Increasing online sales can be driven via several different tactics. You will always focus on bringing more people to your site in an effort to increase your customer base. Maximizing paid search, optimizing affiliate marketing and leveraging off-line marketing are just some of the tasks that e-marketers face every day. At the same time, the web merchant focuses on developing promotions, improving conversion and building up-sell opportunities.
Another required task is to focus on your key customer groups in order to increase their awareness of your entire product selection. This approach, focusing on Category Penetration, attempts to increase the number of categories that your customer purchases from your site, and thus, increase their order total and lifetime value.
To be successful, you need to sell more stuff to every customer who comes to your site. However, your greatest opportunity lies with your loyal customer base. Everyone knows that retaining a current customer is always more profitable than attracting a new customer. The same can be said for increasing the average order amount for these two groups.
New customers are “try-ers”, and your focus should be on building a buying pattern with them to the point where you are “top of mind” for your product categories. This may take 2 or 3 purchases before these customer move from “try-er” to “buyer”.
Your existing customer base has already developed that buying pattern. With this group you are focusing on expanding the selection of products that they purchase from you and increasing the frequency of purchases. RFM (Recency, Frequency and Monetary Value) is the secret to success that we all learned in our 101 marketing back in college.
Once you have developed an understanding of how your customers break down in the RFM hierarchy, you would want to determine the penetration by product category for each group to determine if additional promotional offers should be developed for different customers.
As you make these promotions available over time, you need to develop a method for understanding their effectiveness. One method that I prefer is to calculate the Average Order Contribution by product category. This metric is very similar to calculating the Revenue per Book ($/bk) that you have used in determining catalog effectiveness.
With $/bk, you are really determining the interplay between the catalog’s response rate and the average order amount. Both of these metrics can be optimized independently, but in the end, you will find the Revenue per Book the key metric.
Response Rate = Number of Orders / Number of Catalogs Mailed
Average Order = Total Revenue / Number of Orders
Revenue per Book = Total Revenue / Number of Catalogs Mailed
As you move from your print media to your web site, you will want to track the effectiveness of your marketing materials in a similar manner. Here you may be reviewing your email or affiliate efforts. You can calculate the Revenue Dollars per Delivered email ($ / Delivered) or the Return on Advertising Spend (ROAS) for your affiliate efforts.
By digging deeper, you can gain an understanding of how each product category is performing overall. This is where the Average Order Contribution comes into play. When you are determining which products receive the premium spots on your Home Page and/or in your emails, you need to understand which categories perform the strongest and if these are improving or declining over time.
By tracking how much each product category contributes to the total average order amount, you can gain insight to how effective past promotions have been for category. Again, as with the $/bk calculation, the Average Order Contribution is a combination of two other metrics: (1) the Percent Penetrated; and (2) Dollars Penetrated.
Percent Penetrated = Orders with Category (A) / Total Orders
Dollars Penetrated = Category (A) Revenue / Orders with Category (A)
Average Order Contribution = Category (A) Revenue / Total Orders
As you track the Average Order Contribution Trend over time, you will be able to identify those time periods where your marketing efforts have produced exceptionally strong results as well as when your efforts have fallen below the trend line.
Once you have identified these periods of interest, you can investigate the specific sources (or lack thereof) of sales. Did the stronger results occur because you sold more products to your existing customers (you can identify this by tracking your Dollars Penetrated results) or because you expanded your sales to more customers (you can identify this by tracking your Percent Penetrated results).
These calculations will help you identify which promotional periods are succeeding and help you understand the related base components. Once you understand these factors, you will be better prepared to determine which marketing messages are effective and which one are not.
Until next time,
Dan
