Should CPG Companies Build or Buy a Digital Commerce Solution?
Are you familiar with headless commerce, the MACH Alliance, and what they mean to CPG companies in the digital commerce world? If not, read my colleague Justin Honaman’s recent post on Headless Commerce: What Is It and Why Does It Matter to CPGs?, and learn more about the MACH Alliance here. If you’re already familiar, then pat yourself on the back, because you’re keeping pace with the evolution of digital commerce. My guess is you’ve been asked, or you’ve been thinking, about your company’s long-term digital strategy with things like:
- Your roadmap to facilitate digital commerce.
- Whether to buy or build a digital commerce solution.
- Ensuring that you follow best practices.
In this post, we will provide guidance to help you determine the best strategies to create a digital commerce roadmap based on your company’s digital maturity.
Why Should CPGs Care about Digital Commerce?
Even before the pandemic accelerated digital transformation, most CPGs were already starting their journeys toward digital commerce for the following reasons:
- Consumers had been slowly shifting away from physical stores to online store browsing and buying.
- New and innovative digitally native CPG brands had been capturing market share at lightning speeds.
- Sensing these market changes, most CPGs wanted to keep pace with these trends and get closer to consumers to better serve their needs.
- Third-party marketing cookies are expected to go away by the end of 2023.
We want to dig a bit deeper on point #4, about marketing cookies going away. If you aren’t familiar with the topic, be sure to read these posts: “Third-party Cookies are Going Away: What Should Retailers Do About It?” and “Retailers: Become Data Sovereign Before Third-party Cookies Go Away.” This massive change to marketing cookies means CPG marketers won’t be able to push targeted online ads to consumers as easily as they have in the past, which will likely lead to declines in ad performance. To launch marketing campaigns that will be as effective as targeted ads from third-party cookies, CPG companies must have digital commerce capabilities to collect and analyze first-party data, such as email and physical addresses, to provide the insights to target online and offline ads.
Should I Buy or Build a Digital Commerce Ecosystem?
This is the key question that CPG companies ask when they reach out to AWS about digital commerce strategies. Unfortunately, there isn’t a simple answer to the buy vs. build question. Instead, the answer is highly dependent on each CPG company’s level of digital commerce maturity. The amount of money that a CPG company is willing to invest in a specific geographical region also plays heavily into the build vs. buy decision. Often, the answer is usually a combination of both building and buying.
All of these different functional areas make up the entire digital commerce ecosystem:
- Product Information Management (PIM)
- Digital Asset Management (DAM)
- Distributed Order Management System (dOMS)
- Warehouse Management System (WMS)
- Ecommerce frontend
- Headless ecommerce engine
- Static Content Management System (CMS)
- User Generated Content (UGC)
- Payment and Fraud Prevention
- Tax Calculations
- Product Rating and Reviews
- Customer Data Platform (CDP)
- Reporting and Analytics
- Marketing and Advertising
- Customer Service
- Distribution and Logistics
- Fulfillment and Delivery
- Reverse Logistics for Returns
- Customer Loyalty
When you are creating the roadmap for your digital commerce strategy, ask yourself the following questions:
- What systems do you already have in place? Many CPGs may already have PIM, DAM, and tax calculation systems. This is especially true in the fashion and apparel sub-industry, because CPG companies and brick-and-mortar retailers share many product content and digital assets, and the CPG needs an in-house tax calculation service. Following this scenario, you should identify the systems that you already have in place and evaluate the opportunity and cost to extend the existing solution to handle digital commerce. In many cases, your IT team, or a systems integrator partner, can build an API layer to integrate existing systems with both the ecommerce frontend and the headless engine.
- Do you have the skills to build different ecommerce systems? Every CPG company has different in-house IT talent. If your company has the capabilities and bandwidth to develop and maintain solutions in-house, then go for it! Most CPGs that we’ve engaged with have talented IT people who can build and manage content-rich websites. This means that creating and maintaining the front-end of an ecommerce website is usually a natural extension of the team’s existing workstreams.
Total Cost of Ownership Determines the “Buy” Strategy
If a CPG company is leaning toward a buy strategy, then there are typically two scenarios: buying a bundled end-to-end solution, or choosing a-la-carte components and working with a systems integrator to put the solution together. Here, we consider the following two revenue milestones to determine whether the CPG should go with a bundled or a-la-carte strategy:
- The projected annual revenue is less than $10 million USD.
- The projected annual revenue is more than $100 million USD.
When the annual revenue is expected to be less than $10 million, most companies are dipping their toes in the ecommerce waters, or the digital commerce channel is more about collecting first-party consumer data than driving revenue. If your focus is primarily on generating first-party data from the channel, then we recommend buying a bundled end-to-end solution as a good starting point. However, it may cut into your margins.
However, if annual revenue is targeted beyond the $100 million mark and most bundled solutions will cut into margins, it’s better to cherry-pick different providers for different functionality across the digital ecosystem. In this case, you will also have more in-house talent to build the services or the integration layers to reduce the TCO.
When your annual revenue is between $10 and $100 million, things get more interesting. At this stage, the goal is usually to grow digital commerce sales rapidly, and that means you’ll immediately see an impact on your P&L from the monthly platform cost (revenue sharing), fulfillment (per item unit or per shipment), tax calculation (per API call), credit card authorization and settlement (per transaction), and so on. Although most service providers offer tiered pricing, you will likely still pay hefty fees to the service providers as you grow your business. Therefore, you’ll need to find ways to reduce your operating costs. This is when you must start looking outside of the bundled end-to-end solution and reach out to different service providers to negotiate your terms and prices.
In fact, there is the third milestone – when the projected annual revenue of the ecommerce channel is over $1 billion USD. This is a critical milestone, because if you are running your digital commerce website on a revenue sharing platform, then you will certainly want to save the platform fee and take back all of the bargaining power that you can play with service providers. If you maintain your digital commerce website in-house, then running it on AWS will be your best option.
Last, if you are interested in extending the “buy” or “build” reading to your IT strategy in general, read our other colleague Mark Schwartz’s recent post on Is “Tailor” the Modern Solution to the IT Dilemma of “Build vs. Buy”?
To learn more about AWS ecommerce solutions for CPG, contact your AWS account team to get started today.