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Issue 7
Contents
MATHS: The new equations of retail MAGIC: The never ending brand story The magic of communications 04 14 18
M.C. Eschers Ascending and Descending 2012 The M.C. Escher Company-Holland. All rights reserved.
eCommera is a specialist retail-focused commerce product and services business. We deliver robust and exible technology to enable you to trade online, combined with insight to help you focus on protable action. Its our blueprint for your success We call it trading intelligence.
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Any customer can now shop from any online retailer. In a world of unlimited competition and unlimited access, magic is required to stand out from the crowd. Magic is your brand in dialogue with customers capturing their attention and winning their loyalty. *** In this edition of the Trading Intelligence Quarterly we take an in-depth look at maths and magic. I n our focus on maths we give you a avour of the formulas needed to answer some of the critical questions across operations, marketing and site. In our focus on magic, Ajaz Ahmed, founder of AKQA, explains why retailers need to use the power of narrative to capture the imagination of their customers and how making the customer the leading character in any story can work to create deep engagement. And Tim Ryan, former SVP Marketing, Global Catalogue Priorities at EMI Music, teaches the magic of communication. In his article he explains how to think of your customers as people rather than an antagonist on the other side of a transaction. We hope that you nd this issue stimulating. We would be delighted to have the opportunity to discuss how we can help you grow your business with the right products, services and insight.
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A common complaint of the retail CEO confronted with the tsunami of online data is now what?
Retail is about thousands of small decisions so the question should be: what new or different decisions should we make given this data? Three things make this difcult: New activities Google, site sort orders, CRM, delivery to customers are all generally new disciplines for retailers, and require new skills New data each of these activities generates its own torrent of data which needs to be collected and understood New costs the cost per click of Google, the variable costs of picking/packing/shipping, the cost of communicating with customers. New costs change the economics of retail. New activities mean new decisions. And new costs mean different decisions. These decisions require rules. And the new data allows rules to be codied what we (somewhat) grandly call the new equations of retail. This article gives ve examples (out of the hundreds of possible examples) of the sorts of scenarios where new and different decisions need to be made and where its easy to get it wrong. How much is it worth investing in the service experience? What prot per order maximises your overall prot? How much should you spend on a keyword on Google that hasnt generated any sales? What combination of markdown and product views maximises prot? When should you target a customer who has stopped purchasing?
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(ii) Do a standard fraud check but insist that the rst order is delivered to the billing address (iii) Do a rigorous fraud check and probably miss the delivery promise. The likes of Amazon and Net-a-Porter can simply decide to make service a focus and have a messianic belief that its the right thing to do. For the majority of retailers, their CEOs and boards require convincing that this is the right place to invest. A key operational question therefore is how can you make the trade-off between cost versus service? The Maths Intuitively it is obvious that better service drives customer retention, but how do you quantify the value of service? Whats the equation that tells you when to stop investing? The key is to understand the relationship between service and customer retention, and then to quantify the value of retaining customers. A typical analysis is presented in gure 1. ILLUSTRATIVE
INPUTS Impact of delivery on promise on customer satisfaction Impact of customer satisfaction on repeat purchase rate Impact of repeat purchase rate on customer lifetime value (LTV)
Optimisation opportunity
TODAY
Incremental prot
Less Prot
-2%
-1%
TODAY
+1%
+2%
+3%
+4%
Better service
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Once the relationship between cost and service has been established, new processes need to be put in place. Of particular importance are automated fraud processing, order prioritisation/ routing, order cut-off times, carrier pick up time, shift patterns, weekend working (to avoid a Monday backlog), etc. For example, Figleaves had a focus that all instock orders placed by 4pm should be shipped same day and the warehouse managers daily report showed orders placed by 4pm not shipped. It is vital to develop processes that make failing on promise unacceptable. In the early days of Net-a-Porter, orders from VIP customers were printed on pink paper so they stood out in the warehouse, with a mandate that all VIP orders had to ship same day. Operational magic!
