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….