The Problem Explained — Part 2 of 4
Auto-Replenishment’s Value Proposition Problem Solved for CPG and Household Essentials
But Will Retailers Make the Necessary Changes to be Successful?
As detailed in my previous article:
Auto-replenishment is the process of automatically re-purchasing products at the moment a consumer needs a refill. An auto-replenishment system forecasts, or detects through real time monitoring, when the inventory of a household product is low and then automatically generates a refill order on behalf of the consumer to ensure that he/she does not run out.
One of the most widely adopted implementations of auto-replenishment for CPG and household essentials today is Amazon’s Dash Replenishment. You may be scratching your head and asking, “Isn’t that the little push button thingy that Amazon used to make?” You’re actually partially right, but there have been some big changes in the last 2 years.
*attributed below*
The Dash button was Amazon’s earlier attempt in this space but it was not automatic. The buttons were only made for a handful of products and customers had to manually press the button in order to replenish the item. Even with the product physically in our hand, we are notoriously bad at predicting how much longer it will last. What if multiple people push the button? What about a double-tap? Overall, ordering the buttons and setting them up were just more than most consumers were willing to do for the value they offered. Amazon Dash buttons were retired in early 2019.
What is the new Amazon Dash Replenishment today?
Amazon Dash Replenishment enables your connected devices to automatically reorder every day products from Amazon. — amazon.com
How does Amazon Dash Replenishment work?
Amazon Dash Replenishment checks product levels in your connected devices (think printer toner or laundry soap), and automatically reorders more — before you even know you’re running low. You get the same low prices, great selection, and convenient delivery found on Amazon.com. — amazon.com
The P&L Problem with Auto-Replenishment
Auto-Replenishment might be the greatest customer offering since sliced bread but if it doesn’t look good on a P&L (profit and loss) statement, CPG companies are not going to roll it out. As with many things on Amazon, the P&L is largely impacted by two things: the unit price and the shipping cost. I grossly simplifying this for the sake of brevity. There are surely many articles discussing the many intricacies of an Amazon product P&L statement so I won’t waste time on that here.
I’ll summarize the fundamentals for those that don’t sell products on Amazon currently. Smaller household products are typically correlated to lower prices. Lower priced items have much lower gross margins because a higher percentage of the price has to cover the shipping fees, usually free to the customer from Amazon Prime (est. over 112mm members). As a result, consumer packaged good companies always prefer to sell larger pack sizes over smaller pack sizes. This can be clearly seen on most product searches like this one for Cascade Dishwasher Pods.
You can see the first four product listings from Amazon above. Cascade offers a 78 count, a 70 count, a 105 count, and a 62 count. The Best Seller is the 70 Count and the Amazon Choice recommendation is the 105 count. How often do you see people at the grocery store buying a 105 count of dish detergent? It never happens (Costco is different). As a result, in order to make eCommerce work for CPG, we have to try to alter natural consumer behavior.
This sizing issue presents a major customer experience problem when it comes to auto-replenishment.
Large pack sizes lead to very long gaps between automatically generated replenishment orders. These long gaps typically reduce the perceived value of the experience in the mind of the consumer.
The more frequently a consumer experiences the joy and benefits of a product or service, the more valuable it will appear to be in his/her mind. In the chart above you can see a customer that experiences auto-replenishment at a “once a month” interval. He/she should maintain a relatively high perception of the experience’s value and will love their innovative new way of shopping because they experience the benefit regularly.
The second customer shown above experiences the P&L driven auto-replenishment with a unit size chosen by the brand and the retailer to meet predetermined values for an economically viable product. This alternate customer only receives a new product delivery about 3 times a year and steadily derives less and less value from it. How many times will this customer have had the capability of purchasing dish detergent from a brick and mortal retailer during this time? My guess is at least 50 over the course of a year. Saving a customer from remembering to make a purchase only 3 out of 50 times, a mere 6%, is not a very good value proposition.
The diminishing value proposition aside, there are massive differences in the ideal consumer size of a product vs the ideal eCommerce brand/retailer size of a product. How much more space under the kitchen sink does it take to store 105 dishwashing tablets vs 37? The larger size also comes in a hard plastic tub vs. a soft plastic package that can be compressed as the product is depleted in the case of the smaller size. A “just in time inventory system,” like auto-replenishment aspires to be in the home or business, should always be striving for less consumer supply storage requirements and not more. All storage space is wasted space. How about when a 105 count tub is mostly empty and still weeks away from a refill? It can definitely frustrate consumers to have a large, mostly empty tub taking up valuable space, especially in smaller kitchens and homes.
