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The Power & Pitfalls of Digital Transformation.
When a company has been built on a solid foundation of retail & direct mail marketing, digital transformation into e-commerce can offer powerful growth opportunities, but at what cost? (7 min. read)
Transformation is never an easy process, but the end result is usually worth the effort.
The trick is figuring out how to balance the power of traditional marketing efforts, and the cash flow that they generate, with the need to future-proof the company through e-commerce design, development, and marketing.
In today’s economy, it’s hard to argue against the fact that e-commerce and digital marketing provide a significant opportunity for established businesses to grow their market penetration and reach.
According to the most recent Canadian e-commerce trends report, retail e-commerce sales are projected to grow to $108 billion by 2023. In July of 2020 alone, Retail e-commerce sales rose 60.6% year over year, while total unadjusted retail sales increased by only 1.9%.
But even with that level of growth, e-commerce only accounts for around 8% of total retail sales.
So how much of your effort do you put behind 8% of the total market?
It certainly should be more than 8%. Growth-oriented programs & markets always require more effort than mature programs & markets.
Between 2020 and 2024, e-commerce retails sales are projected to grow by 43%. Traditional retail is only projected to grow by about 12% during that same period.
Add to that your current market share within the traditional vs the digital world. For example, if you own a sizeable share of wallet in the traditional space, but very little in the digital space, you have a greater opportunity to grow new revenue streams digitally.
Finally, you want to look at the geographic opportunity that the digital space provides. For example, the average potential customer is only willing to travel about 14 minutes to purchase Home & Garden products from a local retailer. This significantly limits your geographic reach, probably to about a 9 km radius around your retail location (depending on traffic, speed limits, and other factors).
There are no such geographic limitations with a well-established e-commerce business.
Striking the Traditional vs Digital Transformation Balance
Sears is the perfect example of a company that failed to take advantage of the opportunity to digitally transform their business.
They had everything they needed to be successful online. A core part of their business – for many years – was the Sears catalogue. With it, they had established a loyal customer base and integrated fulfilment processes, which even included in-store pickup options (something most other retailers didn’t have until years later).
But they did not maintain their brand promise on their website. They did not create a seamless shopping experience between the retail stores and their e-commerce properties. They did not embrace digital transformation as a business opportunity.
Different things could be ordered at different prices with different delivery options. This fragmented their user experience and frustrated their customers, me among them.
By the time they started to catch on, it was too late.
On the other hand, Deluxe is a company that got it right (for the most part, eventually). They understood the importance of optimizing & enhancing their direct mail programs while simultaneously building a strong digital presence.
They adopted a cautious “don’t hurt revenue” approach to make sure they protected the core revenue through direct mail programs while re-investing some of that revenue into digital transformation projects.
Could Deluxe have moved faster to capitalize on digital transformation? Possibly.
But, in the end, they were able to strike a reasonable balance between growing their e-commerce presence and optimizing their direct mail revenue.
This has resulted in the company experiencing quarter over quarter growth for more than 40 quarters in a row, even during unprecedented financial times. Therefore, they must have done something right.
How to Find the Digital Transformation Balance
There are several ways to approach digital transformation, and people are often all too willing to provide their opinion on how fast or slow your business should transform.
Including me. Here is what I have learned about digital transformation and the different approaches that can be applied.
The “All In” Approach Rarely Works
Unless your direct mail programs are losing money hand over fist, it makes no sense to shut them down in favour of investing all that money, time, and effort into e-commerce development.
E-commerce transformation takes time, and you do not want to shut off a sizable source of revenue to empower that transformation.
Your e-commerce purest might tell you to leave the old-school direct mail programs behind and focus on the future. That would be a mistake.
The “Set It and Forget It” Approach Rarely Works
Investing a small amount of budget, time, and effort to get your business online, and then letting it sit and stagnate will not achieve the growth your business needs.
Digital transformation takes a sustained effort to reach its potential. Therefore, you should be prepared to build on that foundation before that foundation crumbles.
Your direct mail marketer might admit that having a website is a necessity in today’s marketplace, but “if you build it, they will come.” That would be a mistake.
The “Grow Everything” Approach Rarely Works
Perhaps, with a massive budget and huge staff, you can effectively grow both the traditional and the digital programs significantly during the same period.
But keep in mind that the opportunities to grow are going to be different in an established direct mail program versus a new e-commerce venture. Achieving a 10% increase in direct mail revenue could be a massive undertaking, while achieving a 10% increase in e-commerce revenue could be the matter of fixing some common SEO problems.
Your CFO might push the idea of “can’t we just do both?” so that they can squeeze as much revenue, and effort, out of the existing team as possible. That would be a mistake.
A Balanced Approach Is the Best Approach
Companies that tackle their digital transformation in a strategic and thoughtful way are the companies that end up achieving the greatest level of success.
But how much balance is “balanced”? That will depend entirely on your business.
The first step to establishing a balanced approach is to look at your market penetration in the traditional vs the digital market.
For example, if your business is driving a smaller percentage of revenue through e-commerce than the industry average, then you have a tremendous upside.
If your company is only generating 5% of its revenue through e-commerce and the industry average is 15%, what could your business do with triple the e-commerce revenue?
According to Stats Canada, here are the industry averages for the percentage of revenue generated by e-commerce. These are what you should be comparing against your business.
|Industry Classification||E-commerce %|
|Food & Beverage||1.2%|
|Health & Wellness||7.3%|
|Clothing & Accessories||23.6%|
|Sports & Hobbies||27.0%|
If the percentage of revenue you generate from e-commerce sales is well below the industry average, that is a clear indication you need to focus some attention in that arena.
And even if the percentage of revenue you generate from e-commerce is at the industry average, that doesn't mean you should stop. After all, what company wants to be average?
The next step is to look at areas of opportunity within each program.
Has your direct mail program been crafted and optimized over the last 10 (or more) years? Is it running smoothly, effectively, and profitably?
Are all your digital ducks in a row when it comes to user experience, conversion rate optimization, search engine optimization, and digital marketing?
Squeezing an extra million dollars of revenue out of an already well-oiled direct mail marketing machine could be far harder than it would be to squeeze an extra million dollars of revenue out of an untapped e-commerce program.
The other side of that problematic coin is that a 2% lift in your direct mail response rates could drive much more revenue than a 2% lift in your website sales.
And that’s where the “balanced” part of your Digital Transformation Strategy comes in.
Ask yourself these 4 questions:
Which side of the business (direct mail vs. e-commerce) needs more help?
Which side of the business (direct mail vs. e-commerce) has more potential for growth?
Which side of the business (direct mail vs. e-commerce) better supports the brand?
Which side of the business (direct mail vs. e-commerce) better supports business goals?
Any program, direct or digital, can be optimized and enhanced.
Creative can be tweaked. New offers can be tested. Customer & prospect lists can be filtered and segmented. Purchase propensity models can be optimized. Purchase flows can be improved. New audiences can be targeted.
If you’ve run out of ways to improve current programs, you’re probably just not thinking hard enough.
The trick is to determine how much effort to put into maintaining, optimizing, enhancing, or growing each of the two arms of your performance marketing program.
Protect the Revenue, Grow the Future
In the end, you want to establish a digital transformation strategy that protects the company’s revenue, including any established revenue growth patterns, while adding new revenue streams through e-commerce.
That way, you don’t just replace one revenue stream with another, you create a wholistic growth strategy that doubles down on your ability to reach, engage, and convert new customers.
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