Why high-growth retailers need the right agency to think operationally

10/05/2022


Thinking Operationally

When retailers or ecommerce agencies think operationally they are looking to forge a connection between their technology and their business efficiency, or operational costs. 

An ecommerce agency that thinks operationally is one that leverages technology to create a nonlinear relationship between operating costs and revenue, this, in turn, breaks the link between the growth of the business and the growth of costs. Technological decisions impact not only how the website performs but also have a commercial impact on the whole business, extending across product lifecycle management, fulfillment and logistics, returns and refunds, customer service, and experience.

In order to achieve an operational mindset, however, a retailer must first break free from the monolith approach to re-platforming, and understand why it’s imperative to think beyond the capabilities of their ecommerce platform in order to find solutions that scale. A good ecommerce agency can enable retailers to do this. 

Having the right combination of technology, or creating the perfect stack, can impact many areas, such as the total cost of service for an order transaction which, if reduced, can significantly improve margins. For example, how efficient is it for a retailer to upload a product onto their website? This may involve merchandising, imagery, data, and multiple personnel, but the time taken per product upload could be reduced with the right technology. Or, implementing technology that could solve common customer service queries, such as automated stock check or order tracking, in order to significantly reduce the number of queries customer services need to deal with. This reduces the need to expand customer service teams when growing the retailer’s number of orders. 

How can technology hold retailers back?

Mid-size retailers often have similar operational challenges to contend with but often have different approaches to how they manage their ecommerce operations or how they’ve gotten to the point where their technology is holding their business back from significant growth and revenue. We believe that there are essentially two types of tech monoliths, both posing different challenges for an agency to overcome. 

  • Web-platform monolith These retailers run their web platforms, such as Magento, using the monolith approach, which basically means one platform manages multiple functions like product information management (PIM), search and merchandising, and order management. Magento and other web platforms are brilliant for ecommerce businesses and particularly for retailers with smaller transaction numbers but unfortunately, there is a glass ceiling for high-growth businesses. Magento is not designed to manage multiple functions in this way for high-growth retailers. There is a tipping point, so when growth depends on scalability, the retailer has to consider how to move away from this monolith when approaching a replatforming project.
  • In-house ‘Frankensystem’ monolith These retailers built their own monolith platform in-house. The biggest challenge is their inability to change the current system. It’s likely to have been architected poorly with various inputs from different people or teams over the years whereby they’ve tried to build everything into one platform that is no longer fit for purpose. 

Retailers can function with their monolith approach but there comes a time, a tipping point, when their technology and platform start to hold them back from growth. Cue the need to replatform.

What operational challenges do retailers commonly face ahead of re-platforming?

  1. For retailers that have built a monolith, a key challenge is an inability to change the current system, this can be due to it being architected poorly. For example, when everything is built into one platform with various inputs from different people over time or when it is built in a platform that isn’t fit for that level of growth, it begins to hold their business back.
  2. Not appreciating the benefits of economies of scale because costs are increasing in line with revenue growth therefore they’re not realising margin gains on that growth.
  3. Lack of distinction between roles and departments. The obvious ones are merchandising, product management, and customer services.

How can smaller retailers recognise what the tipping point is for when to think operationally?

Smaller retailers often aren’t concerned with scaling operations like merchandising or customer services, they just battle through. It’s the retailers experiencing fast growth that cares because they have to start dealing with all sorts of business and operational challenges like creating departments and teams. When you get to this level of operational sophistication you need systems and processes built around them that can flex and scale. 

The tipping point for smaller retailers comes when they can no longer manage with that small multi-tasking team and need to turn their attention to creating departments around functions and problems. From an online revenue perspective, this is typically at the £10-£20M mark. 

Why should retailers look for an agency that can think more operationally?

First, it’s important to say, not all ecommerce agencies need to think operationally. Many agencies do brilliantly by focusing on creating beautiful websites and user experiences based on an out-of-the-box web platform. There will always be a demand for this solution when retailers are just starting out or in the early growth stages.

But for ecommerce agencies, like us at Ampersand, with high-growth retail clients, there is absolutely a need to not only think operationally but also have the skills and resources necessary to build a best-fit ecommerce solution. Retailers at this pivotal growth point need an agency partner that can isolate and fix one problematic system without the need for the whole ecommerce engine to be affected when just one function or process is broken or no longer fit for purpose.

There are a few practical ways in which agencies can lean into this mindset to help retail clients, it starts at getting to grips with business-level and operational-level objectives and KPIs. Agencies should not just factor in common KPIs such as cost of service, they must go further to uncover the metrics that matter most to the retailer, these more often than not, are ones they invented or adapted in some way. 

Ecommerce agencies that think operationally want to understand the costs that chip away at the margin for the retailer. Agencies should seek to look at the gross margin of an order, after the acquisition, merchandising, shipping, material handling, and customer service costs and attempt to reduce any or all of these areas by implementing a flexible, scalable technology stack that can grow with the retailer.

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