at Magenta Advisory. Antti is a competent online and retail professional whose functional expertise areas include online business model creation, online business concept development and execution support, and retail performance and master data management.

[email protected] +358-44-3533064

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