The COVID pandemic saw an overnight shift in demand from instore to online: in Q2 2020, 
e-commerce sales grew 44% y/y, and consumer products (CP) companies raced to put up a digital-first strategy.

Many found themselves underprepared and ill-equipped to rival retailers who had been at it for decades. They navigated challenges ranging from how to determine the ideal product assortment to how to select the best operating model. However, they initially did find easy opportunities buying sponsored product placements with major digital players like Amazon and Google Shopping.

Many of the operational kinks have since been ironed out, but a growing challenge looms: the performance of digital marketing is now sinking. In addition, the e-commerce growth rate fell to 10.8% in Q3 2022, well below the growth rate of 49.7% in Q3 2020. Settling growth has seen competing retailers vie for limited digital real estate, where three companies (Meta, Amazon and Google) captured 65% of digital ad spend in 2022. It is a strategy of diminishing returns.

To maintain market share, CP companies need to reconsider their digital marketing strategy, from key performance indicators (KPIs) to ad allocations and talent. Here, we look at key levers CP e-commerce players can pull to turn the tide in their favor.

1. Upgrade KPIs according to margin

Common marketing performance KPIs such as cost per acquisition (CPA) or the annoyingly misnamed ROAS (“return on ad spend,” but not really a measure of return), are flawed. They do not give a true picture of profitability, nor do they allow companies to maximize total profits. Regardless of digital tactics, understanding true margin is critical to ensure ads have a chance to be optimized.

For example, a cosmetic client was surprised to discover they had been losing money on almost every sale in a premium segment once we adjusted their costs to determine the true contribution margin of their online sales—they had thought it to be highly profitable. The company was simply spending far more on advertising than they could afford, unaware of hidden costs.

Partnering with your finance function to combine advertising costs with others (e.g., varying shipping costs, return rates) is instrumental to guide your marketing effectiveness tactics.

2. Impose better guardrails to your agency

Digital media agencies are typically a great thought partner and a critical campaign execution arm for many advertisers. CP companies rightfully use them to avoid having to build a fully blown digital advertising team in-house.

The issue is that agencies’ incentives are never quite aligned with their clients’. With limited time to allocate to each account to ensure they themselves remain profitable, agencies will typically resort to reaching the basic target (e.g., ROAS of 5, or 500%) given to them. If some seemingly harmless trick can help them hit their goals this quarter with minimal effort, heck, why not?

For example, they may dial up the spend on branded search in order to show “results.” Because that search type comes from people looking for the brand (e.g., searching for “Woolite”) in the first place, it benefits from superior click-through rate and conversion. It’s also much less costly per click than “non-branded” search performance (e.g., “gentle detergent for wool”). But these branded searches do nothing to expand a brand’s reach. This approach is a lower funnel tactic that, when overused, provides a false impression of performance.

Impose strict and sophisticated guardrails to your agency as part of your vendor management strategy. This is key to ensure your precious media dollars are not wasted.

3. Commit to getting the right talent

Most likely, the team that got you here can’t get you there. As we assess marketing capabilities at various companies, we often find skills gaps.

Marketing for consumer goods has traditionally been an upper funnel activity. Success is often defined through engagement and long-term brand impact rather than through daily and attributable revenue.

By contrast, managing digital marketing for e-commerce demands an entirely different level of analytical scrutiny, execution rigor and swiftness. A different expertise is needed. Not necessarily better. Just different.

Committing to hiring the talent you need to be successful is critical. This is obviously true if you manage your digital marketing internally, but also holds true if you use an agency. Without an expert overseer, your agency will lack guidance and supervision, and may very well find itself falling for one of the easy shortcuts we mentioned previously.

Fortunately for e-commerce businesses short on talent, recent slowdowns in hiring and lay-offs may offer the opportunity to snatch some serious firepower.

Finding a strategy that clicks

When supermarket shelves were bare in 2020, CP companies able to stand up digital retail were easily able to capture a burgeoning market. As the consumer wearies of an online marketplace that limits results and buries organic product placements below an avalanche of sponsored placements, CP companies need to build out a more sophisticated e-commerce marketing strategy.

Whether deciding on direct-to-consumer, Amazon-centricity or another approach, a targeted strategy will stop you from pouring your ad dollars into a bottomless hole. The digital landscape is unlimited, yes, but consumers ultimately want to know exactly where to go.

This is the fourth in our six-part e-commerce series. Read the introductory macro piece here, our point of view on how to structure the e-commerce operating model here, our assessment of assortment challenges here, and stay tuned for upcoming editions, where we will tackle each of the five pillars of the AlixPartners framework.