This is the second part of a guest blog by Omar Lovert from Polaris Growth, based on a talk he gave at a Shopify Meetup in late 2019.
In my previous blog, I listed the five obstacles to ecommerce growth and practical tips to overcome them.
Buying traffic is the most expensive option
Of the four levers that you have at your disposal, increasing your paid traffic is by far the most expensive option and by no means a guaranteed success. That’s why in this article I’ll share how you can use frequency (the number of times a customer buys), AOV (the average order value per customer), and conversion rate as your secret weapons to unlock growth.
Frequency, AOV and conversion rate as your secret weapons
My experience is that 80% of online stores start buying more traffic and then try to improve the conversion. What if you turn this process on its head? Start with frequency and AOV of existing customers and you’ll be working smarter than your competition.
That growth formula…what was it again?
Remember, the revenue growth formula is:
F x AOV x CR x T = revenue.
That gives you four levers of growth at your disposal: Frequency (F), average order value (AOV), conversion (CR) and traffic (T).
An example calculation
Now let’s put this formula into practice. Suppose an online store has 100,000 visitors, the conversion rate is 1% and each customer placed 1 order worth €100:
Using the Growth Formula, the revenue is then calculated at 100,000 X 1% X 1 X € 100 = €100,000
You may have already tried to pull the individual levers. You may have purchased more traffic. Or tried to increase your conversion rate.
But, the big secret of online growth is that improving the performance of each of the three levers above is much more feasible and will deliver better results. Here’s how.
The secret to doubling your sales
Albert Einstein called this the 8th wonder of the world: compound interest (or interest on interest).
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.“
That’s exactly the mechanism that we will use to double your revenue, by increasing individual metrics by only 30% each. Here’s the proof:
The levers actually reinforce each other. 30% more customers are step one, but if you manage to increase the frequency and average order value, you’ll do that for both the new and existing customers.
So, increasing the three levers individually by 30% will cause you to more than double your revenue! And without doubling your marketing costs.
Focus on individual levers, but keep the big picture in mind
In my previous article, I mentioned that focus is very important.
Focus on one of your levers for a month. For example, conversion rate. Then focus on one of the pages of your funnel. Where do you see the most opportunities? When you’ve made the improvements, stop and move on. Zoom out and start working on the next lever of growth for a month. If you only focus on one lever at a time your efforts will not reinforce each other.
Increase your frequency
Retaining existing customers is often completely overlooked in the search for new customers.
To make a profit, you need repeat customers
The reality is that most online stores make little to no profit on a first sale and only start making money on a second sale. That is if they can compel the existing customer to purchase again.
Break-even on the first order
Suppose your customer acquisition cost is $15 and the average order value is $30. Your production cost is $15, so your profit at that time is a simple calculation of $30 – $15 – $15 = exactly, zero.
… and profit on your second order
The moment you can get a customer back to your online store through a more cost-effective channel (such as email) and they place the 2nd order for the same product, it immediately starts to look a lot better. The cost (for email) is in fact as good as $0. Your production cost remains at $15 and the average order value remains at $30. In this case, you then have $30 – $15 – $0 = $15 profit.
This Harvard Business School study shows that a simple 5% increase in customer retention rate can mean a 25% to 95% increase in your profit.
Research by American Express also shows that repeat customers (over a longer period) have a higher frequency and a higher AOV than newer customers. So, the intensity increases when you build a relationship with your customers. In addition, customers with a higher frequency are more inclined to give a recommendation.
The customer group that, in total, bought from you 10 – 20 times returns to you more often per year, and their separate transactions are higher because they love your product.
They purchase more often and spend more, compared to the customer group that bought from you just 5 – 10 times. When you build a relationship, people become regular customers because they appreciate the experience you offer and want to return to re-engage.
Use email marketing automation to increase the frequency
The most effective way to increase your frequency is through email marketing. And not just a newsletter, but behaviorally triggered emails.
Of course, you should send different emails to customers who have bought from you 10+ times than to new customers. This is how you build a relationship and show that someone is not just a number. Email marketing automation is a subject in and of itself.
You could also link up your email service provider with your loyalty program to send emails that resonate with customers. For example, you could send them an email on their birthday letting them know you’ve added more points to their account. This will encourage them to return to your store to claim perks.
Increase your frequency by better serving your customers
You’re probably wondering how you can increase the frequency. A great starting point is to ask: what will my customer need in the future?
