People still can’t do math – and what it means for pricing August 19, 2012Posted by jeremyliew in Ecommerce, pricing.
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Definitely worth reading and experimenting with if you’re in ecommerce.
Pretty interesting article in the current edition of the Economist about the psychology of discounting:
A team of researchers, led by Akshay Rao of the University of Minnesota’s Carlson School of Management, looked at consumers’ attitudes to discounting. Shoppers, they found, much prefer getting something extra free to getting something cheaper. The main reason is that most people are useless at fractions.
Consumers often struggle to realise, for example, that a 50% increase in quantity is the same as a 33% discount in price. They overwhelmingly assume the former is better value. In an experiment, the researchers sold 73% more hand lotion when it was offered in a bonus pack than when it carried an equivalent discount (even after all other effects, such as a desire to stockpile, were controlled for).
This numerical blind spot remains even when the deal clearly favours the discounted product. In another experiment, this time on his undergraduates, Mr Rao offered two deals on loose coffee beans: 33% extra free or 33% off the price. The discount is by far the better proposition, but the supposedly clever students viewed them as equivalent.
73% higher sales is an astonishing number that comes simply from positioning the same discount differently. Of course, this only helps if you are making a positive contribution margin on the sales!
This reminds me a bit of Prize-Linked Savings accounts, basically savings accounts with a lottery ticket attached (that is bought by slightly lowering interest rates):
One way to think of these “prize-linked” accounts is that they can offer an expected market return, but in an innovative way. They pay a guaranteed return below market interest rates, but also provide a lottery ticket whose value makes up the difference.
To be specific, a lottery-lined savings account could offer a lower rate of interest, but also say a one-in-a-million chance of winning $1m for each $100 deposited. Mathematically, the expected return is the same, but the chance to win $1m makes the account much more attractive.
Britain has historically led the way with these sorts of savings opportunities, starting with the “million adventure” lottery in 1694. Households were offered 100,000 tickets at £10 each, with poorer groups able to club together to buy fractions of tickets. Holders received a 6 per cent annual return for 15 years, plus the opportunity to win a prize of between £10 and £1,000. Historians suggest the programme was popular and successful. More recently, much the same theory was seen in the UK’s Premium Savings Bonds, which offer the opportunity to win a prize but no base interest rate. From Brazil to Germany, Mexico to New Zealand, a variety of other prize-linked savings opportunities already exists.
This is another example where reframing the same economic returns can change user behavior. I wonder if framing a 33% off sale so that people buy at full price but with “Every third purchase free” might increase sales overall. Has anyon had any experience with this?
UPDATE: Recently found a really fun and relevant post on pricing experiments that is worth reading from conversionXL.
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As a follow up on my guest post at Pando Daily about why ecommerce startups come in waves, I did a follow up post making the case that celebrities will drive the next wave of ecommerce startups. Check it out.
Waves of ecommerce startups June 21, 2012Posted by jeremyliew in Ecommerce.
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Check out my guest post on Pando Daily about why ecommerce startups come in waves.
I’ve been asked several times how the analysis would differ for an ecommerce business, so I finally got around to uploading a sample cohort analysis for an ecommerce business. Please note that this is a SAMPLE only. Data is dummy data, so you should not use it for benchmarking purposes. I have not allowed editing to the google doc so that the spreadsheet will be useful to anyone who finds it, but you can download it and edit it offline as you see fit.
For an ecommerce business, rather than focusing on the percentage of retained subscribers per cohort, instead you focus on the net revenue (after discounts, returns and refunds) from that cohort in a given period. This revenue has to be normalized by dividing by the number of (original) buyers in each cohort so that you can make meaningful comparisons. You should focus on revenue per (original) buyer in each period for each cohort as the raw data from which you can build a lifetime value analysis. Then you should average across cohorts to understand “typical” revenue per sub in period 1, 2, 3 etc, where period 1 is the first month (quarter/ year) when you see a buyer make a purchase.
