Any marketer who has sat in a meeting and heard three executives articulate three diverse strategies might understand what McKinsey & Co. is getting at in a recent report that criticizes marketers who fail to figure out how they fit into the world of e-commerce.
As a solution, McKinsey outlined four models for companies to follow, saying the best online outfits have a clear understanding of their place in the brave new world of multichannel commerce. These companies “have moved beyond stabilizing their online business to making it a part of a distinctive customer offering,” John McPherson, a coauthor of the report, tells CHIEF MARKETER. The rest tend to make inconsistent decisions that confuse their customers—or as Christiana Shi, another coauthor says, “They don’t have a clear set of shipping lanes or guard rails to make decisions.”
McKinsey presented its results after analyzing the 100 largest direct retailers in North America. They cited nine that fit comfortably in one of the four models: Amazon.com, Dell, L.L. Bean, Ross-Simons, Target, Home Depot, Wal-Mart, J.C. Penney Co., and Williams-Sonoma.
For retailers without stores or for whom stores account for only a small percentage of sales, McKinsey suggested they choose from one of two models:
* The Efficiency Machine. This model fits sellers of low-margin products – CDs, books, PCs – because of the wide global scale the Web provides these companies. Because of their massive fixed costs, such companies must generate huge cash flows. They do so by offering deals to customers, investing heavily in brand marketing and innovative Websites and building highly efficient sourcing and fulfillment processes. General merchant Amazon.com and computer manufacturer/marketer Dell fall into this category.
* The Niche Leader. This is a company that sells higher-end products with fatter margins, such as jewelry and apparel. Because, as niche marketers, they typically have more-modest marketing resources, they need to offer excellent service to keep customers happy. McKinsey cited apparel and outdoor gear catalog L.L. Bean and jeweler Ross-Simons as examples, saying the best ones excel in coordinating their online and offline sales efforts, offer broad product choices on their Websites, and make online ordering a stress-free affair.
For merchants that reap a significant portion of their sales from brick-and-mortar stores, McKinsey offered two more models:
* The Traffic Driver. Behemoths such as general merchandisers Target and Wal-Mart and home improvement retailer Home Depot have lower margins but enjoy massive scale advantages. The key to success for these companies is to understand their multiple channels and how fulfillment costs can rub out profits. To counter the latter, they promote the high-margin products – uch as bedding and apparel– online and offer just enough other products to show off their range.
* The Triple Play. This is a company that sells relatively higher-margin products through the Internet, stores, and catalogs without overtly favoring one over the other. Its key to success is to understand how the channels complement each other and efficiently leverage them to lure customers and convince them to spend more. General merchandiser J.C. Penney and kitchenware merchant Williams-Sonoma exemplify this model.
“It’s time for retailers to make some choices,” McPherson says regarding the models. “If you look like this, you should be this.” For example, if a company determines that it most resembles Traffic Driver retailers, it should keep the goal of driving customers to stores in mind when making decisions about its online marketing. It doesn’t mean not selling via the Internet; rather, it’s a matter of allowing customers to return online items to stories, clearly identifying store locations online, and selling mostly higher-margin products online to offset the heftier fulfillment costs.
What happens when a company can’t figure out which model it best fits into?
“It means it’s difficult for senior executives to really articulate the strategies for each of their channels,” Shi says. And that translates into companies displaying contradictory policies and annoying multichannel customers, such as those purchase online but want to return orders in a store.