The e-commerce sector is constantly evolving, with new market entrants and new offerings. This creates opportunities for firms to adopt different performance metrics to enhance their competitive positioning. Online retailers should focus on gross margins as a key performance measure for revenue generation, converting customers into repeat buyers, and encouraging cross-border shopping.
According to a 2014 report by the U.S. Census Bureau, over 80% of total retail sales in Australia were transacted through brick-and-mortar stores, while only 1% was conducted online. In contrast, the United States had 45% of retail sales undertaken offline while 32% was done online as per 2013 statistics from the Department of Commerce.
Although these numbers indicate strong growth potential for Australian e-commerce companies, the figures also highlight the necessity to understand and consider key performance metrics when evaluating e-commerce firms.
This Essay will briefly assess online retail industry drivers, provide a foundational analysis of online retailers, and conclude with forecasts for industry sectors in terms of market share, gross margins, and return on investment.
The underlying driver that has led to an increase in demand for e-commerce is the internet. Over time it has become a universal tool for businesses to use as a conduit to reach out to their customers. Online retailers have been able to manage their supply chains more efficiently while reducing operating costs by centralizing warehouses, utilizing economies of scale from bulk purchases, and offering lower prices due to low overhead costs.
Growth of e-commerce
The e-commerce industry has grown rapidly over the past decade. The Australian Bureau of Statistics (ABS) revealed that total retail turnover in Australia had grown to $1.6 trillion in 2014, increasing 4.2% from 2013. This is seen across all industries where brick-and-mortar stores have experienced growth through online channels, with a substantial 7.4% rise in sales contributions attributed to online transactions.
While still only comprising a small proportion of the total market share, it can be expected that e-commerce will continue to cannibalize traditional bricks-and-mortar retailers by offering consumers more convenience at lower prices. As per Deloitte’s Online Forecasts, AIS forecasts online transactions to only comprise 8.7% of Australian retail sales by 2020. However, it is predicted that e-commerce will contribute an additional $17 billion in revenue within the same time.
E-commerce firms should adopt a revenue generation focus instead of marketing and advertising expenditure due to increased competition and declining margins. Successful e-commerce companies monetize their platforms through low priced products and comprehensive customer targeting strategies.
The benefits include higher conversion rates from targeted customers, increasing repeat purchases, and gaining customer loyalty, leading to lower marketing costs for future campaigns. Market segmentation enables online retailers to be more strategic with their pricing structure and how they communicate with different groups of customers such as Millennials or Generation X.
Online retailers should also focus on gross margin to be a key performance metric for revenue generation. Gross margins reflect the company’s revenues and expenses, minus depreciation, expressed as a percentage of revenues. The gross margin percentage demonstrates how profitable a business is from its core operations by showing the proportion of total sales that remains after deducting direct costs associated with producing or providing goods or services.
While other factors such as logistics volumes, price competition, and customer retention strategies should be considered in determining whether an online retailer will have a sustainable future within the industry, it can be inferred that e-commerce firms derive value from their ability to generate higher gross margins while still offering low prices due to economies scale.
Holidays and e-commerce
Holidays are a busy time for e-commerce companies. Sales increase and stock prices rise during the holidays, evidence that consumers purchase more goods online than at brick and mortar stores. E-commerce sales may continue to grow as Americans shop with greater frequency, even if only by transitioning from in-store to online purchases rather than increasing retail goods consumption.
Online shopping has become easier because of advances such as mobile apps and user-friendly websites, but this ease of use does not correspond to higher growth rates. There is some evidence that the price elasticity of demand for most products sold online is low (low responsiveness). This low price elasticity may result in fewer large changes in consumption patterns compared to offline consumption. This lack of change in demand may make consumers happy but not necessarily benefit the economy or companies.
E-commerce sales are expected to grow faster than total retail sales, supported by structural growth drivers such as technology improvements and increasing consumer spending power. The number of people shopping online is expected to grow, increasing the demand for goods across all categories.
E-commerce has had a profound impact on both shoppers and brick and mortar stores through competition that has forced traditional retailers to invest more into their digital arms or risk being left behind. With companies investing so much time, money, effort, etc., into digital marketplaces, it can be assumed that they will take significant measures to secure their foothold in this space even further after seeing the success it has had thus far. Check RemoteDBA.com for insights.
As other retail outlets have been closing due to a lack of foot traffic, e-commerce sites that sell various products, such as Amazon and eBay, continue to add new customers. In addition to keeping existing shoppers online longer, US consumers are becoming more comfortable making purchases on mobile devices than ever before.
Mobile e-commerce is expected to grow exponentially shortly because it represents the most convenient way for shoppers to engage in digital marketplaces. Some companies may even begin limiting their physical presence to generate sufficient revenue through purely online channels.
Overall holiday sales are projected to increase by 2% year over year, which would mark the fifth consecutive year of positive growth, according to the National Retail Federation (NRF). While the holiday season is busy for e-commerce companies, online sales only accounted for 9% of total retail industry sales in 2015. This number is expected to increase due to growing demand and ease of use, but it will still be a small portion of total store revenue.
E-commerce growth rates are projected to be higher than overall retail growth, but there may not be significant changes in consumer behavior. For example, it’s possible that consumers would purchase more goods if they were readily available online, yet this does not appear to match up with current data. E-commerce companies are continuing their investment into technologies that make shopping easier on digital marketplaces, which will result in continued growth during the holidays.
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