Monthly Archives: July 2015

Can 80/20 be used to improve eCommerce metrics?

Introduction

I am a big fan of Perry Marshall and his application of 80/20 Pareto principle to sales and marketing. Perry Marshall opens our eyes to look the power of 80/20. In this part 1 of a multi part series, we will explore how 80/20 principles apply to eCommerce.

Why is 80/20 powerful?

We all have heard of the 80/20 or Pareto principle – 80% of the worlds’ wealth is with 20% of the people or from a business perspective, 80% of your revenue comes from 20% of your customers. But 80/20 is more powerful than that for business due to the following reasons.

  • Recursive or exponential application – the 80/20 applies inside the 20% as well. So you may find that 80% of your business comes from 20% of your customers, but also that 80% of the 80% of the business comes from 20% of the 20% customers – i.e. 64% of your business may come from 4% of your customers. And if you have a large enough customer base, this can be applied inside the 4% as well, recursively.
  • 80/20 can be used in a predictive forward looking manner. If you were to identify the 4% in the above example and maximize returns from them or look for more of them you will increase your business.

How can 80/20 apply in eCommerce?

    In this part we show you some insights into eCommerce, specifically finding and working with your most valuable customers

  • Select a metric – revenue / profit / items sold / # of checkouts.
  • Query your sales data for this metric grouping by customer over the last year or lifetime of your business
  • Sort your customers by the the metric.
  • Import this data into excel with the columns revenue, customer_email.
  • You can now plot the data in excel on a line graph – simply select the revenue.
If you are using Magento, the following query on your database will give you 
select sum(base_subtotal) as revenue, customer_email from sales_flat_order where
created_at > (curdate() - interval 1 year) group by customer_email order by revenue desc

The 80/20 power curve (ref : Perry Marshall)

We ran this on a sample real life store data but due to the long tail, we restricted to a minimum value of purchase for a customer to quality for the study. We also scaled proportionally the value number. We ran the 80/20 recursively 3 times and here are the graphs we got. Based on Perry Marshall’s power curve.

80/20 power curve

80/20 power curve

80/20 power curve

Adding more info to your study

  • Add 2 new columns one that gives the cumulative metric and another that gives the % of total this cumulative metric.
  • You can easily see what % of your revenue is due to your top n customers.
  • You may be able to see bands or patterns of value customers.

What can be done with this data?

The top 4%
  • might represent a major part of your metric. Treat these customers differently and see how you can sell more to them, but try to develop a personal relationship with them – a one on one. Create special coupons from them if they like to use coupons, analyse to see if they buy on anniversaries and connect with them, etc. If they like premium, sell them more premium, if on the other hand they like value for money, sell them more of that, individually
  • Ask them for reference – they might easily turn into advocates for your site
  • Is it possible for you to feature them on your site? Do you have a blog? Can you write up feature articles for your best customers?
The top 20%
  • The next band needs to be treated a bit differently – the group will be larger so you cannot market to them with a personal relationship. However, consider putting them into a sales funnel. Cohort them into groups depending on categories they prefer, if they like coupons, etc. and create special newsletters for each cohort. Study the results of each newsletter and see if the sales increase

Do you have a couponing strategy?

eCommerce seems sometimes to not exist without coupons. Many affiliate marketing sites are fronts to distribute coupons. Store owners know well that coupons represent that necessary evil – not having coupons seems a recipe for low conversions and excessive couponing is a recipe for a less profitable business. In this article we discuss some strategies for couponing

Is the coupon code entry during checkout good or bad for conversion?

    Every checkout flow seems to have a place to enter a coupon. However, I think that is not a very good idea and here is why – it may lead to cart abandonment.

  • “Invalid coupon code”. When a shopper sees an entry for coupon code, there will be a tendency for them to go search what seems some special people have that they don’t. They may end up on affiliate sites that give coupon codes which are quite often not current. They enter a few coupon codes and get a “Invalid coupon code” message. Frustrated they never return to complete the checkout.
  • Many shoppers may get distracted and never come back. This may be particularly true for shoppers who have landed on the site without a urgency to buy.
  • Early research(http://www.emarketer.com/Article/Sad-Tale-of-Abandoned-Shopping-Carts/1007156) showed that in 2009 in the US 27% cart abandonment was due to coupon search.
    What can be done?

  • Macys.com puts up its coupons on the home page or gives a page and a hint at checkout to click and see the coupons. No more guessing and searching.
  • If you have mailed a customer coupons, show the coupons so they can be applied to the cart right away.
  • Make the coupon entry less conspicuous on the screen and away from the checkout button.

Reward cart abandoners with a coupon?

    A number of sites actually send you a coupon code when you abandon a cart or popup a coupon when the mouse moves to top right corner near the close button when in the checkout screen. I would use this with caution.

  • Use it as an experiment rather than a permanent feature, as it could create a habitual offenders to always get coupons.
  • When you decide to stop this couponing such visitors will abandon anyway.
  • Watch the analytics – the abandoned cart email may be working, when your abandonment rate may be increasing. You need to look elsewhere for the drop in conversions.

What is the loss of couponing?

    Another factor consider when couponing is understanding the costs of couponing.

  • Your products are being discounted, the obvious loss of revenue.
  • Customers who would have paid full price are now buying at a discount. This is a side effect of couponing.

What should you give coupons for?

  • Items on clearance – you know for sure this is a clearance sale and will not reappear on your store anytime soon. Make customers know you are serious.
  • High margin products. Products that you know you will always high margins on – such as accessories.
  • Consider running a sale event instead of regular couponing – sale events such as flash sales are a great way to generate more traffic and get new customers.
  • Give coupons in emails – this is a good way to get your newsletters opened. But make sure you also put them on your site on a page so google indexes it. This would prevent coupon sites from hosting old coupons. Oh, are you yet sending the same newsletter to all your subscribers? Register here to get an update of our blog which will soon include an article on how to segment your customers.

If you consider couponing as a customer acquisition strategy, Drew Sanocki, eCommerce Marketing guru says “There are other ways to incentivize a purchase by adding on additional services, additional selection. These are people who want to pay for your product. And in focusing on them, I think the flip side of that is the ones who require that coupon to purchase are just bad customers. They’re less loyal and very low lifetime value.”