All online retailers, whether they're cognizant of it or not, live by the following equation:
$ = ( VISITS x CONVERSION x ABV x MARGIN ) - COSTS
The only way to increase profits in any e-commerce enterprise is either by:
1) increasing the number of visitors to your site
2) improving the so called conversion (percentage of those who buy to those who only view your site, aka look-2-buy ratio)
3) increasing the average booking value
4) increasing the profit margin on products sold
5) decreasing operating costs or overheads
Let's have a better look at each of these profit drivers.
I've broken them into two categories, based on how much innovation we can expect from each of our equation variables.
Tired Variables (past their innovation hay-day)
VISITS
We've seen it all. PR, SEO, PPC, Affiliate Marketing, Online and Offline Advertising, Mobile, Social, Viral, Video. Most marketing and online marketing innovation of the last decade went into shuffling more and more visitors into the sales funnel. Stepping from CPM, via CPC, onto a CPA, our models became more sophisticated and cost effective. We learned to be aware of the quality of our traffic and discriminate based on its source, channel, provider, season or time of the day. We have virtually become visits-crazy. The notion that the best way to increase profits is buying more traffic is the first commandment of online marketing. Visits, Leads, Clicks & Acquisitions are to online marketers like der, die & das'es are to German speakers. Today, competition in the traffic generation business is fierce. I doubt however, we are to see a lot of new innovative concepts arriving in this segment in the years to come.
COSTS
These days, squeezing the bottom line is way more sexy than lifting the topline. And rightly so. It's more predictable, fun and requires genuine smarts to generate same profits with half the work-force. Outsourcing, off-shoring, drop-shipment, business process automation are just the tip of the iceberg. Read the cultic
4 hour Work Week to get a sense of the cost reduction potential in e-commerce. I am myself a big fan of this movement, but come to a realization that our cut-costing ideas are slowly running out. We'll undoubtedly continue on this path, yet unlikely find new and innovative solutions to significantly squash the bottom line further.
Wired Variables (expect a lot of innovation here)
CONVERSION
Personally, I believe this is going to be a juiciest part of the equation going forward. How is it possible that 2 competing online hotel retailers, who sell virtually same stuff, who acquire their inventories at similar costs, have almost same pricing for the consumer and attract virtually identical quality traffic, yet have conversion 3 to 4 percentage points different from one another. Answer: site ergonomics, on-site & off-site user experience, managing users' trust, branding, constant, never-ending painstaking improvements to the sales funnel. Problem is: improving conversion is hard. It's an unpredictable trail and error process. Needs to be done in-house (not via a flashy agency). Puts burden on the entire organization, not a single person, and last but not least - it takes hell of a lot of time and dedication. It really is easier to go buy more traffic, than think up new ways to squeeze more out of existing visitors. If I was to start a conversion initiative I'd put emphasis on web analytics, customer insights, research (not only usability), branding, then move into loyalty & CRM and finish with personalization. But it's just me :)
ABV
Lifting the Average Booking Value is my #2 on the up and coming profit generators list. I always smile when I extend my domains at GoDaddy. These guys mastered the up-sell and cross-sale process like no-one else I can think of. True, it pisses me off, being asked 5 times if I want fries with that, yet I relentlessly push on with my shopping cart. Not so sure if other folks don't stop-by and fill their carts stuff they don't need, easily falling pray to these upgrade efforts. Obviously, we should aim at a balanced solution. One where the user is offered an opportunity to upgrade the product fitting his profile and interest criteria, but not too much to record a significant jump in path drop-outs or watch customer satisfaction dashboards turning red.
Another smart strategy to lift the ABV is micro-chunking (conciously pushing
Umair Haque's definition a little bit beyond its original meaning). Best example deliver our resourceful friends at low cost carriers. Take wizzair for example. Previously you could fly Gdansk - London for, say € 50 return. Today you can also fly this route for € 50 return, but you know what? if you want to take any luggage with you, need to pay extra. If you want an invoice, need to pay extra. If you want to pee, need to pay extra (ok, exaggerate here, but I'm sure this one is on their Q1 budget initiatives list). What they've done was, they've left the base price as it was, but smartly decomposed a product into micro-chunks and got customers to pay extra for the bits and pieces which previously were included in the price. This is just one strategy, annals of micro-economy are filled with similar tricks. I presume online retailers will soon learn from the ball-breakers of the airline industry and surprise us with some smart ways of lifting the value of the basket as we move along the shopping path. Just watch.
MARGIN
Most e-commerce sites I know only vary their profit margin based on the type / category of products they sell. Many do not bother differentiating it on a product by product bases. Almost none make effort to engage into
price discrimination techniques and sell one item to customer A at X and that same item to customer B at X +$1, five minutes later. Some claim it's not ethical to sell a product at different price points to different people, based on the judgment how much they can afford to buy it for, yet we experience this process on a daily basis with consumer auctions, government bids or other B2B dealings.
I expect margin management to become the new arrow in quiver of a contemporary e-commerce manager. As with conversion, this process is tricky, sometimes even illegal (some governments have laws against it), but done properly it would deliver great results. Also, as with conversion, analytics, personalization, loyalty, customer segmentation and CRM are the tools of the trade.
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Not all variables are equal. They have different weights attached to them. These weights differ based on industry, company, product and vary over time. It takes talent, time and effort to discover what works for your business and what doesn't. I encourage you however to experiment and do things that your competitors don't. If they sign up to that 3rd affiliate network to get more leads, it's a sure sign for you to try things outside of the box.