Somewhere, Jeff Bezos is cackling an evil laugh and stroking a cat as he slowly swivels around in his chair.
Leading for the Long Term
Jeff Bezos, CEO and founder of eBay-rival Amazon.com, is famous for his general disdain and disregard for the fluctuations of Amazon’s stock price. He has, during his tenure, trained investors to see profit loss quarters as signs of future growth—rather than a cause for concern. In fact, it’s frankly rare for Amazon to have a quarter with remarkable profits. What is not rare, however, is Amazon crushing overall growth goals. Regardless of net-profit losses, Harvard Business Review named Bezos “The Best Performing CEO” in 2014 by a wide margin. Why? Because, powered by Amazon’s overall growth, Bezos has delivered the best overall returns for shareholders over the long term (a staggering 15,189 percent return).
Why is Amazon so focused on growth? Because Bezos knows that e-commerce is still a startup industry, so he’s leading Amazon like it’s still a startup. The massive growth numbers in e-commerce spending by consumers, between 15 percent and 20 percent YOY, and the rapidly growing market for B2B e-commerce are not indicative of a market where companies should stop investing in growth and start solving for profitability. The e-commerce market is still in a land grab, as more and more consumers shift their spending habits online and new technologies change the way consumers access and buy products—and no company is safe.
For what it’s worth, I actually agree with eBay’s decision to split off business units whose future isn’t tied to marketplace. Over-diversifying your attention is the bane of all startups. Let PayPal be PayPal, let Enterprise be Enterprise, and let Marketplace fanatically obsess over solving for the customer and solving for the seller.
Customer-Centric Unit EconomicsIn 2011, Matt Lauzon, founder and then-CEO of Boston e-commerce company Gemvara, made an offhand remark that transformed my perceptions of the e-commerce industry. When I asked him how e-commerce companies could possibly remain price competitive with margins being slashed over and over as price aggregators and marketplaces brought individual products as close as they’ve ever been to a market of pure competition, Lauzon said simply, “In the future, I think that e-commerce companies will sort of need to start thinking like SaaS companies.”
He didn’t actually elaborate beyond that, but it clicked nonetheless. Working at a SaaS (Software as a Service) company, I’ve done research around e-commerce, and I have a deep understanding of both SaaS and traditional B2C economics. However, like most B2C analysts and marketers at the time, I hadn’t really combined the two models.
The defining characteristic of SaaS (and any recurring revenue) models are customer-centric unit economics. “Customer centricity,” perhaps the most over-used jargon term of 2014, doesn’t mean “the customer is always right.” What it means is that, instead of focusing on transactional economics (such as marketing costs-per-sale and product margin), companies obsess over the costs to acquire a customer and the customer’s lifetime value.
However, according to this case study, the average Starbucks customer has an average LTV of $14,099! So as a customer-centric B2C marketer at Starbucks, you don’t look at your marketing funnel as a static, transactional model where you’re trying to spend less than $1.26 to sell a $5.90 order of coffee and food, you’re trying to acquire and retain a $14,000 customer.
Solving for this ratio opens up a whole new world of growth for e-commerce and other B2C companies. Partially, this is because recurring revenue models are willing to lose money to acquire a customer (meaning that they spend more on sales and marketing per customer than the customer spends in their first transaction). This is because a recurring subscription gives the business enough confidence for future revenue that it can accept a future “time-to-payback.”
A SaaS company for example, billing $200/month with 50 percen profit margins, can actually spend $200, $500, or even $1,200 to acquire a customer and be confident that if the customer sticks around they’ll make their money back in two, five, or 12 months and then bank the future of the customer’s subscription as profit.
What this method of analyzing your business does is split your company growth into a simple guiding metric: CLTV (Customer Life Time Value) to COCA (Cost Of Acquiring a Customer). Actual acronyms may differ depending on where your CFO went to business school, but essentially this ratio shows that for every $X you put into acquiring a customer, your business gets $Y out. To use my simple math from earlier as an example, if you have a $200 monthly-recurring-revenue (MRR) customer, a 50 percent margin, and your company has an average of 10 percent MRR churn (meaning that 10 percent of your revenue cancels in a given month), your CLTV is ($200 x 50 percent)/10 percent or $1,000. If you’re spending $500 to acquire a customer, you have a CLTV:COCA ratio of $1,000:$500 or 2:1 and your time-to-payback is five months.
What makes a good ratio? Well, that depends. Greater than 1, of course, because otherwise you’re losing money on every customer. However, you don’t necessarily want your ratio to be too high (such as 100:1) because that means that you’re probably not investing as heavily as you could in customer acquisition (unless you’re in a magical market where you already have 100 percent market share). Nailing the actual targets is a complex strategic and financial question, and therein lies part of the value in great business leaders.
