To understand this changing landscape, Kellogg Insights spoke with Jim Lesinski, clinical associate professor of marketing at the Kellogg School and former vice president of consumer solutions at Google, who spoke about the current state of e-commerce and how companies can reach customers in a multichannel world.
Because in the world of e-commerce, nothing lasts long. “Artificial intelligence is playing an increasingly large role in consumer purchasing decisions,” says Lesinski. “AI's predictive and generative capabilities now enable us to deliver superior online experiences for shoppers.”
This interview has been edited for length and clarity.
Kellogg Insight: I think a lot of people expected the pandemic to lead to a permanent increase in e-commerce. Has that happened? How important a role do you think e-commerce will play going forward?
Jim Lesinski: Before the pandemic, e-commerce adoption was growing steadily. During the pandemic, e-commerce spiked, then dropped, and is now back to pre-pandemic adoption rates. It will never be at 100%. You have to think from the consumer's perspective. Where you shop, online or in-person, depends on what you need to make a purchasing decision. And it's different for every customer. Some consumers want to try and touch products by lying on a mattress, trying on shoes, checking the ripeness of fruit, etc. And some customers will never go to a retail store to buy something. They're happy if their mattress or other products arrive in a box. It depends.
Insight: Can you talk about how companies like Amazon, SHEIN, Temu, etc. are approaching e-commerce and what is the value proposition for brands leveraging these marketplaces?
Lesinski: There are more than 100 such online marketplaces, including Amazon, Tmall in China, Lazada in Southeast Asia, and Mercado Libre in Latin America. Some, like Amazon, offer many categories of products, while others are narrower, such as offering only hotel rooms or handmade crafts. But what they all have in common is that they bring together multiple buyers and sellers in one space where transactions can be completed. Amazon, eBay, and Walmart Marketplace are estimated to have more than 3 billion monthly visits in the United States.
These marketplaces also offer a suite of services to brands, including advertising on their platforms and back-end fulfillment. For example, “Fulfillment by Amazon” can handle a brand's customer service needs, including picking, packing, shipping, inventory management, and returns processing. Of course, these additional services come at a cost. Overall, it's not uncommon for online marketplace fees to amount to nearly half of a brand's gross profit margin on each sale.
Insight: The past decade has seen the rise of direct-to-customer (DTC) brands competing with traditional brands that also sell online. Can you talk about the benefits and limitations of a DTC strategy?
Lesinski: DTC brands have what's called a unichannel route to market, which means there's only one way to buy. Warby Parker started this way: If you wanted to buy their glasses, you either went to their website or opened their app. This channel strategy works for certain buyers, but not all. Some customers want advice, expertise, and service when trying on products. That's why Macy's still has staff at its makeup counters, for example. Other customers want immediacy and in-store options. Same-day delivery or Instacart in 3 hours isn't enough. They want it now.
As such, the DTC route only appeals to a certain demographic of buyers, and by default, these brands can only scale to a certain size. Even successful unichannel DTC brands struggle to grow beyond about $300 million because demand for services absorbs all the buyers that can be satisfied through that unichannel.
Insight: That's interesting. So, if you're a unichannel DTC company looking to grow, what are your options?
Lesinski: One option is to expand into multichannel. With multichannel, you sell both online and in stores. The stores can be your own stores or stores like Walmart or Macy's. Warby Parker has done this. They sell through more than 200 retailers and online. Today, they do $600 million in sales, half of which is DTC and the other half is brick-and-mortar. For any DTC brand, any expansion option into stores means lower margins. But if you want to keep growing, you have no other choice.
The other option is omnichannel, which ties all channels together to create a seamless experience, but an omnichannel strategy is very difficult to execute, and not many brands do it well.
Insight: Why is that? Can you give us an example of a company that has had success with an omnichannel strategy?
Lesinski: H&R Block was originally a unichannel brand: If you wanted to file your taxes, you called to make an appointment, put your receipts in a shoebox, went to a branch, an accountant filed your taxes for you, and called you back when your tax return was complete.