Gross prot per order Trading prot per order Delivery revenue/ cost per order Promotion cost per order Marketing cost per order Number of orders x Online visitors
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Tough-minded retailers often announce that they want to make money on every order they ship. This statement sounds sensible but is (i) not what it seems and (ii) is denitely not the way to optimise prots. Firstly, aspiring to make money on every order is primarily a statement about the granularity of marketing allocation. Why? Look at the marketing cost of an example order, the visitor clicked on Google and that visit cost 27 pence, so the individual order looks very protable. However, you then note that this protable order is accompanied by 300 visits that didnt convert. So the order is protable but the marketing activity directly associated with the order isnt. Secondly, ensuring that all orders are protable is clearly a different statement to ensuring that the
overall prot is maximised. Imagine a retailer with a 10 delivery charge this may guarantee that every order shipped makes money; unfortunately, a high delivery charge has a negative impact on conversion rate, and will depress the volume of orders. So, a core marketing question to ask is what prot per order maximises overall prot? The Maths Maximising overall prot requires the right balance of marketing spend, delivery charge and promotion cost. To give a simple example, a retailer makes more money from 5,000 orders at 5 prot per order, than 2,000 orders at 10 prot per order. The critical equation to understand is what distribution of order protability maximises total prot (and the optimal prot will typically come with some loss making orders), see gure 3. For example, ASOS offer free delivery and free returns
ILLUSTRATIVE ILLUSTRATIVE
OVERALL PROFIT
More prot
AVERAGE 18.20
TODAY
Optimisation opportunity
<0
0-10
10-20
Less prot
5
More promotional
10
15
TODAY
20
25
Less promotional
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in the UK. It is unlikely they made any money on the 3 order I placed for an earring multi-pack, but the overall business is extremely protable. Online retailers need to recognise that monitoring and managing the distribution of order protability is a new discipline. They should monitor competitors delivery charges, free delivery thresholds and the availability of widely available discount codes. Offering free/reduced delivery by stealth (i.e. without marketing) is a great way to understand the latent elasticity without creating a call to action. There are creative ways to manage order protability: for example, Zappos treats promotions, marketing and delivery as a single pot so that free delivery becomes a promotional activity funded by marketing.
ILLUSTRATIVE
60 50 40 30 20 10
20% off
100
200
300
400
TODAY
600
700
800
PRODUCT VIEWS
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(do you give money to Google or customers?). The maths requires understanding the relative elasticity of price versus trafc. A typical analysis is presented in gure 4. Once this relationship is understood the next challenge is one of cultural change. Merchandising teams must learn to make discounting decisions using analytics data. Buyers incentivised purely on achieved product margin have little interest in worrying about end-to-end product economics. Similarly, marketing teams incentivised on a cost per order dont worry about gross margin. I asked the CEO of a US department store how he got his buyers and merchandisers to engage in this sort of analytically driven markdown approach. He replied: If buyers/merchandisers come to me to approve a markdown and dont have any analytics data, its a short meeting.
Figure 5: Optimal stopping point for example keyword Figure 5: Optional stopping point for example keyword
INPUTS: Example for Canon Ixus 230hs Cost per click W pence Product gross margin X Expected customer lifetime value Y Target customer acquistion cost for this keyword Z Informed prior distribution assumption
40 Expected prot
ILLUSTRATIVE
50
30
20
10
0 5 -10 10 15 20 25 30 35 40
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when do you stop? Stop too soon and you will miss sales, stop too late and only Google wins. A critical marketing question then is How do you determine the optimal stopping point for a new keyword? The Maths The maths of paid search is horribly complex. Google has created a deceptively simple model you pay per click. How hard can it be? In reality it is an enormous mathematical puzzle. The maths requires understanding after how many clicks to stop spending. The analysis in gure 5 shows the relationship between the expected prot versus the number of visits without a sale.
There are a wide range of new activities and processes that are required to manage thousands of long tail keywords. If a keyword isnt working, its easy to simply switch it off, however that may not be the best action to take. The new processes include: Checking price/availability (dont blame Google if youre out of stock or overpriced) Checking match type its easy for broad match keywords to pollute performance Checking landing pages/copy (looking at bounce, engagement, quality score its easy for landing pages to become out of date) More targeted bidding by geography or time of day for example, we found at Figleaves that bidding on the keyword lingerie was less economic late at night. Google are the virtual landlords of the high street. And as on the high street, no one likes to over pay on rent!
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actually do. Take a customer (John) who has spent 1200 over the last 3 years making 12 purchases. Johns last purchase was 6 months ago. Do you: (i) do nothing, (ii) send an email promotion, (iii) retarget John with a banner advert, or (iv) call John? Common wisdom is that a customer who hasnt purchased for 6 months is lapsing and after 12 months is lapsed. These are clearly broad generalisations. Every category has its own purchasing rhythm. So a key question on customer next best action to ask yourself is: When is the optimal time to target a customer who hasnt purchased?
