Retailers shift their ad spending from TV, radio and print ads to digital ads.
Strategic plans enable e-retailers to act, not react.
When Harvey Seegers became president of Home Depot Direct in 2005, he had to completely revamp the multi-channel retailer’s e-commerce operations. His mandate was to greatly expand the number and variety of items sold online and create what the company calls the “endless aisle,” where customers can find whatever obscure item they need for their home improvement project. The first order of business was to craft a formal e-commerce strategic plan.
Seegers, who ran e-commerce at General Electric Co. before joining The Home Depot Inc., says having an e-commerce strategic plan is a must, whether a merchant is turning its online operations upside down or just expecting business as usual. “You need a formal plan for e-commerce just as you would for any business,” he says. “And e-commerce has matured to the point where the planning process varies very little from the one used in mainstream business.”
Many Internet retailers, big and small, may think they don’t need a strategic plan, but without one they’re simply reacting to tactical moves by competitors, to unanticipated fluctuations in supply or demand for their merchandise, or to new developments in the industry.
“A lot of times a business will just roll along and there’s not much effort toward improving,” says Craig Smith, founder and managing director of Trinity Insight LLC, a consulting firm that works with e-retailers on strategic planning. “People spend their time putting out fires” instead of thinking about the future. A formal e-commerce strategic plan is one of the best tools for ensuring happy customers and profitability, Smith adds.
Online retailer Tool King recently completed its first formal plan. Unlike Seegers at Home Depot Direct, Tool King owner Don Cohen used an ad hoc, informal planning style for the first five years of e-retailing before he felt the need to create something more structured. Cohen founded Tool King in 1978. It was a small regional hardware chain until one fateful day in 2000 when Cohen discovered eBay. Now Tool King is eBay’s biggest tool seller and also operates its own e-commerce site. The company racked up total sales of $36 million last year, 85% of it from online business. This year Cohen hopes to double that sales figure and has mapped out that and other goals in his new e-commerce strategic plan.
“When you’re smaller, strategic planning is not as important because you’re in a learning curve; but as you add more people and experience growth, you deal with lots of issues-like facilities, space requirements, fulfillment-and things become more complicated,” Cohen says. “You have to move from impulsiveness to structure and organization, and being able to define where the value is coming from.”
Developing the two-year plan took three months, during which Cohen and his top managers drilled down into all of their e-commerce data to identify what they were doing right, where they could improve and where new opportunities might be. Through that analysis, they concluded they could increase their initial revenue projections in their strategic plan for 2007 by 30%.
Planning’s in the bag
The Sak, a manufacturer of handbags and accessories, has to map out a dual plan-to help both its own web site and those of the retailers who carry its merchandise. The Sak was founded in 1989 and sells to more than 1,900 department and specialty stores. It started selling direct on the web in 2002. “We had excess inventory, and we could make more margin and develop a loyal customer base for our product,” says Lee Topar, director of e-commerce.
At the time, The Sak had only one online fulfillment customer, eBags. As its other wholesale customers began to notice The Sak’s web site, they also started to “connect the dots,” Topar says. “There’s an opportunity for our e-commerce unit when our wholesale accounts recognize they can expand their customer base by offering a wider assortment of products but don’t want to take the inventory risk. We already have the risk and can let them experiment with our merchandise.”
Drop-shipping for clients’ web sites became a core part of The Sak’s e-commerce strategy with the addition of the Nordstrom and Macy’s web sites two years ago. Expanding retailer relationships is the centerpiece of Topar’s current strategic plan, and he hopes to add two more this year.
Scaling inventory is the biggest challenge-and the one that makes planning essential, Topar says. “If we integrate these efforts in the year ahead, what will that mean for our inventory level? If we keep inventory the same as last year and add more retailer partners, we may not have enough.”
But the plan has to be nimble and able to turn on a dime in case things don’t work out as expected. “We’re constantly reevaluating our execution and our priorities, and how to optimize an existing channel,” Topar says.
If a retailer hasn’t done an e-commerce plan before, sometimes it’s effective to start with just one aspect of the business. Eric Shannon joined cataloger and e-retailer Taylor Gifts as Internet marketing manager about a year ago, and like Seegers at Home Depot Direct, he had to hit the ground running and create an e-commerce strategic plan. Before he arrived the company had been without a plan since its web debut five years ago. When online sales came to represent more than a third of the company’s business, the merchant decided it was time to get serious.
So far, the formal plan is confined to the marketing department. Shannon has designed the strategic plan more as a “to-do” list to harvest low-hanging fruit. With web analytics from Omniture Inc. in place since April and Trinity Insight consultant Smith onboard to do deep number-crunching, Shannon has converted all web advertising for Taylor Gifts from a cost-per-thousand basis to pay-per-click. The result: a doubling of year-over-year revenue attributable to online advertising with only an $800 increase in ad spending.