As an e-commerce business, this changes the traditional focus from lower transaction acquisition costs to raising CLTV, primarily through customer marketing. Recurring revenue models can afford a loss on the first transaction because the recurring revenue means that they’re confident that a given customer will give them more revenue. Transactional B2C marketers haven’t looked at their models this way, in part, because they haven’t been investing in customer retention enough to be confident that a given customer cohort would continue spending with them. Once you do, an e-commerce company can afford to take a break-even or even negative value on the first transaction a customer makes and out-spend its competitors in sales and marketing investments for customer acquisition. Like Amazon does to eBay.
eBay, of course, knows all of this. The company has smart people who understand the damage that customer churn has on their business. “It's the infrequent shopper that comes two, three, four times a year," eBay CEO John Donahoe told USA Today. “They didn't come back at the rate we thought.” This is a strange ailment for the company that invented the online shopping addiction. What’s changed?
Solve for the CustomerThe beautiful thing about customer-centric unit economics is that it quickly and clearly illustrates that not all customers are created equal. Anyone who’s ever worked at an e-commerce company has noticed that some customers are far more valuable than others. They order more and order more frequently. Conversely, we’ve all also worked with customers and thought to ourselves, “This person has to be costing me money.” When you use a customer-centric model, you can easily segment your customers into profitability cohorts and then use your marketing analytics to find out not only which campaigns drive the most traffic or sales, but which campaigns attract and influence the best customers.
In the Starbucks case study, for example, a marketer doing a buyer persona analysis of my colleagues at my company would find that the LTV:COCA ratio for tech startup employees is even more favorable than the average consumer. We drink a lot of coffee, and often spend hours in Starbucks when, say, we’re writing an article for the ERA Blog!
Once you’ve defined your desirable buyer persona cohorts, you can have your marketing teams focus on campaigns that attract and convert these specific types of customers. You should have specific marketing teams own the LTV:COCA for each type of buyer persona. If possible, hire or leverage passionate volunteer customers from these cohorts to create and test your marketing.
This method also helps prevent marketers from chasing high revenue but low-growth buyer personas. Tech startup employees may be worth twice as much to Starbucks when the LTV calculation is done (say, $28,000). Looking at that, you might think it’s worth just parking a barista in our front office! However, that would raise the COCA so much that it might not be worth it because the same costs would be distributed across a smaller number of more valuable customers. If your normal customer is worth $14,000 and you spend $2,000 to acquire and retain them, your ratio is 7:1. If a tech startup employee is worth twice as much ($28,000) but it costs $7,000 to acquire and retain them (because a barista is a fixed cost of sales and marketing but you’re getting less customers) then your ratio is a less-attractive 4:1.
By looking at it as a ratio instead of absolute values, e-commerce companies can determine which buyer personas lead to growth and avoid chasing high-value targets that are lower profitability long term. This is a consistent mistake with startups that over-invest early on in going after high-dollar sales instead of focusing on growth personas.
For less profitable (or even negatively profitable cohorts), you may even want to “fire them” by excluding them from your customer marketing efforts or even stop selling to them entirely.
It’s an attractive proposition to try and be everything to everybody, but it rarely works out. eBay should identify its most valuable buyer personas and obsessively solve for its experience. Invest not only in battering customers with catalog depth, which can often create confusion and actually lower sales, but in creating experiences that attract and help the company make decisions. As I’ll discuss later in the article, over-invest in customer acquisition for these cohorts and over-invest in customer retention and happiness for these cohorts—even to the exclusion of less profitable buyer personas. Amazon is famous for this—obsessing over delivering value and experience for the customer—and it’s helped the company lure customers away from other marketplaces like eBay.
Find the Sellers That Bring the Best Buyers
Another unique advantage of customer centricity is that, instead of looking at seller relations from the perspective of industry or product line, eBay can identify the sellers that attract and convert its best buyer personas. People aren’t isolated into silos of product lines. However, a specific buyer persona will often have a range of products that they find most appealing and buy online.
Two-sided marketplaces have a classic chicken-and-the-egg problem: You need sellers to attract buyers, and you need buyers to attract sellers. The solution, usually, is that the marketplace will subsidize the acquisition of one side of the market (usually the supply side) and monetize through the attraction of the other side (usually the demand side).
While, again, you can’t make everyone happy, eBay should identify sellers (both existing eBay sellers as well as those not currently on the marketplace) in the best customer cohorts and over-invest in attracting and retaining them on the marketplace. eBay already has a seller protection program, by expanding this and really focusing on sellers in the best persona cohorts, eBay can ensure that the products that its most valuable customers are looking for are available at competitive prices on the site.
Once identified, eBay should heavily invest in acquiring and retaining these sellers on its marketplace. “eBay needs to get out of the sellers’ way,” says John Lawson, eBay power-seller and founder of ColderICE. “They need to provide a platform for the sellers to create their own following, like they did in the past. They need to think about how to empower the seller voice again.”
As obsessively as eBay should focus on customer happiness, it should refocus on seller success and satisfaction.
Marketing Automation and PersonalizationMuch of e-commerce marketing is focused on acquiring new customers. This causes e-commerce companies to invest heavily in marketing activities like SEO and PPC. However, as eBay CEO John Donahue indicated in his comment to USA Today, the largest leverage is often in customer retention rather than acquisition. Customer marketing is an activity powered primarily by email marketing automation, content personalization, and social media.