This could be a new need based on their previous purchase or a recurring need. Think of offering complementary products (tennis racket = tennis balls), giving monthly reminders that they have to replace a product on time, or implementing a loyalty program where they can save points.
Want to take it a step further? Then see if there are possibilities to add a subscription to your products.
Increase your AOV
So, frequency is about increasing the total revenue of one customer. The AOV is focused on individual transactions. How can you ensure that your customer adds more to her shopping cart?
Increasing the AOV is one of the best ways to lower your breakeven point and increase your ROI (return on investment). In short: with this lever, you can increase your profits.
Of course, you can find your AOV in Shopify’s reporting feature. It’s a simple metric:
AOV = (Total Revenue / number of orders)
Increasing your AOV empowers you to invest
As early as 2006, Amazon announced that 35% of its revenue growth came from its AOV lever.
Unfortunately, many ecommerce businesses don’t pay any attention to AOV. Or they just see their AOV as a “result” rather than a lever they can use for growth.
There are only two ways to increase AOV:
- By having customers buy more products per order or,
- By having customers buy more expensive products per order
How you can achieve this is done in different ways, from very simple to very complex. Here are a few options to get you started.
- Increase the free shipping threshold
A very simple way to do this is to increase the minimum order amount for free shipping. For example, take your current AOV, add 10% or 20% to it and set it as the minimum order amount for free shipping
- Time or stock sensitive deals
You can do this, for example, by creating a feeling of scarcity with a deal where you get a discount or an extra gift that’s only available temporarily, or in limited stock. Think of “Product Drops” with limited editions
Show complementary products that are relevant to a visitor. Think of recommendations, cash bargains, shop the look, others also bought, etc
Show better (more expensive) versions of the same type of product and motivate visitors to choose the better option
- Bundles or sets
Find out which products are often bought together, immediately or after a certain time. Check your data! Then create and promote a new product consisting of the products that are often bought together
- Graduated scales
Offer volume discounts to entice customers to buy larger numbers
- Bulk orders
- Offer products in larger variants. For example, a pack of 4 or 8 or 12
Increase your conversion rate
Step 1: Research
Before you get started, you first need to know where to focus your efforts. This is why conversion research is divided into 2 parts: quantitative and qualitative research.
Quantitative research is statistical. For example, Google Analytics research. What goes wrong (and right), where, when, how often does it happen and how much does it cost (or how much could it generate)?
After Google Analytics has been set up properly and you are 100% sure that your data is correct, you can start looking at where most people drop out and leave your website.
Of course, the numbers don’t tell you why. We try to figure this out with qualitative research. Examples include user surveys, website polls, surveys and mouse tracking analysis.
“You can get started only after being 100% sure of the quality of your data.”
Step 2: analyze
After research, we’ll have a large list of issues and points of improvement. For example, you might see analytics that shows there is a high drop-out of visitors in the last step of checkout. Or the poll you set up shows that customers don’t find the payment options clear. Then, in the mouse tracking, you see that they keep going back and forth between all options.
Step 3: develop solutions
Now that you know what’s going wrong, and why, you can start thinking about how to best solve the various issues that stand in the way of increasing conversion. Because you can’t tackle everything at once, you have to sort your solutions by priority. One of the ways to do this is by using the PIE framework. PIE stands for Potential, Importance and Ease:
P = How much improvement is possible?
I = How important is it?
E = How much time or money does this improvement cost?
By entering the PIE score for each point (on a scale of 1 to 10), you can see which points are the most important. In addition to PIE, there are also other frameworks that you can use, such as ICE or PXL.
“Tip: Wherever possible, try to come up with at least 2 solutions per issue. This way you avoid getting stuck and you increase your creativity.”
Step 4: implement
Do you come across bugs or other technical problems, such as slow speed or compatibility issues? Great! Because you can tackle them directly. These are really quick wins. With other adjustments that have to do with influencing the behavior of your visitors, it’s better to first do A/B testing. This way, you can determine whether they will actually bring an improvement to your online store and your conversion.
Hopefully, I’ve inspired you with enough tips to get started with your growth. Avoid the pitfall of wanting to do everything at once. See where you have the biggest impact with the least effort. By keeping the right focus you’ll get more done than by doing everything at the same time and all at once.
Start with the frequency and the AOV so that you are ahead of 80% of your competition. Then focus on increasing your conversion. Do you need help and are you curious about what Polaris Growth can do for you? Feel free to email me at [email protected], or find me on LinkedIn.
This article originally appeared in the LoyaltyLion blog and has been published here with permission.