September 30, 2020

What Is the Profitability Flywheel? 3 Steps to Boost Ecommerce Sales & Profit

By John LeBaron / Brand Growth

Earlier this month, we taught you about the Profitability Death Spiral, the vicious cycle brands fall into when they decide to focus on revenue at all costs. A slip into the Death Spiral starts with wide distribution and leads to businesses losing control of their brand online and watching their prices erode as bad players undercut other sellers to get ahead.

At its worst, the Profitability Death Spiral creates channel conflict that damages your relationship with other sellers, it siphons your profits, it leads to your products CRaPing out on Amazon, and it may even prompt Amazon to shut down your account. The Death Spiral is a death knell for your ecommerce business.

Price Erosion Over Time from Unauthorized Sellers on Ecommerce | Pattern

True to its name, the Profitability Death Spiral will eat into your business over and over again until actionable steps are taken to end it. The good news is there’s a strategic solution that can effectively stop the Death Spiral in its tracks and get you back on top again. We like to call it the Profitability Flywheel.

What is the Profitability Flywheel?

The Profitability Flywheel is a series of strategic maneuvers that take your ecommerce business from dysfunctional to a well-oiled machine. In our work with nearly 100 different consumer brands across myriad marketplaces, countries, and selling categories, we’ve found that focusing on three specific maneuvers—selective distribution, stabilized pricing, and seller expertise—is key to creating a Profitability Flywheel that gets you out of the Profitability Death Spiral.

Here’s where it all starts.

1. Selective distribution

Think about all of the car dealerships in your city and where they’re located. Now think about a single car brand. Let’s say Honda. Imagine what would happen if Honda put all of their dealerships on the same block instead of geographically spreading them out. For one thing, that would be an excessive amount of Hondas chilling out in the same spot, but more importantly, each dealership would be forced to compete primarily on price to get anybody to consider buying their cars.

Selective Distribution for Ecommerce to Grow Profit & Sales | Pattern

This same scenario happens on ecommerce channels every single day. Because consumers can easily compare prices across channels on their smartphones—think of ecommerce like a virtual cluster of Honda dealerships on the same block—the seller with the lowest price is the one getting the sale. The more sellers you have for your product, the more incentive there is to lower prices to stay ahead, and once a price drops in this kind of environment, the race to the top becomes a feeding frenzy where your margins are the meal. That’s how the Death Spiral starts.

The best way to avoid price-based competition is to limit your distribution on ecommerce marketplaces. Choose as few sellers as possible—the ideal is to pick just one—and make sure those sellers are committed to following your pricing policy. This will give you the control you need to stop price erosion, pull yourself out of the Death Spiral, and take back control of your brand online.

2. Stabilized pricing

Beyond limiting your distribution, another thing you can and should do to escape the Death Spiral is level the playing field with online pricing.

Set up a MAP policy and brand guidelines and make sure they’re enforced so your sellers know who’s boss. Track violators and remove them from your distribution list with the help of a legal partner if they won’t comply—even one violator can cause a lot of damage to your pricing. Data from Pattern’s Predict omnichannel ecommerce software can inform and empower you to take action on your own sellers before the problem grows out of control.

3. Seller expertise

It’s not enough to limit the distributors you work with. You also want to make sure those you do work with make caring, aligned, and intelligent partners.

When you’re selecting a distributor to partner with, be picky enough to find someone who’s as devoted to your brand’s success as you are. Look for a partner that has the expertise to double down on investments in content, advertising, customer service, and more so that your customers have a consistent, quality experience with your brand that makes them want to come back.

Selective distribution combined with seller expertise can help your brand regain lost Buy Box sales because you’re no longer competing against unauthorized sellers. You’ll also be able to offer better customer experiences that lead to higher conversion rates, better reviews, and more profitable sales that help your business grow and thrive in the long-term. That’s the key to defeating the Death Spiral: focusing on growth overtime instead of the ravenous rush for profit now.

How the Profitability Flywheel works

All of these maneuvers make up the grease that gets the Profitability Flywheel moving. Selective distribution leads to price stability. Price stability leads to leverage with retailers, and leverage with retailers leads to better brick-and-mortar performance, more control of your brand, and ultimately, investment in your customers in a way that grows your business.

How the Profitability Flywheel for Ecommerce Works to Grow Sales and Control Online | Pattern

When you have control over your brand online and limit your partnerships to sellers who bring their expertise to the table, you’re able to be more efficient in ad spend, make concentrated investments in your content and SEO customer service, own the Buy Box, and continue growing in a way that’s healthy and lasting.

That is the Profitability Flywheel, and while it isn’t the quick fix to increased revenue, it’s by and large the best fix for sustainable growth and profitability.

Profitability Flywheel success stories from Pattern brands

The Profitability Flywheel can have major impact for ecommerce brands wanting to grow revenue and increase brand control. Here are success stories from 3 Pattern brands in their own words.

INTEGRATIVE THERAPEUTICS: 39% REVENUE GROWTH IN 1 YEAR

“Prior to Pattern, we had two individuals spending a lot of time on ecommerce and not making much progress. Going to the next step of making Pattern our sole Amazon reseller was critical to achieve the control we ultimately needed and have been able to maintain. They treat our brand as if it was their own and not only empower us through data to enforce our MAP policy, but take into account every aspect of quality management, ensuring it is of the highest level. We trust them with our brand.” — Mandy Kraynik, VP of Innovation, Integrative Therapeutics

PURE ENCAPSULATIONS: 400% REVENUE GROWTH OVER 4 YEARS

“We implemented an omnichannel legal framework for distribution control, authorized reseller enforcement, and MAP policy, and consolidated our online channel to one exclusive 3P Amazon seller (Pattern) and fewer than 10 preferred non-Amazon e-retailers. Pure Encapsulations has grown 4x since 2016, and has become the #4 VMS brand overall and #1 professional brand on Amazon. MAP compliance is consistently 100% online, resulting in improved wholesale and retail margins.” — Adam Branfman, E-Business Director, Professional Brands at Atrium Innovations

SPECTRA BABY: 73% AVG. MONTHLY REVENUE INCREASE DURING 1ST YEAR

“In the beginning, we were selling directly to Amazon, which was a big mistake because then our pricing strategy went nowhere. We decided that we were going to go with a 3P company like Pattern. It wasn’t shortly after that where all the doors that we were knocking on at big box retailers took a look at Spectra because when people are looking at pricing and looking at brand, they go to Amazon first, and the stories that Pattern helped us create within our product line really helped us get to our goals.” — Chris Mayhew, Spectra Baby USA Sales Executive

Here at Pattern, we have the data and expertise to help companies regain control of their brand online. Our unique approach to ecommerce with the aid of our specialized Predict software helps brands assess where their weak spots are, create a strategy for success, and focus on profitable growth, not just revenue, so they can find sustainable expansion across ecommerce channels.

For a free, comprehensive analysis of your brand across ecommerce that can help your profitability grow, reach out at hello@pattern.com, schedule a demo below, or call us at 888-881-7576.

More Resources
The Great Debate: Is Revenue More Important Than Profit?
Achieving Brand Control & Stopping Unauthorized Sales Online