"e-comm"onomics 101 - Why Some Firms Lose Money Online

If you studied economics, you know it involves the production, distribution, and consumption of goods and services. E-commerce sits squarely in the distribution part of that chain and has traditionally been the realm of retailers. But what happens when manufacturers sell their own products direct to consumers, either as a DTC-native business or an additional, owned channel alongside their retail customers? And how profitable is that pursuit? This is the study of e-comm-onomics.

In the early days of the Internet, websites for everything sprang up. etoys.com and pets.com died very public deaths, as did drugstore.com (a URL since bought by, and now redirecting to, Walgreen’s). Notwithstanding the eventual success of a start-up bookseller named Amazon, many dot-coms made little sense, as the subsequent dot-bomb fallout showed. But is it also true to some degree today, a quarter-century later?

It's alluring for manufacturers to go direct because they can capture the margin otherwise earned by retailers, and collect customers' first-party data that can be used for better communication, research, decision-making, even loyalty programs. Otherwise, retailers keep that intel and monetize it.

The allure for consumers to shop direct from manufacturers is more mixed. Advantages include full-range product selection, exclusive discounts, and a direct relationship with -- and customer support from -- their brand of choice. Disadvantages include the inability to compare and shop across brands and greater hassle in making returns.

Having analyzed e-commerce economics for four recent clients, the range of profitability has been drastic— from accretive to outright value‑destructive. Some of these businesses ultimately re-thought entirely the role of their e-commerce channel.

Case 1: CPG Brands – When Shipping Devours Margin

Consumers expect free shipping, whether as part of their Walmart+ or Amazon Prime membership or otherwise. When heavy, liquid, household cleaning products sell for about 7 dollars a bottle and the average shipping cost per e‑commerce order is around 8 dollars¹, it’s impossible to turn a profit without larger order quantities.​ Most direct orders were destroying value on a fully loaded basis, so it made economic sense for this Parallel‑49 client to disband its e‑commerce capability and direct its Facebook / Instagram / Google advertising traffic to the retail.com sites of its two largest retail partners, Walmart and Amazon.

Case 2: Consumer Durables – The Right Combination

Some clients require interim marketing leadership, and as SVP Marketing for a major consumer durables business, a key channel was the company's e-commerce site. Selling direct-to-consumer has been core to the business model since the company’s early emphasis on direct-response infomercials, first with a 1-800 number and then via the web. Price points are generally high enough to cover even the above-average shipping costs involved with heavier, bulkier items. Price / promo discipline and differentiated assortment and offers enable the company to avoid channel conflict with its retail partners like Walmart, Costco, Amazon, Target, Kohl’s, Best Buy.

Case 3: DTC: Trendy, But Tough Economics

DTC is, by definition, an e-commerce channel. A Parallel-49 client in the meal kits business is the 5^th largest among more than 400 players in the U.S. meal kits industry.²  The largest player in the category, HelloFresh (78% share), operates with a 5% EBITDA margin³ and the 3rd-largest, Blue Apron (6% share), has a negative 17% EBITDA margin.⁴ Customer churn is a category-wide challenge, with less than 10% annual retention.² With so few sticky customers, it’s critical -- but expensive -- to recruit new customers given escalating Customer Acquisition Costs (CAC). Downstream, operating costs for last-mile delivery and cold-chain transportation also burden the P&L.

Case 4: – Fashion Retailer – When Scaling Back Makes Sense

A PE-owned retail client was losing money. More than 110% of the negative EBITDA could be attributed to the e-commerce channel; in other words, the brick-and-mortar stores were profitable. Operating in the fast-fashion category (e.g., tee shirts), average order size was small, and shipping costs ate up a large share of the unit margin. From a fixed-costs standpoint, we uncovered 32 vendors required to support the e-commerce capability: software/SaaS programs ranging from the storefront and checkout through order/inventory, fulfillment, and customer / marketing systems. The 3PL contractor was the largest line item, and when combined with the other 31 providers, total costs exceeded the margin generated online. The result? In working with the heads of IT and e-commerce and advising the CEO, the decision was made to shutter e-commerce except for BOPIS (Buy Online, Pickup In-Store), and the retailer’s red ink turned black. It turns out that stores – for all the challenges faced by shopping malls – are still an economically efficient way to bring goods to market. If even a retailer is willing to re-think the role of e-commerce, then a manufacturer should rigorously evaluate that channel's profitability.  

What Earns High Grades in e-comm-onomics?

Use the table below as a self-scoring diagnostic tool: If your e-commerce channel checks most of the boxes in the left-hand column, then you’re likely in good shape. If it checks most of the boxes in the right-hand column, then it may be unprofitable, especially when the channel is burdened with the true costs it takes to run it.

How to Use e-comm‑onomics in Your Business

If you’re a manufacturer / brand owner, a few simple diagnostics can reveal whether your e‑commerce channel is creating value or quietly eroding it:

• Does your average order value comfortably cover pick/pack, shipping, marketplace/retailer fees, and CAC with margin left over?

• Are you shipping small/light products in e‑comm-optimized packs, or large/low‑value items that carriers penalize with dimensional weight and oversize fees?

• Is your e‑commerce P&L profitable on a fully loaded basis, or are stores and wholesale quietly subsidizing the online channel?

If you can’t answer these questions confidently—or if you suspect the answers are unfavorable—an e-comm‑onomics review can usually surface clear actions: re‑packing SKUs, adjusting assortment, redesigning promotions, or redefining the role of DTC versus retail.com and marketplaces.

If you’d like to apply this framework and dig deeper into the e-comm-onomics of your business – and how we might improve them – then let’s chat. Together, we can determine whether to right-size, redesign, or double-down on your e-commerce presence.

Michael Hunter is founding partner of Parallel-49, a marketing and M&A consulting firm to privately held companies.

Sources:

¹$7.96 is average cost per e-comm order, per ClickPost

²Wall St. Journal

³Finanzwire

⁴Business Wire