One day you may wake up to find your eCommerce business just isn’t working anymore. Growth is not coming as easily as it used to, if at all. Channels that once drove sales consistently are struggling. All your KPIs are down, but nothing significant has changed in your strategy, campaigns or tactics.
The first time I experienced it personally was earlier in my career. We went from consistently hitting our daily sales targets by noon each day to struggling to comp last year. I didn’t have enough experience to understand the situation, so I had to trust our senior leaders to carry us through.
And this is what happened: leadership threw a bunch of tactics against the wall and none of them stuck. The effort required to execute those tactics burned out our junior team members (myself included) and because that effort was never acknowledged and because it never resulted in a positive outcome, leadership lost credibility.
Everyone started turning on each other, picking apart minor tactical nonsense in an effort to shift the blame onto someone. For example, the head of finance would blast out emails at 2am when he saw a single typo or a broken image on the site…because he thought that was causing our conversion rate to drop 30% year-over-year. Right…
It quickly became apparent that none of these seasoned professionals knew what the hell was going on. This is an all too common situation, because the discipline of eCommerce as we know it came of age in a time when the total pie was growing, competition was low, and it was really hard not to grow at least 10% each year. The tools we use to monitor the health of our businesses were built in that era, and most of them were built by programmers selling ads who never managed a retail business.
To understand why your business isn’t growing, or why strategies that worked in the past are no longer effective, you need to go beyond cliche, campaign-centric eCommerce KPIs.
If you’re struggling, 95% of the time it’s for one of these four reasons:
So your eCommerce business is growing? Fantastic. Where is that growth coming from? If your answer is the name of a digital marketing channel…you’re gonna have a bad time.
It is critical to understand how much of your revenue is coming from new vs. returning customers and, within those two groups, how much revenue is coming from full price vs. markdown or promotional purchases.
Most online businesses fall into one of two buckets today:
- Venture-backed DTC rocketships who are driving a ton of acquisition with no clear path to profitability. They assume that some of those customers will come back at some point, but don’t think closely about why, how, or how many.
- “Traditional” retailers who grew up in wholesale or bricks-and-mortar who are leaning heavily on repeat purchases from promo-hungry returning customers and have no idea that the foundation of their business is so fragile. If the top line numbers are going up, it’s all good (until it isn’t).
There is actually a third bucket — businesses who measure and understand these dynamics, build a reasonable growth target and strategy around them, and are profitable. You don’t hear a lot about them because they’re run by heads-down operators who are looking to make money, not go viral.
Every year you are given a revenue goal to hit. You should be able to forecast how much of that goal is going to come from returning customers. The rest has to come from new customers. You can get a “good enough” estimate of the returning customer spend by looking at how much revenue is retained every year by each annual cohort of new customers. The revenue contribution of an annual customer cohort typically “decays” by each year.
You can then look at your cost to acquire a customer and estimate how much you’ll need to spend on digital marketing (or other marketing) to hit your goal. Chances are that your 2020 budget is based on 2014 CACs, and therefore your acquisition efforts are being under-funded.
There are more sophisticated and accurate ways to do this, but they’re difficult to execute without data science expertise. The method outlined above will give you enough ammo to gut check the professional expectations being placed on you and strategize accordingly.
The Pipeline Problem
Where do your best sellers come from? If your answer is “I don’t know, they just happen” then you’re gonna have a bad time…unless you are blessed with an incredibly talented merchandising and design team who is doing all of this work for you.
Many people are born with talent, but smart, consistent practice turns talent into superstardom. Similarly, many products are born with potential (trend right, resonate with your customers, good price) but it takes a smart marketing system to turn them into rainmakers for your business.
Apparel, footwear and accessories retailers are some of the worst when it comes to product marketing, and I think that is due to the unique evolutionary path from wholesale to online/direct in this industry. In a wholesale business, the new product release is the event. The newness is what department store buyers care about, and get excited about. For a vertically integrated business that started out with its own stores (Gap, A&F, etc.), new product release was also the newsworthy event, and the mall-driven shared traffic model ensured sales. “Stack ’em high and watch ’em fly”.
That doesn’t work for the eCommerce business model. Your customers are not your wholesalers — they don’t care that you’re dropping 40 new semi-distinguishable SKUs that were developed for no reason other than to fill out an assortment plan. And there is no passive traffic on the internet — especially not in 2020, when we have algorithms to price the dollar value of human attention. Even if someone makes a purchase from your website, they’ll forget about your existence within the next 60 days unless your brand and product are truly spectacular (or you are a smart, strategic direct marketer).
Look to other industries for guidance on how to turn a product with potential into a certified hit:
Pricing Out Your Customers
Your customers don’t love you as much as you think they do. In fact, 77% of them wouldn’t care if all the brands in the world disappeared tomorrow. And yet, time and time again, we fool ourselves into thinking that customers will follow us upmarket as we become more “luxury” in an attempt to recover margin dollars that have been eroded by years of flogging “50% Off!” non-stop.