ILLUSTRATIVE ILLUSTRATIVE
Optimal intervention point
Optimisation opportunity
20% promotion
10% promotion
TODAY
10
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The Maths It is critical to analyse and understand the impact on customer lifetime value of different promotions at different times post purchase. See gure 6. Offering a discount on the next order immediately may be too soon, after 12 months may be too late. The optimum time will be different for each business. For example the Economist designed a renewal at birth campaign after recognising that the best time to renew a subscription was just after it had been taken out. Moving from broadcast to targeted communications requires building a customer-centric marketing capability with a culture of disciplined testing. Many organisations claim to be customer-centric with a test and learn culture. Few act like this in practice true customer centricity is difcult and most retailers like the concept of test and learn, but dont like to make mistakes.
*** As Richard Feynmann who won the Nobel Prize for Physics often remarked, If anyone tells me they understand quantum mechanics, they dont. I feel the same is true of most aspects of eCommerce. eCommerce is still in its infancy and many of the new equations are simply unsolved. The best eCommerce practitioners know what they dont know.
Moving from broadcast to targeted communications requires building a customercentric marketing capability with a culture of disciplined testing.
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l
erging the data from the many silos M across the eCommerce operation Presenting a single integrated view of trading activity Identifying the root cause of trading uctuations Creating team worklists prioritised by their impact on prot
One thing Intelligent Trader has taught us is that theres a huge number of opportunities even within what we thought was a reasonably well run operation theres quite an awe inspiring number of issues which are uncovered by Intelligent Trader and they all relate to the business we do now rather than what we might be doing in the future which is very inward looking. So rather than investing in 4 new sites, we think theres a lot more to be made out of our current operation. Andrew Mossman, eCommerce Director, TM Lewin
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Contact us today to discuss how we can help accelerate your online growth. +44 (0)20 7291 5800 | trader@ecommera.com | www.ecommera.com
Ajaz Ahmed is the founder of ideas and innovation company AKQA. Ajaz is also the co-author of the number one international best-seller Velocity Seven New Laws for a World Gone Digital.
I realized the importance of having a story today is what really separates companies. People dont just wear our shoes, they tell our story.1
Blake Mycoskie CEO Toms Shoes To succeed in todays highly competitive and dynamic world of commerce retailers need magic. Magic, for retailers, is not about rabbits in hats or other tricks of illusion. Magic for retailers is about inspiring and engaging your customers. The best way of doing this is through the oldest form of communication the story. As human culture evolved, folk tales were the means by which our ancestors hoped to help their descendants to catch the woolly mammoth,
escape the dark forest, and live happily ever after. Then, as literacy spread, plays, poems and novels passed on these learnings. The story gave us a form in which to pass on advice, information and inspiration. As was then, stories that spread are the ones with the greatest emotional resonance. A compelling story is the best way to cut through the sheer mass of choice, data and distraction in our lives today. In a digital world, its all too easy for retailers to forget the person at the other end of its service. Equally, its also incredibly easy for that person to click to something more meaningful if your stories product, brand or corporate are forgettable and unremarkable. The trick is nding a way to turn your brand into a rich, crosschannel story with which your customers want to engage.
1 http://www.fastcoexist.com/1678486/toms-shoes-ceo-blake-mycoskieon-social-entrepreneurship-telling-stories-and-his-new-book
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The idea of using stories or a brand narrative as an engagement strategy is not complicated. But doing it well is. In this article I offer three tips on how to use narrative to make your brand come to life: Make your brand an engaging story Make your story multi-channel Make your customer the star of your story.
brands now selling direct means that it is much more difcult to capture the attention of consumers. Even more challenging than capturing attention is long term engagement.
To succeed in todays hig h In ly a wo cr om pe t ld it iv w e h e r eand d y n a chanm ic is wor ge of tld he norm, com m a pu c e re r er , sime t a ile rs p le st ory na ee c a nd g ic bm . M e a be a g ic , drock fo or e f t a ile rr rg b s,g u il is d na in ot re t ae bw out r n a b b it innova s in ha s t io n s at n d or e rk b tr eot tth ic k e s r of in d s o f ill ula sio .n M r e a g ic tn fw io or s h ip s ith ru es ta re sr c is about tile om s . inspiring and engaging your custome rs.
T he b e If se yo t way u r o f c dfi on oin dg et h n tis ais nd c or th n is os ugh tt e n t h e a be os ut old yo o u ro tf c r m fore s t o r y , y u communico can tio n build outa f r o m it T E T mH O or R eS Y freely ..
