The Power of Supply for Digital Marketing, Part One - Four Supply Woes that are Digital Acquisition Killers

$14 billion.

That’s how much collective GMV I’ve had the opportunity to acquire in my career as the owner of retail performance marketing channels across many different channel partners, brands and budgets.

Performance marketing (dollar in; dollar out) has a constant mandate to drive GMV while also maximizing–or at least controlling for–net marketing contribution to EBITDA.

In performance marketing, you are making your marginal ad placement buy at extremely frequent intervals, so having all your information controlled and tight is critical to winning the market that day.

Unfortunately, poor supply (both in terms of assortment and inventory) will cause an enormous drag to both GMV and EBITDA, especially in a comparison / auction channel (Adwords, Google Shopping, NextTag, Shopping.com, etc).

In this post I will discuss four ways that supply challenges harm performance marketing success.

Four supply challenges that harm performance marketing success

1. Lack of Differentiated Assortment

In order to succeed in performance marketing you need a differentiated assortment that includes both product placements you uniquely hold as well as competitive placements.

Take Google Shopping for example. Being the only retail listing for a product that has demand means not only getting all of the traffic for that product listing but also being able to set your bid at the very bottom. Since there’s no competition, it effectively becomes free traffic acquisition.

Every product placement you uniquely hold in the market, meanwhile, allows you to have a larger warchest for more competitive placements.

Why? Because unique product placements are much more profitable.

Even having a single competitor in an auction against you means a bidding war. It’s classic prisoner’s dilemma. You and that competitor may try a little signalling, but ultimately both bids climb to a level that depletes margins on both sides, and the auction owner (Google) wins.

Add a third competitor with bravado into the mix, and your acquisition team will be immediately double-checking LTV calculations to see just how “strategic” their investment can be to win customers.

It’s important, therefore, that your assortment is differentiated enough to hold both unique and competitive placements.

2. Not Eliminating Competitive Assortment Advantages

This is a corollary to challenge one, above.

Even as your own product offerings become well differentiated, your acquisition team needs further assortment that undercuts your competitor’s flywheel.

Why? Because, as we have seen, every product that a competitor uniquely holds in the market will give them uncontested fuel to aggressively outbid you in head to head demand.  While your own marketing team wants to only pay $.01 on unique assortment, they absolutely do not want their competition to have that same advantage.

Your supply therefore needs to constantly evolve and grow in such a way as to remove competitors’ assortment advantages.

3. Trying to Fill Assortment Gaps with Marketplace Products

Marketplace assortment is better than having nothing, but if you have a marketplace sourced product and are competing against the same product on a drop ship or wholesale margin from your competitors, you’ll be running out of gas very quickly.

What do I mean by that?

Assume you are advertising on a $100 pair of shoes. Let’s say there are 3 competitive ads for those shoes on Adwords:

• You – Marketplace Listing, Margin expectation of $10
• Competitor A – Drop Ship, Margin expectation of $40
• Competitor B – Wholesale, Margin expectation of $60

Assuming you’re willing to go for $0 profits as part of a customer acquisition strategy, your maximum cost per order is still only ¼ of your next competitor! They could outbid you for customers without breaking a sweat and still make a profit.

The situation is actually even worse than this since marketplace sourced products often have inferior photography and content. Such shoddy marketing will be an extraordinary headwind to your conversion, and a 200 basis point gap in conversion adds up to a lot of EBITDA at scale.

Whenever possible, therefore, avoid filling your assortment gaps with marketplace sourced products. Drop shipping and/or wholesale are much more competitive.

4. Lack of Available Inventory Visibility

While giving your acquisition team feeds of “less-limited” assortment skus along with extensive attributes is essential for success in performance marketing, it will be a wasted effort without good inventory visibility.

The reason is that when you have to pay for every potential customer so low in the funnel, it becomes a big waste very quickly if you send them to products that are out of stock because you did not know what was available in your inventory.

Not only do you not get the conversion, but you lose the entire margin of your next conversion. To some extent you’ll be able to cover the cost with a healthy cross-sell experience, but you will not recoup the conversion loss.

Inventory visibility is therefore essential for harnessing the revenue generating potential of high-quality differentiated assortment.

Conclusion

If your performance marketing team isn’t pushing you for intelligent assortment and significant visibility to inventory, they are missing out on a step-change in their ability to allocate budget. Better quality differentiated assortments along with rich item data not only improve conversion rates but also have excellent value for building first-bid predictive models (more on that at a future date).

Thus, while it is not the role of performance marketing to push you into an endless aisle, a highly relevant “less-limited” aisle is going to be a significant catalyst for growth.

As we’ve seen, however, one of the keys for developing such a “less-limited” aisle strategy is inventory visibility.

In my next post I’ll show you four stages of inventory visibility, and how even the first phase allows 10% of performance marketing budgets to be reinvested elsewhere.