You still typically see a steep drop off in revenue per buyer after the initial period. But a well run ecommerce business that does a good job of retention marketing and line expansion should see stable revenue per buyer after the initial drop off. This is in contrast to subscription businesses which typically continue to see attrition over time. If you do see continued drop off, you should model that in a similar way that I do it for subscription screen sharing businesses, but if you see relatively stable out month revenues per buyer, it’s OK to model that in the out months.
Lifetime Value is calculated as the cumulative contribution of an average customer, so you have to multiply lifetime revenue by contribution margin. Contribution margin should include all variable costs except one time acquisition costs. This typically includes COGS, packaging, shipping and handling, reverse logistics, inventory obsolescence/write offs, customer service, credit card charges, hosting costs, fraud accruals etc. It would not include fixed costs such as photography, production, site development, merchandising or other overhead.
The two most importnat metrics that I look at to gauge the health of an ecommerce business are LTV/Customer Acquisiton Cost ratio and payback period. This is why i highlighted these two metrics in the spreadsheet.
I like to see LTV/CAC > 2.5 (which tells you that you have a robust long term business with enough margin to cover overhead) and Payback periods under 12 months.
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Today’s NY Times notes that subscriptions are all the rage in ecommerce. It features three of our portfolio companies. Alex Zhardanovsky, cofounder of Petflow*, and Azoogle before that, is one of the people interviewed:
But he had an idea to build the business by taking a different approach to sales. While selling online ads, he had seen other companies, like Netflix, persuade consumers to lock in monthly fees for repeat orders. Those companies, he believed, were generally more successful and thus bought more of his ads. For his new business, Mr. Zhardanovsky’s plan was to sell dog food on a subscription basis. He figured that other pet owners had experienced the same frustrations keeping the food stocked and might be willing to sign up for a monthly delivery service as well. “Dogs never stop needing to eat,” he said….
In its first month, July 2010, the company shipped about 60 orders; by January of this year, that number had leapt to 27,000. In 2011, PetFlow exceeded $13 million in revenue — with 60 percent of its sales coming on a subscription basis — and it projects revenue will exceed $30 million this year. “I’ve come to appreciate,” Mr. Zhardanovsky said, “that subscription models are, in so many ways, the holy grail of business.”
Brian Lee, cofounder of Shoedazzle* with Kim Khardashian, is also quoted:
“A subscription model allows you to establish long-term relationships with customers as opposed to selling them one pair of shoes and hoping they come back,” said Mr. Lee, who also was a founder of LegalZoom. It was his experience at LegalZoom, a legal-document business based on single transactions, that prompted Mr. Lee to look for recurring revenue: “I wanted to start a business where you didn’t have to worry as much about whether the customer would come back.” The idea of using a subscription model to sell shoes came to him, he said, after he realized how many shoes his wife was buying on a regular basis.
The Times also notes where the subscription model works best:
Given the experiences of companies like PetFlow, ShoeDazzle and BabbaCo, it is tempting to wonder why not every company is trying a subscription model. And, in fact, Brian Lee, the founder of ShoeDazzle, said he frequently heard pitches from entrepreneurs who wanted to create the ShoeDazzle of wine or underwear or some other product. “I think subscription models work best in two instances,” he said. “Where the product is a necessity or when it’s an absolute passion. It stops making sense when you try to do something like a tree-of-the-month club, which doesn’t fit either of those categories.”
Taking his own advice, Mr. Lee recently founded another subscription-based business, this one with Jessica Alba, the actress. It is called the Honest Company*, and it ships diapers and other baby products.
We’re proud to be backing such great companies and entrepreneurs.
* Lightspeed Portfolio Companies
Why so many hot apparel ecommerce startups are vertically integrated February 3, 2012Posted by jeremyliew in apparel, Ecommerce.
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The WSJ has a story on what goes into the price of a shirt that shows why so many of the current batch of hot apparel ecommerce companies (e.g. Shoedazzle*, Bonobos*, J Hilburn, Warby Parker, IndoChino etc) are vertically integrated. The retail value chain has a significant markup built into both the wholesale and retail channel as can be seen here.