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The digital world gives people freedom to look elsewhere and a tendency to be impatient so keep your story short, honest and to the point. Because digital has caused so much turbulence for once-steady businesses and has made the world so much more transparent for consumers, an inconsistent message or skeleton in your closet can be ruinous or ridiculed. For example, in 2007 UK Mars Bars became non-vegetarian for purported budgetary reasons. Days later, after over six thousand complaints mobilised digitally via the Vegetarian Society, Mars became vegetarian once more. In a world where change is the norm, a pure, simple story can be a bedrock for building great new innovations and better kinds of relationships with customers. If youre condent and consistent about your core story, you can build out from it more freely. A macro-narrative that everyone agrees on gives you freedom to experiment and innovate on-brand at the micro level. You only need to look at a brand like Red Bull to see how a brilliant, authentic story that expresses the idea of your product succinctly can provide such a platform. Red Bull is about action and energy which has created a celebrated, international community of extreme sports, music and adventure. This single-minded focus has now transcended into the mainstream through ideas that capture the worlds imagination.
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That was a reminder of the new kinds of insights that smartly-analysed customer data and nuanced proling and communications systems can have in retail. When you are honest with customers about what information you will be using and why it will ultimately benet them, they will be more inclined to believe that you see their story as unique and distinctive and not just a number or an identikit audience-segment type. *** If the Mad Men era is dead, then long live the new era of The Long Tale, where the enduring quality of your story matters more than the relentlessness of your promotional spend. Thats not an unhappy ending.
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Saying just the right thing at just the right time evoking a desired response, a protable response... is that a science, an art, or just plain magic?
In todays world of dynamic eCommerce, maybe its all three a good dose of science, derived of cues and insights received every day through both direct interaction in your stores or online, an artistic touch born of carefully crafted creative and inspiring messages, and magic combining the rst two to address the right people at the right time with the right messages, consistently and protably. Sounds easy? Clearly, its not. Its complex and dynamic. Effective communication with those you seek to make your customers equates to success or total failure, prot or loss. Many get it wrong. Very wrong. And as true as the adage of the certainty of death and taxes, its clear the world has changed with retail commerce at the sharp end. Customers are people too... Customers today are far more than the antagonist on the other side of some form of transaction they are people. People with the power of abundant choice. People who have hopes, dreams and fears. They readily seek solutions to problems, to mask insecurities, to have experiences that let them build their world the way they want it, for a little while, at least. And because retailers and brand owners are most often selling something people want to meet some form of higher-level need (Maslow), they hold the key to a massive opportunity, no matter how you measure it.
Look carefully at your communications. Are your marketing messages militaristic? Or are they focused on understanding your audiences and keeping relationships going keeping the permissions alive, adding value, winning trust, capturing, converting and captivating particularly in the initial stages of the relationship. To win permission to interact with customers and help full their desires, retailers and brand owners must do more than broadcast information with the sole objective of motivating a transaction to suit something on their retail calendar. Its no longer good enough to just tell people about products. Communication must be open and two-way what do your audiences want to know? How can you give them something more than just meeting the desire that they came in for? To put customers into receive mode todays most successful retailers focus on responding to them as individuals, and, to a large extent, as their friends. By using the massive amounts of data received every day, retailers and brand owners focus their marketing on introducing customers to things they might like and to other friends they might also like, creating environments that are actively open, long term and above all, protable. Reciprocating with even more insight, customers go into share mode, both with you as well as with other friends they have and with whom they want to share good things. Once a customer is truly something more than a customer they become a person who has desires you can satisfy, engaged in a long-term and protable dialogue. That is the magic of communications.
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eCommera is a pioneering provider of intelligent eCommerce trading solutions, enabling brand owners and retailers to sell efciently and intelligently across multiple channels. A selection of our clients includes Asda Direct, Clarins, Space NK, Belstaff, T.M. Lewin and Jaeger.
eCommera TradingEdge products deliver multi-channel growth for our clients. Take control of your eCommerce business with our exible, multi-channel platform: Delivered on-demand for speed to market and in-life exibility Extensible with pre-integrated best-in-class partner products Continuously innovated and upgraded. Built, managed and evolved rapidly and cost effectively by our eCommerce technology experts. Intelligent Trader, a decision analytics product, helps eCommerce teams work together to accelerate online sales and protability by: Merging the data from the many silos across the eCommerce operation Presenting a single integrated view of trading activity Identifying the root cause of trading uctuations Creating team worklists prioritised by their impact on prot Backed by strategic advice, planning and operational consulting from our retail experts. Transact your brand online and internationally through our fully managed eCommerce service: Strategic framework for planning and deployment Dedicated team of retail practitioners to manage and optimise all aspects of your online operation, from marketing to fullment. Our multi-skilled team use best practice methodologies and leading edge technology to deliver optimised customer experience and online growth.
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