Even if your customers do love you…unless you’re catering to the 1%, everyone’s budget has a hard, physical limit known as “disposable income”.
Let’s say Jane has $2,000 per year to spend on clothing (not including things like socks, underwear, etc.), and needs to purchase at least 10 items per year or else she’ll go naked and/or experience professional consequences. Your average full price AUR used to be $200, so she could hypothetically meet her needs entirely with you. Now that AUR has increased to $298. Even if she loves you, Jane needs to go somewhere else or go naked. Perversely, if she really loves you, Jane will wait until your clothing goes on sale so she can afford it. So long incremental margin, and so long brand perception.
The line between can and can’t afford it is finer than you think. To get a quick read on the viability of your pricing strategy, try this:
- Look at every unit you sold last year, and exclude those that were sold on clearance (70%+ off, or whatever you consider clearance).
- Line them all up by AUR (the actual price the customer paid for the item) and sort them in ascending order (lowest to highest).
- If you divided those units into three groups that each had an equal number of units per group (i.e. 30 total units, each in groups of 10), what are the AURs at those cutoff points? These are your high, medium and low price bands as defined by your customer.
- Now perform the same analysis for your 2020 line plan, based on full price AUR. What are the high, medium and low price bands in your full price assortment?
It is very hard to shift a consumer out of their preferred price point. Raising prices implies new customer acquisition, which requires money. Unless its done very, very strategically, raising prices is not a viable way to improve the bottom line.
The Hot Item Problem
The hot item problem is a runaway bestseller that causes a brand to overestimate the total addressable market for its product offering at a given moment in time. I’ve covered this phenomenon in depth in my case study of Mansur Gavriel and provided actionable advice on how to manage it here.
Having a best selling product that changes the trajectory of your business is great. In fact, it’s something that every brand should strive for — a hit product is some of the cheapest customer acquisition you can get. The trouble arrives when a brand lets success skew its perspective on financial planning, or is not approaching financial planning from a strategic standpoint in the first place.
A hot item may bring in new customers, but what you choose to do with those customers is up to you — and it can make or break your business. If your hot-item buyers are not coming back to shop with you at a similar rate to that of your core customers, it probably means that (1) they are significantly different from your core customer in some way and (2) you’re not selling anything else they want to buy. You can’t factor those customers into next year’s growth plan unless you respond to their needs.
If you want to proceed “like we’ve always done” on the product side, pull your sales results with hot item transactions excluded and forecast off that. But if you want to retain those customers and continue to scale your business, you need to learn more about your newbies, why they loved your hot item, and what they value. Having an eCommerce channel makes this incredibly simple — just reach out to people and ask! You already have their contact information. You may not like what they have to say, but you owe it to yourself, your employees and your creditors to make an informed decision.
Many DTC startups that are struggling to achieve profitability have experienced the hot item problem in reverse. They were really good at engineering one or two “hit products”, but leaned on that narrow assortment for too long until customer acquisition reached the point of diminishing returns.
Casper’s “bed in a box” is the perfect example:
- Started with a strong, PR-friendly narrative: we are disrupting an experience everyone hates (sleazy mattress sales guys) with a superior product that saves you money
- Viral visual hook that was tempting to share on social media — unboxing the mattress
- Applied fun, modern branding elements to a stogy category — most wouldn’t feel embarrassed to geek out about this brand
- Priced accessibly (for a mattress) at $595
The initial launch was a hit, but future assumptions about growth and marketing costs were based on the artificially deflated sell through and CAC that comes along with hot item buzz. Fast-forward to today, and Casper is still unprofitable. They are attempting to go after the entire category of “sleep” to justify their spend and valuation, but subsequent product launches launches did not convert the mattress buying cohort at scale, nor did they reach hot item status.
Protect Ya’ Neck
If you’ve made it this far, you’ll notice that none of these problems are strictly caused by a single business function — they aren’t strictly marketing problems, or design problems, or merchandising problems.
But there is a reason that the CMO is the c-suite position with the highest turnover: the impact of any one of these four issues is typically felt by performance marketing first.
If your product offering becomes 5% less relevant to people, your marketing channel performance is going to get around 5% less efficient assuming no other changes were made. But there are no easy, standardized ways to measure the relevancy of a product assortment while there are plenty of easy, standardized ways to measure marketing efficiency. For that reason, marketers need to understand these dynamics and evangelize this way of thinking about business performance.
If you read the real Worst Case Scenario Handbook, you’ll know that the best way to get yourself out of a dangerous situation is to avoid it in the first place. As you evaluate new opportunities, use these four growth issues as a framework for learning how management understands the business. If they get defensive when you mention product or assortment strategy, or if they insist that digital marketing is a panacea for all their issues, run away!