What E-commerce Pricing Strategists Can Learn From Aircraft Piloting

 

“Airspeed, altitude, or brains; you always need at least two.”

This classic pilot’s saying can also apply to logistics with the following equivalencies:

Airspeed = Sales Volumefunny-picture-sign-saying-caution-low-flying-aircraft-

Altitude = Margin

Brains = Good Decisions (Hopefully)

Case-in-point, Amazon appears to have chosen to fly primarily on high sales volume and brains. Margin got “cut.”

In a recent Harvard Business Review interview, Amazon Chief Executive Officer Jeff Bezos stated, “Percentage margins are not one of the things we are seeking to optimize…. It’s the absolute dollar free cash flow per share that you want to maximize. If you can do that by lowering margins, we would do that. Free cash flow, that’s something investors can spend.”

But flying so close to the bottom line doesn’t leave much room for error, especially when mountains of shipping costs are piling up ahead.

planechart

A Businessweek article characterized the battle for e-commerce business as a land grab, and one of Amazon’s strategies is to build the largest customer army possible by offering the lowest prices and best incentives and loyalty programs. Even if it means reporting $636 million in shipping losses in the third quarter alone and earning only an estimated 1 percent profit margin per item, Amazon is determined to increase its volume and customer base. If you want to ship a 1,509-pound safe for free (usually $700 to ship), you know where to go.

Among many other endeavors, Amazon is extending its Prime membership program to Canada. It looks like Amazon isn’t slowing its revenue rampage, and it’s rattling many retailers. But, will Amazon continue to be able to navigate the rising shipping costs? With all its big decisions lately, I hope Amazon has the “business intelligence” to make good ones.

One key to e-commerce profitability is having the right tools and expertise to find actionable solutions and navigate the peaks. After all, “No one has ever collided with the sky.”

Thanks for flying DSS.

Amazon’s Financial Indicators… “Falling With Style”?

Recently, an article came out questioning if Amazon is “a giant ponzi scheme dressed in drag,” and it reminded us of a blog post we wrote in January, “What E-commerce Pricing Strategists Can Learn from Aircraft Piloting.” In our post, we discussed Amazon’s current precarious strategy of flying fast and low on increasing revenue and decreasing margins; this “ponzi scheme” article digs deeper into Amazon’s finances to reach a very similar conclusion to ours: “If AMZN’s revenues slow down or its expenses unexpectedly increase, for whatever reason, AMZN could face liquidity problems.”

With Amazon’s “airspeed” (revenue) increasing and “altitude” (operating margin) decreasing, those stakeholders with “brains” may want to know where the parachutes are “stored.”

Picture1(Original chart by Dave Kranzler; Edits by DSS)

Perhaps Amazon’s current position is comparable to how Buzz Lightyear describes his ability to “fly”:

“This isn’t flying, this is falling… with style.”

http://www.traileraddict.com/emd/14537

Vital Signs- What medical technology can teach the eComm world about ‘retail health’

While success in the medical field has much to do with skill, many times the technology needed to know what is going on inside the patient is equally indispensable. As anyone that has recently visited the doctor’s office will attest, once you’ve proven the ability to afford the service and spent the requisite time in the waiting room, they immediately hook you up to the machines to take your vital signs.

Foremost among these initial bio-inquiries are temperature, blood pressure, heart rate and oxygen level. All of these must be within a certain tolerance or additional testing will likely be required. So, why are these four indicators so critical? Well, in addition to being easy data to obtain, they give immediate insight into cardio-pulmonary performance and the presence of illness or infection.

Supposing the patient was the current eComm business environment and the four key medical indicators were iStock_000018818610Smalltranslated as follows:

  • Temperature = Customer Satisfaction Index
  • Blood pressure = Order Fulfillment Efficiency
  • Heart Rate = Sales Tempo
  • Oxygen Level = Product-level Profitability

If eComm business units that are heavily subsidized by a successful store side or investor class underwent preliminary testing, how would their vital signs look?

Temperature Elevated due to reliance on free-ship promotions and accelerated service
Blood Pressure High during peak periods and always challenged by SKU profiles and mix
Heart-rate High with unlimited digital connectivity
Oxygen Level Low from stress in maintaining the other three key indicators

If an eComm unit lost its lifeline of financial support or wished to reduce subsidies, how would it survive? Simple, by increasing the self-generated O2 . Step one in this effort is to measure and understand the impact of product mix and customer proximity on profitability. For example, as the industry moves toward a two day delivery imperative, customer proximity will become an essential factor in limiting oxygen-sucking premium transportation.

Just as with the medical professionals, eComm logistics leaders are very creative and capable of designing networks that manage inventory positioning, peak fulfillment demands and non-standard freight service levels. What is often missing is the “machine to take your vital signs”. While “machine” is a simplistic word used to broadly describe a process by which essential sales and operations data is connected and presented, you get the point.

The key component of this machine is data engineering. Linking the freight and fulfillment costs to the order profile and subsequent allocation sets the stage for item-level profitability modeling. The further addition of contribution hurdles enables exception highlighting of under-performing products and assortments. Coupled with additional dimensional diagnostics, merchants and operators can triage product groups to optimize profitability or even discontinue web availablility.

Can you see and cross-functionally share item profitability?

Onepager-items*(click to enlarge)

Can you assess promotional activity in near real-time?

Onepager-promos*(click to enlarge)

With eComm – and omni-channel – being primary drivers of future growth for most retailers, now is the time to establish your manage-to metrics.

Long-term health awaits those who can effectively monitor and institutionalize stock-illustration-32053300-tough-man-icontheir critical vital signs…
those who don’t,polls_tombstone_clipart_0743_576322_answer_1_xlarge well….

