The Vicious eCommerce Cycle That’s Eating Your Profits & How to Break It
A company is measured by its profits, not revenue
Everyone is going all-in on eCommerce personalization – it’s all about giving the customer what they are looking for. The goal is clear: optimize your store’s conversion rate and boost sales. It might increase revenue, but is that the bottom line of a business? What about profits?
If an online retailer wants to boost profits, personalization alone is not enough.
Why? We’ve got the answers.
In this post we will discuss:
- The Vicious Cycle: The eCommerce Pareto Principle
- The Costs of Non-Moving Inventory
- Breaking the Vicious Cycle and Optimizing Profits
- Advanced Product Sorting with Smart Collections
Let’s jump in.
The Vicious Cycle: The eCommerce Pareto Principle
The Pareto principle states that 80% of consequences come from 20% of causes. In eCommerce retail terms, this means 20% of a brand’s products (or sometimes even fewer) generate 80% of its revenue.
Unfortunately, many eCommerce stores have a classic Pareto, and it comes down to product discoverability.
By only promoting bestsellers and showing customers the items that are most likely to sell, stores fall into a Pareto loop: they mostly sell these 20% products that are easy to sell, and neglect 80% of their products. This creates a vast cache of non-moving inventory.
The Costs of Non-Moving Inventory
What do brands do when they need to free up storage space? Get rid of inventory at a reduced margin.
When this non-moving inventory is seasonal, such as with fashion brands, retailers are forced to create big discount promotions to get rid of this stock at the end of each season, sacrificing on margin to try and recoup inventory costs. When this doesn’t work, products that didn’t sell are moved to the outlet, donated, or thrown away.
There are many hidden costs to non-moving inventory, such as:
- Storage
- Handling
- Physical deterioration
- Lost margins
In fact, this could end up costing up to 50% more than the actual cost of the product, and could mean retailers are eating away as much as 20% of the company’s profits!
So, how can retailers optimize their merchandising to prevent non-moving inventory and ultimately increase their profits?
By enhancing their store’s merchandising abilities, and integrating personalization.
Breaking the Vicious Cycle and Optimizing Profits
So, how can a store avoid the vicious cycle of the eCommerce Pareto principle and find a balance between boosting revenue, reducing non-moving inventory, and maximizing margins?
By integrating personalization with smart merchandising.
This means taking a variety of parameters into account to ensure you’re providing a great, personalized shopping experience for your customers while also meeting the business needs of your company - creating a perfect balance.
One of the most important aspects of a store’s merchandising activity is collection/category sorting.
Around 75% of clicks on products happen on the first results page. Therefore, for a store with hundreds or thousands of products, collection/category sorting is crucial.
To avoid that vicious cycle, an eCommerce manager should form a sorting strategy for each collection/category that takes multiple product parameters into consideration, including:
As an eCommerce manager, you should consider the relevant parameters (personalization is one of them, but not the only one) for each collection/category based on specific business needs.
Of course, not every parameter has the same importance for each collection/category.
In your ‘Sale’ collection/category, the amount of inventory and days to finish inventory are more important than they are for your ‘Bestsellers’ collection/category.
Therefore, you need to choose the relevant parameters and decide on the importance and influence they should have on the sorting strategy.
Does this strategy work? Most definitely!
Let’s take a look at one advanced product sorting case study.
Case Study: Advanced Product Sorting with Smart Collections
After four weeks of using a multi-parameter product sorting strategy that integrates personalization with smart merchandising using Kimonix smart collections, Swarovski Israel saw a significant increase in essential business metrics.
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By using a combination of personalization, sales quantity, inventory, conversion rate, and real margin, they were able to achieve:
- 8% increase in revenue
- 18% increase in conversion rate
- 29% reduction of non-moving inventory
- 72% increase in the daily sales rate of top products by inventory volume
Final Thoughts: Bypass the eCommerce Pareto Principle to Reduce Non-Moving Inventory and Boost Profits
It is no longer profitable to go all-in on personalization without taking important retail KPIs into account. To truly beat the eCommerce Pareto Principle and recover lost profits, advanced product sorting and discovery strategies are essential.
Therefore, to optimize profits, eCommerce merchandising managers should be using smart automated collections that are sorted using advanced parameters in conjunction with personalization.
You can either do this manually or by using advanced merchandising tools such as Kimonix.
Kimonix uses AI personalization and advanced analytics to allow merchandising managers to take multiple parameters into account when establishing sorting strategies.
Want to leave this vicious cycle behind and optimize profits?
Check out how Kimonix lets you create and sort AI-personalized collections using all these parameters, by setting the influence of each one on the sorting algorithm.
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