There’s one exception to diminishing value proposition with long cycle times and that has to do with the auto-replenishment of “scheduled use” products. I used to have a shower head with a Culligan water filter that needed to be replaced every 6 months. Instead of automatically sending me a new filter every time I needed to change it, acting both as a replenishment mechanism and a usage behavior trigger, I was instructed to affix a tiny sticker to my shower door with a date on it (that I had to write) to remind me when to replace the filter. In a case like this, auto replenishment, even with long gaps of 6 months or a year between purchases, have an extremely high value perception because these are things we typically forget to purchase on our own. We also have far fewer relevant purchase engagements for comparison. Instead of the 3 out of 50 example above for dish detergent, a water filter (or HVAC air filter or septic tank treatment, etc.) is probably closer to a 1 out of 1. Not only do we typically forget to replace these products, we spend far less time in specialty stores where we might be able to buy them in close proximity to the required replacement timeframes.
What is the Fix?
The fix here is quite simple but it means that we need to come to grips with changes to the retailer shipping methodology. The retailers also need to be convinced to make these changes because they would seem to slightly lower the overall service value proposition. When the customer’s needs are taken into account, this can be easily shown to be an incorrect assessment and the reverse actually happens.
Today, auto-replenishment orders are all single product. When Amazon Dash fires off a refill order, it bypasses the customer’s shopping cart and executes the order for that specific item only. That single product order is then processed, packaged, and shipped off to the customer. Unfortunately, this means that the entire cost of shipping needs to be absorbed solely by that single product in the refill order, eating into the gross margins necessary for an economically viable product.
The change then, is to devise a way to distribute the shipping cost across multiple products. How can this be done if only a single product is being ordered? This is where data science comes in. Continuing to use Amazon as our retailer, here are the key data points that need to be examined and exploited to make auto-replenishment work in the real world, offering benefits not just to the consumer and to the retailer, but to the brand/product manufacturer as well:
- The customer’s auto-replenishment cycle. If the customer is running at 6 weeks between purchases, Amazon knows this.
- The customer’s usage rate for the product in real time. Amazon knows the historical usage rate and if there is any deviation for the existing supply (doing more dishes over the holidays, for example). It can continually recalculate the “zero inventory” date.
- Likelihood of additional purchases. With complete access to the customer’s purchase history, Amazon can reasonably estimate whether or not an additional purchase is going to be made within 2 weeks on either side of the expected auto-replenishment date.
- Shipping times. Amazon has data to ensure that the auto-replenishment order will arrive before the customer actually runs out, regardless of seasonality, which allows them to slow down and order fulfillment if need be.
By using all of the data points above, Amazon can make its best effort to bundle the auto-replenishment product with an additional order, maximizing the shipping value and minimizing the impact on the individual product P&L’s. This might mean that the refill product comes a little earlier in some replenishment cycles while in others it might arrive a little bit later. Still though, the product always arrives before the customer’s supply runs out. This is still critical because the moment the customer needs to run to the grocery store to buy a product refill, the value proposition basically drops to zero.
If Amazon and other eCommerce retailers make this change, a fledgling sales model becomes substantially more viable overnight. Solutions like Dash Replenishment all of a sudden work for the household essential products that consumers would actually buy in a brick and mortar grocery store. These completely different products will rise to the top of the Amazon sales charts to meet already existing customer needs. The gross margins will be improved for the brands as shipping costs per product go down and more products can become candidates for auto-replenishment. The frequent fulfillment experiences drive enthusiasm for the product and increased loyalty for all involved.
While Amazon has definitely started making changes to its traditional purchase shipping model to drive more sustainability (Amazon Climate Pledge) in the form of a “day of week” shipping preference, this has not made its way into the auto-replenishment space yet. They are going to need to make this change quickly because products are being developed and pilots are being run right now. If a brand team’s market research indicates that consumers don’t find value in getting 105 dishwashing tablets sent to them 3 times a year, the whole system is going to fall flat and disappear.
Conclusion
Auto-replenishment needs to strive to live up to its origins moving forward. There is an opportunity to take this innovative new purchasing model to the next level but the entire supply chain absolutely needs to rethink the approach to reduce product pack sizes and the corresponding replenishment cycle times. The brands, the auto-replenishment technologists, and the eCommerce retailers need to adjust to a customer centric philosophy that compliments the P&L instead of being at odds with it. As shown above, this is very doable. If auto-replenishment doesn’t work the way the customer wants it to work, it doesn’t work at all. Think 3D TV in 2010–2011. No matter how much the home entertainment brands and the retailers pushed it, the customers’ needs were not at the forefront of that push. The entire product line died a very quick death. In 40 years there may just be a sequel to Atari: Game Over and hopefully it won’t be about auto-replenishment devices.
*Amazon Dash Button Photo Credit: Alexander Klink — Own work, CC BY 4.0, https://commons.wikimedia.org/w/index.php?curid=45381572