The No. 48 Chevrolet Team & Winning the Business Intelligence Race


racecar-daytona

In the Predicts 2012: business intelligence still subject to non-technical challenges report, Gartner estimates that by 2014 over 70% of BI initiatives still won’t align analytics completely with enterprise business drivers and, therefore, fail.

That rate is even worse than the 19/43 drivers who didn’t complete all 200 laps of the 2013 Daytona 500.

So, what do the 30% BI success stories and 56% cross-the-finish-liners have in common? All five key T’s.

BI-NASCARchart

Let’s break down the 2013 Daytona 500 champion, who had all five keys:

“We work really hard … to prepare for the superspeedway races. We put a great product out there.… I think what we have above and beyond everybody else is the desire to go out and win races. We’ve got 500‑plus employees at Hendrick Motorsports. When they all want to go out and win races (and) you put guys like this [Jimmie Johnson] behind the seat, you’re going to see magic happen” (nascar.com).

–       Crew Chief Chad Knaus

Tools

lowescar

 

 

 

 

 

Talent

500x_jimmie_johnson_winThe winner, Jimmie Johnson, has proven talent and experience:

  • 400 starts in the NASCAR Spring Cup Series
  • Second Daytona 500 victory
  • Five-time NASCAR champion

 

Technique

11-18-12-johnson-pit-crew-4_3_r541_c540“The work of Johnson and crew chief Chad Knaus is the gold standard in the NASCAR garage. They think of everything, including the risk-reward factor of running a new-generation car in an unruly pack during testing sessions at Daytona. So while others tore up cars and engines and just about everything else — see Edwards, Carl — Johnson’s 48 Lowe’s Chevy remained pristine leading up to the 500.”

“‘I know it was pretty boring for Jimmie from time to time,’ said Knaus. ‘He was running laps by himself when there were packs of 10 cars running around, but we felt that was the best way to understand this new generation of race car’” (thedailyworld.com).

Teamwork

What is the secret to Hendrick Motorsports’ success?

johnson&hendrck

  • “Mr. Hendrick and the people he gets to make this place go.” – Kasey Kahne
  • “People and passion in what they do.” – Jeff Gordon
  • “The people; it’s all about the people.” – Crew Chief Kenny Francis
  • “We say we’re driving performance together. It’s everybody working together.” – Rick Hendrick

Tenacity – The Drive to Win

Johnson500Win

  • Hendrick Motorsports has a NASCAR record 13 owner’s championships and 14 overall
  • Roster of top drivers Kasey Kahne, Jeff Gordon, Jimmie Johnson and Dale Earnhardt Jr.
  • Hendrick is second on NASCAR’s all-time Cup wins list (1949-present) and leads all owners in modern-era victories (1972-present)
  • His Cup-level teams have won at least one race each year since 1986 – the longest active streak – and averaged nearly 10 wins annually during the last decade. (hendrickperformance.com)

Five T’s for BI Success

That formula for winning the Daytona 500 should also apply when it comes to “taking the lead” in business intelligence. As seen by Hendrick Motorsports, success is not an accident; success is a result of bringing the right elements together for a winning combination.

In business, BI is more than a technology experiment; it is an essential element in institutionalizing actionable analytics. When the goal is to create competitive advantage, the ability to make accurate, data-informed decisions is a key to driving the business forward. Those decisions are made by teams who blend the right tools, talent and techniques together and have the tenacity to overcome obstacles.

DSS is made to be on such a team.

Business Intelligence: Partnering To Create A Profitability S.H.I.E.L.D.

the-avengers-15

It’s no secret that Apple has been facing questions as to the ability to continue to innovate as Samsung, Google, Amazon and Microsoft nip at its heels. However, as Tim Cook, CEO of Apple, reminded us, Apple’s competitors are still playing catch-up; they’re in structural-build mode while Apple already has the software, hardware, and services in place and decades of expertise in all three.

“‘Apple is in a fairly unique and, in my view, unrivaled position because Apple has skills in software, in hardware, and in services,’ says Cook…. Google is great at software and services, but not at hardware. Microsoft is in the same boat. Samsung is great at hardware, but not software or services. Amazon is good at services, but not software or hardware” (article).

But, is there truth behind the old saying, “Jack of all trades, master of none”?

If, for example, Google and Samsung were to successfully partner, their individual strengths combined could rival Apple.

Even superheroes, with their amazing strengths, eventually team up for a reason – highly specialized skills make for awesomely unbeatable teams. Think, “The Avengers.”

The arena of business intelligence is no different; it can be your S.H.I.E.L.D.

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“None of us is as smart as all of us.”

– Ken Blanchard

In implementing a comprehensive BI strategy, companies have two basic models: Buy & Build or Partner

Specifically, they can…

  1. Spend time and money to build their own hardware and software or buy preexisting software, then train employees and manage it themselves.
  2. Rent software and services from specialists who already have demonstrable capabilities and expertise.

BuyBuildRentTable

One option offers clear advantages: Partner.

Or, in industry terms, utilize SaaS (Software as a Service) which is “software that is owned, delivered and managed remotely by one or more providers” (Gartner).

Teaming up with a SaaS provider allows companies to integrate business intelligence without having to build or maintain it and they take advantage of others’ experience, expertise and continuous improvement initiatives.

At DSS, we are the “Jack of retail/e-commerce logistics and master of assortment-level profitability improvement.”

In our clients’ battles for top- and bottom-line improvement, we have the tools, talent and techniques to be your S.H.I.E.L.D.