What is the purpose of the work we do in eCommerce?
When we fire up our laptops each day, we typically have two objectives. Some of our time is dedicated to keeping the wheels on the bus. An eCommerce business couldn’t run without fresh web copy and imagery, the fulfillment of orders, or inventory to sell.
The rest of our time is dedicated to growth: what can we do to increase revenue, AOV, and (hopefully!) profit? After a brand nails product-market-channel fit, growth can be pretty straightforward: buy more inventory and generate more traffic. But as a brand approaches the $10-20M revenue mark, things tend to get more complicated.
Whether you’re approaching eight figures in sales or you’ve already left that benchmark in the dust, here is a framework for achieving growth when things start to get complicated.
Note: we’re going to reference weight maintenance and metabolism. If that makes you uncomfortable, it’s probably best to skip this one.
Set Point Theory is a concept that relates to weight loss and the human body, but it also applies to the growth of your business. So what is it?
Set Point Theory is the idea that everyone’s body has a set weight that it will tend to return to, despite changes in diet or exercise habits. This theory is one hypothesis for the difficulty that most people have losing weight and maintaining that weight loss over a long period of time.
Research into this theory revealed that a person’s set point isn’t driven by genetics alone, but by the entirety of each person’s environment. Metabolism is influenced by diet, the environment in which our food is produced, exercise, genetics and epigenetics.
So each person’s set point is hard to move because it’s almost impossible to change your entire environment long term. You might eat less of the same food, but that food is being produced through the same farming methods. Or you might try a new exercise routine, but you still spend most of your day sitting at a desk or in a car.
Your business’ bottom line is subject to the same inertia. You’ll often find that efforts to increase revenue or reduce expenses leave you right where you started, profit-wise. Increase advertising spend to grow the topline and your efficiency declines, consuming any extra profit you might have realized. Attempt to reduce expenses like advertising, fulfillment or even salaries, and your revenue shrinks just as quickly, negating any benefit.
The solution? You need to make a significant, lasting change to the environment in which your business operates.
In the “arbitrage era” of Facebook, increasing profit was often as simple as increasing your advertising budget. There were fewer advertisers on the platform, the data and targeting was better, and consumers’ attention was generally undervalued.
The benefits of low-cost advertising impressions were so powerful that entrepreneurs could make money even if the other aspects of their business were sub-optimal. But business is an ecosystem: you’re managing your own operations, but you’re also dealing with competitors, suppliers, customers and everything that’s going on in the world.
When something in the ecosystem changes, you’ll experience that change in the form of lower or higher profits. When the change manifests as lower return on ad spend, you’ll be tempted to jump to the conclusion that marketing is the problem. But in reality, external forces are making your marketing more or less effective.
The Covid-19 shutdowns of 2020 are a great example. This was a macro event that drove rapid adoption of eCommerce, leading to a bump in sales for many merchants. This rush to online shopping, along with a pullback in Facebook ad spending by many large advertisers, resulted in a surge of profitable growth in 2020 and early 2021. When lockdown measures eased and advertisers returned to Facebook, much of that growth went away.
You can’t manage everything about your business environment. But sustainable growth comes from changing some part of your environment. A lot of the digital marketing “hacks” you can read about online change one thing in one channel, and that’s why they don’t lead to sustainable results.
If you want to improve your advertising efficiency significantly, over a long period of time, you need to address the entire marketing ecosystem. Here are a few ways to do that:
As a marketer you’re managing the size of two audiences: your Total Addressable Market, and your Current Addressable Market. Your Total Addressable Market, or TAM, is everyone who could possibly purchase your product.
This audience is determined by consumers’ demographics and psychographics. Your Current Addressable Market, or CAM, is everyone in your TAM who you can profitably reach today. For most brands, CAM is everyone who is aware of your brand and in-market looking to buy.
If your Facebook ads performance is consistently hitting a wall, you may have reached a point of diminishing returns within the Current Addressable Market you’re targeting. Increase the size of your CAM and you’ll create more opportunities to convert customers at an acceptable price.
Broadening your CAM doesn’t mean tweaking your audience targeting. It means rethinking who might be interested in purchasing your product. Consumers are “in market” because they’re looking to solve a specific problem. Broaden the definition of the problem you’re solving, and you can advertise efficiently to a larger audience.
Supplement companies are the masters of this move. Athletic Greens started out by targeting athletes (it’s in the name!)–professionals and civilians who were obsessed with optimizing their athletic performance. More recently, the brand has reframed life itself as a performance sport.
The product has recently been positioned as a healthy, natural solution to everyday sluggishness or generally feeling “off". Partnering with visible members of DTC Twitter got the conversation started within that niche.
When you run out of ideas for broadening your Current Addressable Market, it might be time to broaden your Total Addressable Market. A larger TAM will lead to a larger CAM, resulting in lower customer acquisition costs. Unlock the right market segments and you’ll also unlock the ability to demand higher margins for your product.
When you broaden your CAM, you don’t change anything about the fundamental value proposition of your product or your positioning. But when you broaden your TAM, you work to reframe the perception of your brand to reach entirely new audiences. This might require a completely new direction for your product strategy or a radical departure from your existing marketing strategy.
Warning: this is a high risk, high reward move. But sometimes it may be your only good option, especially if you’ve passed the $100M revenue mark. And when it works, the upside is tremendous.
Crocs is one example of a brand that pulled this off, resulting in massive revenue growth. When Crocs launched, its hero product was a rubber clog with some holes for ventilation. The shoe was popular with professionals who spent a lot of time on their feet in potentially messy situations, like chefs and healthcare workers. Soon, the brand became popular with civilians who valued comfort way more than style.
Crocs build a solid, sizable addressable market. But in doing so, the brand cut itself off from most younger consumers and from anyone who considered themselves fashion-focused. When sales growth plateaued, Crocs made moves to appeal to those audiences like a collaboration with Balenciaga and Justin Bieber.
Broadening your audience without alienating your core customer is part of the delicate dance of TAM expansion. But you don’t have to rewrite the public perception of your brand to reach new segments of the market. Instead, you can leverage the expertise you’ve developed in your category to develop new products that appeal to different segments of the market.
The modern eCommerce environment can feel like death by a thousand cuts…or costs. Your email, paid social, affiliate and paid search all take their slice of each transaction. But that doesn’t mean you have to accept all of these expenses at face value.
Most brands are spending way too much money marketing to customers who would have converted anyway. The two biggest culprits? Returning customers–especially those with 4 or more lifetime orders–and customers at the bottom of the funnel.
Marketing campaigns that target these two customer types typically deliver what looks like amazing results. And that is because these campaigns insert another touchpoint in front of a conversion that was already bound to happen. They don’t add any incremental benefit, so pausing these campaigns would have no impact on sales.
You can identify potential savings by performing holdout testing on large campaigns that target returning and high-intent users. You’ll often find that campaigns like branded search, abandoned cart/browse emails, and low-funnel retargeting aren’t delivering the benefit that you initially assumed.
You can also use targeting and other criteria to exclude or pay less for low-value conversions within broader channels. For example, you can reduce or eliminate affiliate commissions for returning users, or adjust your paid search bidding strategy so you pay less during times of day when visitors are less likely to convert.
Simple decisions can have long term, unintended consequences because our businesses don’t operate in a vacuum, they operate in an ecosystem.
As a marketer, you may not have control over the competition or your suppliers, but you do have more control than you think.
Think beyond channel-level tactics to create lasting change that impacts the bottom line.
And if you need some help gauging and increasing your business metabolism, take a peak at our platform.
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