The Secret to a Joyous Holiday Season: eCommerce Budget Optimization
‘Tis the season. And you need it to deliver. However, before you commit to increased marketing spend, it’s critical to anticipate and budget for all your major costs to keep your spending and margins in line with your goals for the 2021 eCommerce holiday season. This will be the true gift that keeps on giving throughout Q4. Knowing your costs enables you to develop and execute on your most profitable holiday promotions and offers and stay in the black. While you may think you’ve already baked these costs into your holiday eCommerce budget and plan, you may want to remake your holiday costs “list” and “check it twice” to make sure you’re prepared for some blustery weather ahead.
Cost #1: Marketing
You may offer your customers special treatment during the holidays, but you won’t get any deals on your paid media buys. This year, expect cost per acquisition (CPA) to be even higher, with increased ad competition from more eCommerce merchants. Note that your return on ad spend (ROAS) goals may need to be tweaked this year compared to last year, to account for changes due to Apple iOS updates: iOS 14, which makes tracking and retargeting in Facebook harder, and this fall’s iOS 15, which will make it more difficult to understand which email messaging and offers resonate with customers.
Check it twice: We can’t emphasize CPA enough. Be aware that these extra costs can affect your margins, particularly if you’re going to run deep discounts or spend more in paid media to acquire customers. On the flip side, while it’s critical to set your budget and your CPA thresholds, also be prepared to be opportunistic and react to what your competition is doing.
Cost #2: Fulfillment
Warehouse real estate and labor are big concerns this year. There is unprecedented demand for warehouse space, which means you may pay more. Working with a third-party logistics vendor (3PL) will help secure your warehouse space, but hiring and retaining labor continues to be a challenge, particularly as concerns about worker safety persist due to the pandemic.
Check it twice: Contact your 3PL to gauge if they are staffed up, what surge pricing will be, and if they have the capacity to warehouse and fulfill your orders during the 2021 eCommerce holiday season. It’s likely it will be a crunch. Consider trying to spread out fulfillment by generating customer demand earlier in the season through incentives like free shipping and early bird deals. Depending on your situation, you also may want to shift more of the fulfillment burden to Amazon by directing more traffic to your Amazon store. However, we’ve heard reports that even Amazon warehouse space is filling up rapidly.
Cost #3: Shipping
(Costs 3 and 4 fall under the umbrella of Landed Cost: Landed Cost is how much you need to spend to get your product manufactured, the cost of raw materials, freight costs, insurance, taxes, and duties.)
Shipping in 2021 is likely to be a repeat of—or worse than—2020. Carriers like UPS and FedEx have already announced surcharges based on volume shipped for peak holiday times and USPS will likely again suffer from delays. The other difficult news is that consumers no longer consider the pandemic an excuse for shipping delays, with only 21% remaining sympathetic.
Check it twice: However painful, go back and analyze the shipping challenges you faced last year, including increased costs and volume limits, and develop a plan to mitigate them this year. You can cover higher shipping costs in your pricing, but it’s all about the optics. Do you raise prices and offer free shipping? Increase average order value (AOV) by setting a purchase threshold for free shipping? Or move up promotions to offer free shipping for early bird shoppers? Also consider how you will manage the expectations of customers who wait to order in December and want fast shipping. To guarantee delivering 100% on time, look back at your delivery times from last year to help you set a “last chance to order” cutoff date.
Cost #4: Inventory
There’s nothing worse than running out of your best-selling holiday products and seeing that potential revenue evaporate into thin air. Or overstocking products that won’t budge off the shelves. Both scenarios can affect your profitability. What will consumers want to buy?
Shoppers’ mindsets might be different this year. Salesforce predicts decreased interest in products that fulfill “needs” and increased purchases of “wants,” such as luxury goods or experiential goods and services.
Check it twice: To help you make more profitable inventory selections for the holidays, consider promoting the same or similar products before the holidays to see which products and what messaging resonates with your customers. Having any basis to inform what might be popular is better than purely guessing. Nevertheless, be prepared to shift promotions around during the holiday season to feature and/or bundle products that you need to move, and tone down marketing around products with tight inventory.
More Holiday Marketing Tips
Look at historical data to understand your CPA thresholds for different customer segments depending on the value they bring. For example, your holiday buyers compared to non-holiday buyers, buyers who purchase on Black Friday/Cyber Monday (BFCM), those who buy in October versus in December, etc. You may be willing to break even or even lose money on acquiring a customer if they fit your high customer LTV demographic. Understand when you may want to raise or lower your CPA threshold targets before, during, and after BFCM and the rest of the holiday season.
To help manage your eCommerce budget, consider running “holiday” promotions earlier in the fall when paid media costs are lower. Review last year’s data to better understand when your customers did their holiday shopping—for example, in the fall, during BFCM, or last-minute in December—to help you plan the cadence of your promotions. We estimate that about 20% of shoppers are early shoppers who spend their holiday budget before November. Advantages of an early bird approach are three-fold: a lower ad spend, lower shipping costs, and more manageable and affordable fulfillment. Early promotions also can help you build your customer email and SMS lists before the holidays.
While you should build on what marketing worked for you last year, this is also the time to test different marketing channels (e.g., SMS, Pinterest), so be sure to allocate some budget for this. If the CPAs on these channels look good, be willing to double down fast. Conversely, if a channel doesn’t look like it’s performing well, make sure you have enough budget to let it ride at least a couple weeks and tweak messaging or offers before you decide to cut it off.
Keeping on track with eCommerce holiday metrics
After you determine your holiday plan and optimize your holiday budget, what data should you track and analyze to make sure your strategies result in a holiday miracle? You’ll still review your key metrics, such as traffic, sales, inventory levels, CPA, and ROAS, but you should be ready to turn on a dime to adjust and improve performance as needed.
Knowing your big costs means you can plan for ways to mitigate or avoid them, such as offering promotions earlier in the season when shipping costs are lower. Don’t freak out if you’re not on track right from the start. Use your plan as a guide to determine where, how, and when you can adjust and scale back, if needed, to hit your revenue goals. Also, consider Daasity as a gift to yourself this holiday season—we make it much easier and faster to do the tracking and analytics you need to power not only your holiday decisions, but the rest of the decisions you make at your brand.