Email marketing automation allows e-commerce companies to send an email to a specific customer at a specific time with a specific offering that’s highly relevant to them, rather than sending generic campaigns with a large number of product choices hoping that something will attract the interest of the customer.
Generic emails with multiple offerings to customers are damaging for several reasons. First, by offering a large number of options e-commerce marketers can actually lower the probability that someone will buy something by inflicting “decision paralysis” on them.
Second, by sending consumers a regular barrage of mostly irrelevant emails, you’re actually training them to ignore you. Then, when you actually have a product or promotion that’s highly relevant to them, you’ve cried “Sale!” so many times that the customer can often ignore your email marketing entirely. In addition, untargeted emails that get ignored can actually negatively impact your overall email marketing deliverability, as ISPs look at email engagement as a variable in determining what domains do and do not get delivered to inboxes.
Content Mergers and AcquisitionsThis is a fairly new concept, but one that I expect will grow over the next several years. Traditionally, businesses engaging in mergers and acquisitions activities focus on acquiring companies with significant revenue or market positioning. However, with the increased importance of content in e-commerce marketing—both in attracting new customers as well as customer marketing that helps people make decisions and keeps them engaged with the brand—companies like eBay should continue looking at acquiring excellent content sites that are popular with their most valuable persona cohorts.
The barriers to entry for launching a content site have become essentially non-existent now (for example, my wife made a website in a day where she writes stories about Legos). This has led to an explosion in content creation for interests of all varieties and niches. Many of these sites are casual activities by the authors or are small businesses, monetizing primarily through advertising (whose profitability is far worse than e-commerce).
eCommerce companies like eBay have an opportunity to acqui-hire great content sites and creators to turn the experience of the eBay website from one of price-browsing to one of community and content. It may find that it gets a much better return on excellent content acquisitions (lower cost and higher leverage) than traditional technology and market acquisitions.
eBay has actually tried this in the past without obvious success with its fashion blog and even a fashion-oriented Tumblr. Both, however, have had very little interaction or social sharing. Without being able to see the metrics behind its success in driving traffic and customer acquisition (blogging and content creation heavily influences search engine rankings), we can only assume that eBay did this because it sees fashion-oriented shoppers as a profitable buyer persona. To enhance the strategy, this content should be focused around helping move customers through the decision-making process and be used in marketing automation. They should also test content acqui-hires for other profitable buyer cohorts to see if they can drive greater engagement.
Buyer Protection MarketingeBay actually has good protection for buyers, but it’s not generally known. In fact, getting something other than what you expected while shopping on eBay has become somewhat of a cultural cliché (watch this clip from the popular TV series The Big Bang Theory).
Compare this to the growth of e-commerce companies like Zappos, which overcame consumer concerns with an absurdly generous return policy for buyer protection (free shipping both ways up to a year after purchase, and up to four years later during leap years). Particularly for the valuable buyer personas identified earlier, eBay should create and prominently promote policies that solve for any potential perceptions of risk for consumers. Sometimes, a ridiculous reassurance is what’s needed to regain confidence once lost.
Balancing Platform Strategy With Seller Satisfaction
Amazon’s platform strategy is diabolically genius. In software, platform strategy refers to the ability to allow other developers to create applications that augments the experience for users on your platform (think Facebook or WordPress). This allows software companies to see what features are valuable to users without actually having to invest in building them themselves. Of course, if a particular feature turns out to be valuable enough, the core product team can absorb that functionality into the core software (leaving the original application developer to compete with the core company—a difficult proposition at best).
In e-commerce, platform strategy refers to the unique ability of marketplaces to sell products that they don’t have to have in stock or handle the pricing and fulfillment challenges for. If a product turns out to be particularly popular or profitable, the e-commerce site can then decide to carry it itself. Since the marketplace usually takes a percentage of sales, it has a built-in price advantage. Also, since marketplaces like eBay have much more buying power than the sellers on its site, the company can usually get lower unit costs that let it undersell any other providers (including the original sellers that it used to test the economics of the product line).
Diabolical? Yes. But it’s the massive advantage of being the platform instead of being on the platform.
eBay should focus on attracting and nurturing sellers in product lines that it doesn’t have core competence in, but that matter to its valuable buyer personas, and leverage the learnings from those sellers into a direct selling experience that solves for the customer.
Mobile, Social, and More
There is, of course, a great deal more that eBay could do to innovate and thrive. Doubling down on mobile, already part of its plan, could help drive sales, especially if it gets creative with barcode-scanners or location-based notifications. Social-curation interfaces like Pinterest could be a completely new model for how eBay could innovate around the traditional Site > Category > Product user experience.
Not all of these suggestions may work for eBay, nor are they a good fit for every e-commerce company. The first step, however, is to focus in on specific buyer personas and maniacally solving for growth through customer acquisition and (most importantly) customer retention, even at the short-term expense of being an Everything Store.
Sam Mallikarjunan is head of Growth at HubSpot Labs.
eBay image courtesy of Ryan Fanshaw at rmfphoto.net/
Starbucks image courtesy of Alexander Kaiser at pooliestudios.com/
Amazon image courtesy of Franky242/FreeDigitalPhotos.net