Vertically integrated companies can take a lot of the costs out of the system and provide a much more compelling value to the consumer while still making an attractive margin.
* Lightspeed portfolio companies
WSJ compares Petfood ecommerce, likes Petflow February 3, 2012Posted by jeremyliew in Ecommerce.
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Last year we invested in Petflow, an online petfood retailer. We believed that Alex and Joe, the two cofounders, would be able to repeat the success they had in founding Azoogle (now part of Epic Media Group) and that the repeat purchase behavior inherent in petfood would generate loyal repeat customers and high lifetime value, despite the high shipping costs inherent in petfood. Pets.com went down in flames when the first bubble burst, but we believe that today’s much lower cost of building and running an ecommerce site, today’s variable marketing costs that performance marketing affords, and today’s mainstream acceptance of ecommerce make this a much better opportunity.
Others see a similar opportunity, notably Quidsi (parent company of Diapers.com) who launched Wag.com.
Alex and Joe have been steadfast in their focus on high quality food and service, and it’s nice to see that recognized in yesterday’s WSJ Cranky Consumer article comparing online petfood retailers. The higher quality focus is noted, despite the fact that the tester is used to cheaper supermarket brand food:
Tester Pixel loved this food. We put out two bowls: one with Meow Mix and one with the Holistic Select. He went right for the Holistic Select, and now turns up his nose at Meow Mix. Pixel may force us to return to PetFlow.
Mr. Chewy also got a thumbs up, Wag and Petfooddirect unfortunately did not. Congrats to Joe and Alex!
Today is a good day to market to cheating spouses February 15, 2011Posted by jeremyliew in apps, Ecommerce, seasonality.
Bloomberg Businessweek has an interesting article on the infidelity economy this week, noting that registrations for AshleyMadison, the online dating site aimed at married people, spike the day after Valentine’s Day. But nowhere near as much as they spike the day after Mother’s Day and Father’s Day.
It’s an interesting example of the sometimes ideosyncratic seasonality of web businesses. Knowing the seasonality of your business can help you market to, merchandise for and communicate with your customers most effectively.
Everyone is familiar with the Q4 seasonality of retail businesses, driven by the holidays. But each industry has its own annual seasonality cycles that may be less obvious in foresight, but are always obvious in hindsight. For example, in Shoedazzle’s first year of operation, we missed a few months of the winter boot season. Having the wrong merchandising mix from October to January in 2009/10 definitely dampened sales – women don’t buy as many open toed shoes when there is snow on the ground!
Another example is Mercantila, a company that sells a lot of exercise equipment, rowing machines, elliptical trainers and the like. They see sales spike not in Q4, but in Q1, when people are making their new years resolutions. When many online retailers are easing up on their online marketing and SEM, Mercantila is ramping up what it is willing to spend to reach new potential customers.
Smartphone app developers have learnt that the launch of new iPhones and heavily marketed Android phones is a period when they can rapidly increase installs, as are the days after Christmas, when many new phones are getting unboxed. The first thing a new smartphone owner does, is go to the appstore to get some apps. Being high in the “best-sellers” lists at that time can provide a real boost to your installs. Making sure that your release at that time is bug free, well reviewed and fully featured, is of course important too.
Seasonality is not confined to annual cycles either. As the number of ecommerce businesses relying on email increases, rules of thumb for weekly and daily seasonality are also starting to develop. For example, Mondays and Tuesdays of the first and last week of a month are when people tend to balance their checkbooks, so are bad days for subscription services to send e-mails. They have a higher probability of getting canceled on those days and don’t want to draw attention to themselves. On the other hand, emails sent Sundays after Church show high open rates for some ecommerce merchants. And for deal sites, open rates are higher when you are above the fold when someone first opens their email, which rewards sending emails in the weekday 5am-7am time slot to work based email addresses.