NEW YORK, United States — Duer sells pants and very little else. That might not sound like the best business during a pandemic in which many people are wearing pyjamas and sweats 24/7. But the brand’s founders insist their hero product conveys a unique business advantage – even if it’s an article of clothing that doesn’t show up on Zoom.
By using the same materials and silhouettes for most of its assortment, Duer is able to negotiate lower prices with suppliers, one reason its profit margins are higher than average, according to co-founder Gary Lenett. The company has an arrangement with a factory to place small orders that can quickly be ramped up during busy sales periods, reducing the odds of getting stuck with excess inventory.
“We typically never have leftover fashion," Lenett said.
High margins like Duer’s were part of the original pitch for the direct-to-consumer business model: by cutting out retailers and other middlemen, companies could offer products at lower prices and still keep a greater share of the profits.
But those fat margins remain just over the horizon for many online brands. E-commerce carries hidden costs of its own, from customer acquisition to inventory and fulfilment. During the pandemic, when online sales soared, retailers have welcomed the extra business. They’re also lamenting the extra costs involved in delivering those orders.
Brands are taking steps to address this problem. In its September earnings call, Nike laid out a strategy to improve digital margins, which it says are already slightly higher than wholesale. The plan includes fewer markdowns, stocking inventory closer to consumers to reduce fulfilment costs and prioritising increasing sales to existing customers over chasing new ones.
Below, BoF outlines six tactics to boost e-commerce profit margins.
Keep Inventory Low
The goal for most businesses is to stock as much as they can sell: anything more represents wasted money, anything less represents lost sales. For online brands, the former is worse than the latter because when there’s excess inventory, companies are forced to offer steep sales at lower margins, said Ari Bloom, founder and chief executive of A-Frame Brands, which incubates online brands.
You never want to leave money on the table but it’s a lot better than sitting with dead inventory.
“I would definitely encourage brands to think about buying just enough to sell out,” he said. “You never want to leave money on the table but it’s a lot better than sitting with dead inventory.”
Some brands operate their own factories and other elements of their supply chains, giving them direct control over inventory. Duer, whose primary factory in Pakistan counts one of its owners as an investor, places conservative orders and then quickly ramps up if a product sells out.
“Our factory only produces our brand … so we can move things around and be very agile,” said Lenett. “We can do a quick test [on sales], chase what’s working and that essentially eliminates the markdown.”
Duer also offers a 15 percent discount for customers who pre-order select new styles before they’re manufactured, which gives the brand a better window into demand. The number of these orders, then, are factored into how much the brand decides to produce.
Companies can work with third-party providers that use predictive analytics to forecast demand. These programs use artificial intelligence to project what and how much consumers will buy by connecting a multitude of factors, including a brand’s historical sales data and the weather in key markets.
Bloom’s most recent project, DTC soap brand Keeper, forecasts sales every week and frequently tweaks its offerings off of that data.
“It’s about taking constant stock of how your products are performing so you can make decisions while you still have inventory to buy more, or do nothing, or maybe even cancel a similar item that’s in the works that hasn’t sold well,” he said.
Spread Out Inventory
Not every brand has Nike’s global distribution network. But there are ways they can replicate the company’s strategy of stashing inventory closer to its customers to reduce shipping costs.
Small brands can rent short-term space in fulfilment centres during their busiest sales seasons, or to test out a new market. In recent years, warehouse start-ups have launched in major cities around the US, targeting DTC brands that don’t have enough business to justify opening a long-term space of their own.
“Partnering with some of these warehouse start-ups will … strategically position inventory,” said Cathy Roberson, a logistics consultant. “Getting that right would be a huge cost saving.”
Brands can also ask retail partners to handle distribution out of their stores. Andrew Hogenson, global head of consumer goods, retail, logistics at Infosys Consulting, said he has three apparel clients working out deals to use department stores as distribution centres. The stores would fulfil orders made both in stores and on the brands’ own websites.
“This is a huge trend right now — stronger partnerships between retailers and their suppliers,” Hogenson said.
Simplify the Supply Chain
Bloom’s Keeper uses the same aluminium bottle for its soap and its hand sanitizer, which allows the brand to order a large supply without having to worry about leftovers. He said finding creative ways to place large orders with vendors gives brands more power to negotiate prices, delivery schedules and other factors.
Lenett said Duer buys huge amounts of a stretchy fabric that the brand makes into its slim-fit performance jeans and “No Sweat” pants among other products. Using the same materials also creates production efficiencies, Lenett said.
“Every time you change a fabric on the line, you have to change the tension of the machine,” he said. “Our workers are used to our fabrics and can run through them efficiently. That really helps with getting the best price on the garment.”
Soon after Bombas began selling its signature compression socks and padded no-show socks, it noticed that customers were buying certain products together. The company began to offer four-packs, eight-packs and even 12-packs. When it launched T-shirts and tank tops, it started bundling those together, too.
Anything you can do to increase the basket size, it’ll help with profitability.
When products are bundled, they can be picked and packed together, which saves on fulfilment costs. Bundles can also convince customers to spend more.
“Anything you can do to increase the basket size, it’ll help with profitability,” said Hogenson.
Personalise Product Offerings
If a shopper is looking at winter coats on a brand’s website, they are giving off all kinds of data that can be turned into targeted product recommendations. For example, a shopper might type a colour or pattern into the search bar, allowing the retailer to serve a pop-up recommending additional styles.
“Personalisation is the holy grail of retail right now — knowing exactly what customers want and being able to present to them what that is,” Hogenson said.
A 2019 survey of 2,000 American shoppers by the e-commerce marketing platform Yotpo found that 88 percent said they’ve returned fashion items bought online in the past year, and 66 percent said they’ve ordered more items than they intended to keep.
This is a costly problem for brands, which have been pressured to swallow these costs as customers have come to expect both free shipping and returns.
In order to reduce the rate of returns, brands should add as much information on their product pages as possible – that means including inseam measurements for pants along with the waist size, for example. Photos should represent what an item looks like in person.
Brands can cover the cost of free returns by shortening the return window.
“It’s a tricky thing because you don’t want to scare customers off by not having a reasonable return policy but with 90-day return policies, sometimes you’ll get off-season products back,” said Hogenson.
Bombas sometimes sends refunds to customers and tells them not to bother sending back their unwanted socks. The cost of processing these low-priced items can often exceed their value, said Co-Founder and Chief Brand Officer Randy Goldberg.
Customers often come away from that experience with a positive view of the brand, and will be more likely to shop with Bombas again, he said.