The company then acquired a software company, rebranded as H&R Block online, and became multichannel. But problems arose when people who filed their own taxes had questions: Customers would call their local H&R office, but a representative couldn't help them because the online system was completely separate.
H&R Block is now tying all these pieces together with persistent customer ID to power its omnichannel strategy, a journey that took years and technology investment to get to.
Insight: Let’s talk about technology investments. Why is it so hard to deliver an omnichannel strategy?
Lesinski: To achieve this, businesses need a unified view of their customer, no matter what channel they're using. The problem is, customers enter your ecosystem in many different ways: they sign up for a newsletter, they attend an event, they fill out a warranty card. Businesses need to know that it's you, no matter how you enter.
So the technology needed to deliver this omnichannel experience is technology that ingests all past interactions, anonymous or not, and uses AI to predict what the consumer will buy next.
The goal is to stitch together a front-end user experience with back-end technology, which is easy if you have your own stores and software, like H&R Block, but what if you sell at Dick's and Footlocker in addition to your own channels, like Nike?
Insight: So the question then becomes how to integrate different data sources.
Lesinski: Correct. There are two ways. One is for the companies to enter into formal data-sharing agreements and exchange data. The other is for them to set up what's known as a “data clean room” where each company shares and combines anonymized customer lists. From there, Nike can ask Facebook, Google, or Instagram to create models to show Nike ads to people who look similar to those anonymized customers.
Insight: Changing data collection landscapes, such as Google phasing out third-party cookies over the course of 2024, are expected to change how data is collected and deployed for online marketing.
Lesinski: Yes. Marketers will lose the ability to personalize and will either revert to broad-reach, non-targeted, non-customized strategies (not a good option, as customers want brands to talk to them as if they know them) or use so-called “zero-party” or “first-party” data. Zero-party data is information that a customer voluntarily provides, for example, when a company is given an incentive to offer a 10 percent discount in exchange for telling them the date of their birth. First-party data is obtained through a business transaction, such as checking out online and entering a shipping address.
To make up for the loss of targeting through cookies, companies can build ways to collect this data, for example by getting people to sign up for a loyalty program. There are many ways to capture first-party data, and it's a big push for marketers right now.
Insight: Can you expand on that? What does collecting zero-party and first-party data enable companies to do?
Lesinski: With this data, you can use technologies like a Customer Data Platform (CDP) to deliver personalized experiences. A CDP ingests customer data from various sources to create a unified view of the customer. It then uses artificial intelligence to predict the next best experience for that customer. The products, offers, timing, and messaging that a customer or group of customers receives are determined based on this data. This ensures that customers have timely and relevant engagement with your brand, which improves both your brand's performance and customer satisfaction. One example of this approach would be receiving personalized messages and offers from Starbucks in your app based on past purchases.
Insight: Are there certain industries where this is happening more rapidly than others?
Lesinski: In highly regulated industries such as pharmaceuticals, finance and healthcare, these changes will not happen immediately.
The first industries to rapidly move forward are those that are unregulated and already have both a wealth of first-party data and high purchase frequency. Certain types of retail businesses are at the forefront here because they have identifiable, repeat customers. For example, they might only buy one of your branded sweaters every few years, but they shop at Jewel, Safeway, or Instacart every week or go to Starbucks every day. They're growing fast, especially when technology like Instacart is leading the way.
Insight: That's interesting because a lot of the companies that you mentioned are more traditional brick-and-mortar companies rather than DTC companies.
Lesinski: Yes. The next thing you need is a vision. This isn't just about your situation. Do you have the leadership, the vision, and the will to move in that direction?
Insight: So it's a leadership issue.
Lesinski: 100%. Always. Too often, companies think it's a technology problem. Technology can help, but it never fully solves it. Where you compete and how you win is a people, leadership, and strategy problem.
