Making the leap to running a NeXT-commerce business begins with a long, hard look in the mirror and facing some uncomfortable truths. The most important is that the majority of companies, despite their protestations, simply do not put the customer first. A range of pressures—stakeholder agendas, internal politics, managing channel conflict, short-term financials—leads to significant compromises.
Leaders committed to moving forward into NeXT commerce should begin with an unflinching evaluation of their current reality and answer four critical questions.
- Do you know where your profitability blind spots are? No company gets into e-commerce not to turn a profit. But many companies settle for revenue over profits or have vague notions of turning volume into value at some future date. Executives still see the primary role of e-commerce as driving revenues (67 percent) versus driving profit (11 percent).⁵ This is a dangerous view, especially with expected economic uncertainty ahead. “Brands need to be very practical and ask: How do we protect profitability in e-commerce looking ahead?” said Ajit Sivadasan, president and global head of e-commerce at Lenovo.
NeXT commerce enshrines profitability as a core capability based on two things:some text- Know what your customers value and where you’re distinctive. Customer acquisition costs have risen an average of 60 percent over the past five years.⁶ To redress this issue, companies need to do less paid marketing (essentially buying share) and more engagement. Unfortunately, many companies have incomplete, narrow, or simply incorrect views of what their customers care about. In many cases, this is a result of entrenched mindsets or incentives that reward people for only optimizing experiences within the narrow bounds of their own operational responsibility.
Addressing this blind spot starts by separating table stakes from distinctive sources of value to the customer that competitors will have trouble copying. When Alibaba set up its HeMa grocery business, it maintained market parity for delivery times (around 30 minutes) and pricing. It distinguished itself, however, by identifying “key value indicators,” which included having the freshest seafood and providing ready-to-cook meals for young couples.
For many B2B companies, finding this value entails using tech to help sales and service people. Grainger organized data about its customers to make it easily accessible. When a customer calls about broken kitchen equipment, for example, a Grainger service person is able to access a database immediately to identify the needed part and ship it quickly. - Operational efficiency. Logistics typically are among e-commerce’s highest costs and quickly erode margins. Fulfillment costs, for example, can account for 12 to 20 percent of e-commerce revenues, squeezing margins and making profitability a mirage.⁷
The truth is that most companies have not effectively designed and implemented cost-efficient operations. But companies can often unlock sizable value by using AI to systematically optimize the full range of operations, from pricing and assortment to single-trip productivity and order pooling to long-haul and last-mile delivery configuration and order density, to name but a (very) few. It requires a Toyota factory mindset to squeeze efficiency out of every process with the help of advanced analytics. One US-based energy company, for example, was able to save $20 million annually by using an advanced-analytics model to identify the root causes of repeat customer calls.⁸ As Eddie Huang, the chief strategy officer of SF Express, said, “The stability of operations and logistics, among other things, is critical to service quality and customer experience.”
Given the costs, companies will first need to focus on the biggest pools of value. Some companies, for example, are segmenting their products, customers, and locations to prioritize the highest-value options. Others will need to rely on partners, particularly for last-mile delivery. Similarly, companies should approach cloud service providers (CSPs), with their increasing number of offerings, like partners who can provide them an accelerated on-ramp to advanced capabilities. To support this extensibility, companies will need to put in place a core set of digital mechanisms to enable the necessary connectivity, from APIs that connect to different systems to cyber practices that protect data.
- Know what your customers value and where you’re distinctive. Customer acquisition costs have risen an average of 60 percent over the past five years.⁶ To redress this issue, companies need to do less paid marketing (essentially buying share) and more engagement. Unfortunately, many companies have incomplete, narrow, or simply incorrect views of what their customers care about. In many cases, this is a result of entrenched mindsets or incentives that reward people for only optimizing experiences within the narrow bounds of their own operational responsibility.
- Are your people changes helping the customer? Many of the most promising e-commerce programs falter because the business is simply not ready to change. There are a variety of reasons, but many of them boil down to a lack of expertise in digital and a fear of altering the status quo. Three actions are crucial to combat this tendency:some text
- Hire “doer” talent at scale. The natural tendency in addressing talent issues is to hire a head of e-commerce or a head of digital. But companies often don’t provide these leaders sufficient authority or resources to make the necessary changes, leading many of them to leave in two to three years. Companies need to commit to hiring digital leadership and enough supporting digital talent to create critical mass for change. And while they need key skills—data science, cloud engineering, design—it’s more important that they have key “doer” traits: a preference for action over analysis, an obsession with the customer, and a willingness to test ideas quickly with real customers. At one retailer, the e-commerce head hired 62 people within three months to sustain a digital business. This focus on talent at scale is so critical that we have seen successful CEOs spend as much as 70 percent of their time on recruiting.
- Promote risk taking and learning over safe bets. The pace of change will reward those companies that are fastest to learn and adapt. The best learning happens through constant experimentation. That requires companies to not only become comfortable with failure but also make experimenting easy and cheap. That means creating dedicated areas to test ideas and then capturing and sharing the learnings through transparent reporting and reusable code libraries that are easy to access. As a former digital executive for P&G said, “Fast-cycle learning is a killer app because it leads to a cumulative advantage that is hard for competitors to catch up to.”
- Use data to break through stalemates. Without clear data that everyone is comfortable with, decision making is challenging and often slow. Good data helps create alignment and gives leaders the confidence to make decisions quickly, even when these decisions are not in line with historic experience.
- Are you rewarding your tech organization for delivering better customer outcomes? Companies need to operate like digital natives, using tech to quickly test new ideas and scale the best ones. But IT at incumbent companies is often more of an inhibitor than an enabler of these efforts. The most important point to remember is that NeXT commerce goals should drive technology decisions, not the other way around. Three issues predominate:some text
- Large, outdated systems constrain companies from moving and scaling at speed. Companies need to focus on creating an infrastructure of services to untether them from their legacy systems. Microservices (code that performs discrete tasks) allow them to easily test and swap out selected capabilities without affecting the entire system. Those services can be bought outright and installed directly or used as part of an offering from a CSP. Through APIs, companies can allow this array of services to access data and algorithms trapped in legacy systems. Flipkart, for example, has relied heavily on APIs to allow systems across the enterprise to communicate with each other to deliver complete experiences.
- IT’s incentives generally aren’t tied to customer or business outcomes. Creating the right incentives begins with developing metrics so that problems cannot hide. The solution requires specific IT objectives and key results (OKRs) that are tied to customer experience and profitability, a set of input metrics to identify root-cause issues quickly, and a system of strict enforcement of those metrics.
- Incremental changes just take too long. The only antidote to incremental changes and glacial speed is a big-bet commitment to developing a cloud-based architecture to serve the most pressing needs, such as customer experience.
- Are all relevant functions focused on delivering the best customer experience? NeXT commerce requires a massive coordinating capability across the enterprise. That’s because so many parts of the business are needed to deliver on the customer experience—smooth and fast delivery, inventory availability, tailored prices and promotions, consistent marketing, and informed sales. Mars Petcare’s general manager of e-commerce, Jessica Hauff, had a clear view of how to make that happen: “My job was to build capabilities across the entire enterprise, so I embedded e-commerce teams in functions, including supply chain, product management, and sales.” These teams are responsible for both helping functions better understand how to take advantage of digital capabilities and collaborating across functions on specific product initiatives.