With the increase in online advertising costs and the decrease in organic search visits for online shopping, many e-commerce brands are now investing in brick-and-mortar stores. However, this approach is inefficient and not based on customers’ needs – unlike value-based CRM.
A recent Wall Street Journal article says that many online retailers are investing in physical stores due to the rise in online marketing costs, which could serve to attract new customer profiles and, as some brands state, increase their profitability. But is that really true? And, have e-commerce brands then been betting on the wrong horse during the past years? Let’s take a look at the current state.
The Current E-Commerce Landscape
The number of e-commerce customers has been steadily increasing for years. E-commerce was already growing pre-pandemic, with online platforms expanding and the number of opened malls slowly decreasing. However, the pandemic’s e-commerce surge triggered its boom. In this new landscape, new audiences were brought online, which caused an accelerated growth of the e-commerce market.
In 2020, 71% of the population in the EU made online purchases, which translates to 5% more than in 2019, and 7% more than in 2018. In Germany only, the B2C e-commerce sector generated around 86.7 billion euros in revenue in 2021. This rise of e-commerce alongside the restrictions from the pandemic made it hard for retail stores, especially small to medium-sized businesses, and many of them were forced to shut down. This challenging time for retail shops led to different shopping behavior, and online retailers had to adapt to the newest trends and online competition. The result? Increased advertising costs and a decline in organic search visits for shopping.
Due to the rising costs of online advertising, and as the Covid-19 restrictions keep loosening up, some e-commerce companies are starting to open up brick-and-mortar stores again. Recent research (see graphic) even found that the more sales a company makes with online retail, the less margin is generated. But is investing in physical shops after the pandemic indeed the answer? We think not.
Why Are E-Commerce Retailers Investing in Brick-And-Mortar Stores Again?
High advertising costs and a decline in organic search visits for shopping are just some of the reasons why B2C online retailers are investing in physical stores. These brands believe that having brick-and-mortar stores will help them reach new customers they would otherwise not reach online, bringing them more profitability. However, by not effectively investing in their existing customer base, they are missing out on the potential to increase customer loyalty of those who are already online. With predictive CRM, these brands could effectively predict their customers’ behavior and how to connect and engage with them in a personalized way.
Online penetration and Ebitda margin for selected U.S. publicly-listed retailers with annual revenue exceeding $1 billion.
Source: AlixPartners, The Wall Street Journal
The increase in pay-per-click advertising and online marketing practices doesn’t justify the costs these online retailers will have to cover in order to keep physical stores up and running. For brands, e-commerce still has many benefits over a brick-and-mortar store: the use of cost-effective warehouses to hold inventory, the lack of rent for physical locations, customer convenience, fast shipment, and more room to tailor to customers’ needs. And, just like customers who visit stores expect individual, service-oriented customer experience, online shoppers now expect the same – and this is done when marketing is smart and sustainable.
There are a number of other factors that may cause the decrease in online sales, such as poor past online experiences or untailored marketing messages. Since we have seen how unpredictable betting on physical stores can be, we should now approach online marketing in a different way. Traditional performance marketing channels don’t work the same way as they did a few years ago, and taking a different marketing approach is long due. Now it’s the time to explore marketing methods that actually work with the current landscape and to start investing in generating more value with existing customers.
Why is Value-Based CRM The Only Way Around It?
Customers who shopped online for the first time during the pandemic are by now used to it, and will most likely buy online in the future. This gives online retailers and advertisers the opportunity to retain the existing customers, and also invest in keeping the newly acquired ones. Given the fact that acquiring a new customer costs 5x more than keeping an existing one, and with an increase in these acquisition costs, which will remain high, generating more value with existing customers is vital.
The first step to building customer loyalty in e-commerce is providing a personalized customer experience. To achieve that, users need to be addressed individually, which can only be attained with CRM. The best way to strengthen customer loyalty and increase customer lifetime value is through predictive customer relationship management, one of the leading CRM trends in 2022. With predictive CRM, previous customer behavior can be analyzed, and marketing activities are played on a customer-specific, value-oriented basis.
Investing in current customers and taking good care of them should be a priority for e-commerce brands. By doing so, customer loyalty will increase, and profitability will follow. This is because the purchase probability of an existing customer is much higher than that of a new customer (60-70% vs 5-20%), and because existing customers are more likely to try new products and spend more money on your product.
Repurchase rates from new customers should also be taken into account. Only around one-third of new customers make a second purchase, and this is because new customers don’t have the same level of loyalty that existing customers do. This proves that customer retention and brand loyalty take time, outstanding CRM activities, and contact with the brand and product range.
CDPs can help brands easily compile and understand customer data and act upon it through optimal CRM activities. For example: increase repurchase rates by first allocating those customers who will generate higher customer lifetime value, increase conversion rates through predictive CLV, or adapt the communication means to the stage of the customer relationship. When brands know and understand past customer behavior, they can improve CLV by strengthening customer loyalty and identifying opportunities for cross-selling or up-selling.
Often, however, brands don’t have a clear vision of their customers and therefore lack a clear picture of who their customers are, which preferences they have, and what they are more likely to do in the future – just as you wouldn’t with a passerby of a brick-and-mortar store. This results in bad personalization, unnecessary promotions, and poor user experience and ROI. As mentioned by our CMO Dr. Markus Wuebben in his OMR Masterclass “CRM 2.0” – The Future of B2C Customer Relationship Management Is Now, only companies that identify their most promising and valuable customer audiences and make the most out of them will be able to master the platform economy. Therefore, if you want to make earnings before interest, taxes, depreciation, and amortization, you need value-based CRM – and CrossEngage’s predictive models can help your company do exactly that.