It is not often that we have a chance to speak with the CFO of an online brand. As a matter of fact, we almost never speak to CFOs, and with a rare exception we seldom speak to CMOs and CIOs of the businesses. They always direct us down the chain to troops at the online market frontlines.
The CFO conversation was very interesting but before we tell you more about it, let us give you a little bit of context first.
Do you feel the digital disruption below your feet?
We are living in the age of the customer. The online world has dramatically changed the rules of the engagement and in the process it has given customer the upper hand.
Enough has been said about brick-and-mortar business model troubles while giving very little attention to what is going on in the digital side of business.
Looking at the e-tail industry trends below, one would think that everything is perfectly fine in the online land.
For example, Gigya in its ‘E-tail Quarterly Report’ (that includes the revenue of the 43 publicly traded retailers in North America) reported an impressive +19.2% quarterly year over year growth:
Side Comment: Careful analysis indicates that $7.3 billion came from Amazon. Another eye opening number is that Amazon’s last year revenue was around 23% of all e-Commerce sales transacted in the U.S. as measured by the U.S. Commerce Department.Will Amazon do to the online business what Walmart did to the traditional retail?
Forrester in its ‘US online holiday Forecast, 2014’ is making similarly strong predictions for coming holiday season:
Note: Slight drop in the year over year growth is not due to change in trends but to very short holiday season!
So, what can be wrong with such beautiful pictures? The flag that we are raising is called sustainability.
The same Gigya report tells us also about the price of that growth:
But this is not sustainability that we are talking about. The financial market will continue to fund Amazon and other brands, only as long as they see the growth in the value of their equity. In all likelihood this market trend will continue for foreseeable future, but who knows. This music can also stop very quickly and render many online businesses non-sustainable.
Instead of speculating about wisdom of financial markets, let us talk about major trends that are happening below the shiny surface of the digital business:
Trend #1: From open play to play for brands only
We are at the end of the romantic phase of the Internet where any person with a semi-interesting idea is able to create exciting new business. There will always be the opportunity for a ‘whiz-kid’ to pull a rabbit out of the hat, but for all other mortals, the online business has become a play for professionals and those that are committed to building the online brands.
We use the term ‘brand’ to describe the business state of mind and the set of creative and business activities focused to building long-term value. The amateurs who are opportunistically trying to explore some market’s inefficiency will be quickly ‘eaten’ by pros.
Trend #2: From ‘we must participate’ to ‘show me the money’
During this digital transformation, for many businesses the main question is – ‘how soon can we be there?’ From the need to have a new website, to the need to get more traffic, or need for mobile app or mobile site, the business conversation is more like ‘we must keep up with Joneses’ rather than ‘what is the business case or strategy’ behind the initiative.
That ‘free lunch’ party is rapidly coming to an end. Questions about ROI or ROMI (return-on-marketing-investment) are more norm today than ever before.
Trend #3: From tactics to strategy
One might comment that the first two trends are obvious next stages for the e-tail business that is coming of age. Yes, that is a fair point, however, being on constant contact with e-tailers, we are stunned with how few companies are aware of the first trend.
The third one is the biggest and the most important trend. The smart brands are recognizing that e-tail is not just an additional channel of distribution. They are recognizing that the web is the biggest customer interaction lab that offers deep insights into visitor preferences, trends, and buying patterns. Those who are able to connect the dots are going to gain unfair competitive advantage.
This understanding is the foundation of the customer centric business. Knowledge gained online will impact every aspect of your business, including your business strategy.
Back to CFO call
Now that you understand what we think about digital commerce, you will also understand our curiosity about the CFO view of the world.
From the get go, it was obvious that we were talking to a top-notch professional who was super curious about e-Commerce trends and interested to listen and learn. This is the gist of our conversation.
Here are a few key questions we asked:
Q: When approving the marketing budget for demand generation, how do you judge the effectiveness of the investment?
A: It is quite frustrating. They are asking me to continually increase the budget and the only metric that I am able to get is increase in traffic. Sometimes I am told that our conversion rate has gotten better but at no time am I able to attribute the investment to directly measurable results.
Q: Who is in charge of your site re-design and branding. How do you know that they are doing a good job?
A: Interesting that you asked me that question. We moved our site to a new platform this year. It took almost a full year of hard work and hundreds of thousands of dollars in investment. Ever since we launched the new site, which by all accounts project a great image and modern look and functionality, our sales are below what we had year before at the same time. We have no idea if this is because of the new site or because of something happening in the marketplace that we do not understand.
Q: We can see that you have more than few expensive add on apps on your site. For example, a high-end product recommendation and product review modules. Do you know your ROI from those investments? For example, can you measure how much in new revenue you can attribute to the recommendation module?
A: Nobody can answer those questions. We simply do not know. When we approved those purchases, we did it based on the industry buzz and reference calls. But no, we cannot measure their ROI.
Q: We also see that you using an A-B testing solution. We are curious to learn what is your testing experience.
A: We are new to site testing. From time to time we will experiment with an element or two of the site. I am not directly involved but it looks to me that we are not using testing tools too much. The team is too busy with higher priority items.
The playbook is BROKEN
The CFO was basically painting the picture below:
He was confirming that the demand generation team operates in its own silo using their own performance metrics, like click-throughs.
Branding, that executed a big re-design effort, spent almost a year and tons of money to produce a new cool site that now is not performing as well as the old ‘ugly duckling.’ Most likely, the key decisions about new site were done in accordance with directions from HiPPO (highest-paid-person-opinion).
Likewise, additional investments in Apps and Add-ons were made based on recommendations of other people and not based on directly measurable results.
Last but not the least, testing and personalization is more talk than reality. Even if companies were super committed to site optimization, the traditional testing and personalization solutions that are focused only on discrete aspects of the site will produce only partial results.
In other words, what we learned from the CFO was that the efforts are disjointed and not measurable. The companies have no ability to attribute the increase or decrease in the performance to e-tail marketing activities or budget spend. As a result, they cannot have viable insights into customer preferences and they are flying blind.
The digital commerce is at beginning of its next big transformation. We hope that the industry itself will stop thinking about digital commerce as an additional channel of distribution. Rather, the sooner we recognize that digital commerce and its ability to uncover customer preferences are core to everything we do in business, the sooner will we create a sustainable businesses.
It is still not clear who will lead that transformation. Forrester in its recent ‘Digital Leadership In Retail, 2014’ report suggests that CIOs need to lead the charge and enablement of this digital strategy.
We think that the battle is big and important enough to warrant participation of the entire “C” suite. This is why we greatly appreciated he opportunity to speak to a CFO of a great online brand.