Nov 27, 2021

Six hidden costs of ecommerce and how to manage them

Ecommerce
Strategy
Retail
Business Costs
Kate Birch
5 min
Andrew Gorecki, Managing Director of Retail Directions shares his tips to identify and control the unexpected costs that could undermine your business

With more customers shopping online than ever before, retailers are being forced to either debut online or significantly increase their online presence.

There are obvious and significant costs involved in moving online for retailers of all sizes. The opportunity to make up for lost sales by expanding or launching online has been a lifeline during COVID, but have retailers done enough to identify and tackle the hidden costs of eCommerce?

1 Customer behaviour change

Consumers have switched their spending to new areas over the past year. Loungewear has replaced office suits, lipstick swapped for face-packs, while demand for DIY and gardening tools has exploded.

While some of these behavioural changes will stick, others won’t, meaning it’s vital that retailers don’t base any long-term decisions on short-term customer behaviour change.

Ensuring survival is about looking at the longer-term picture for the retail sector and each business within it. Retailers need to ask themselves what will happen to these new customer behaviours and how they relate to the channels that retailers are operating in.

It’s vital to understand whether retail businesses are facing a structural or a cyclical/ seasonal change. If it’s the latter, then enough cash and resilience should see them through. However, if it’s a structural change then retailers need to restructure their business to cope. 

2 Warehousing costs

Physical retail is built on bulk dispatch principles driven by efficiency requirements, but online fulfilment requires picking and packing individual items. Consequently, item picking costs for customer orders can be up to ten times higher in comparison to bulk picking processes used for store replenishment.

The cost of storage is also higher. If a retailer runs a single warehouse servicing brick-and-mortar stores and online, finding the true per-item cost becomes difficult. If the retailer decides to use brick-and-mortar costs for calculating the cost of goods sold online, the cost will be understated.

It’s no longer possible to get away with a single warehouse operating model. You need to support bulk processes to replenish stores and order-at-time fulfilment systems, so striking the right balance between these two picking, packing, and dispatch patterns is key.

3 Online customer service

Whereas in-store associates can be on hand to help customers with queries, how do retailers answer online customer queries and not face the hidden cost of lost sales from a consumer who’s abandoned their website because they can’t find the answer they need?

From email support to live chat, online service has increased in popularity, but does it work for everyone? Is it valuable or is it a quick fix implemented badly that could actually lose retailers customers?

When using a chatbot, make sure you can instantly connect customers to a living staff member when the bot can’t answer a query. Failing to do this however, risks exposing customers to poor customer service. A simple site re-assessment could work wonders for customer retention. 

4 Delivery costs

Although eCommerce delivery technically isn’t a hidden cost, the shift in customer behaviour has brought a shift in customer expectations, with next day delivery and free delivery often pertinent factors in purchase decisions.

Added to the pressure is the current strain on transport and delivery providers, which has led to delivery delays and escalating costs, which makes finding the balance between urgency and need ever more important.

Retailers need to clearly understand their customer and their delivery needs. Are they time-sensitive in terms of when they receive products? Are they happy to pay extra for next day delivery? Or do they expect it for free? Consider promoting click and collect solutions by offering a discount for customers willing to pick up orders from the store. 

5 The challenge of returns

Returns can be costly at the best of times but add in the impact of COVID-19 and the rise of ‘home fitting room’ behaviours and returns rates can be as high as 40%! Include the risk of fraudulent returns or wardrobing – where a product is worn and then returned – and costs can be even higher.

For online purchases returned to brick-and-mortar stores, the cost of handling the returned stock doesn’t necessarily get attributed to the online business, while online purchases returned to a warehouse require dedicated teams, facilities, and costs.

Returns can signify several issues - from inaccurate product descriptions and imagery to quality issues and errors in garment sizes - but collecting customer data and creating actionable insights into your returns can help identify potential issues and returns abusers. 

6 Having the wrong focus

The most successful retailers recognise three key-value disciplines – operational efficiency, product leadership, and customer intimacy. But they also know that they must not attempt to be a leader in all three disciplines. Instead, they should be striving for excellence in one of the disciplines and competency in the other two. You cannot offer the best product, at the lowest price, with extensive customer service – there would be no profit left.

A common pitfall for retailers who identify problems within their business and attempt to apply the value disciplines formula is that they routinely opt for customer intimacy, believing that getting closer to the customer cannot fail. While this has some benefits, overall it will make matters worse if the business has a poor product offering and is inefficient.

No more surprises

Identifying and keeping control of costs and ensuring retailers have the tools and expertise to manage them is key to ongoing survival.

Precision is vital when understanding the cost structure of a business in the new era of retailing. A successful business requires agility to respond – not just to manage the change itself but also to plan for and mitigate the cost of that change.

Only once the retailers understand the exact costs of eCommerce will they know where the long-term investment and focus should lie.

Andrew Gorecki is Managing Director of Retail Directions

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