Do you get more than 20% of your ecommerce revenue from a single product category (or even a single product?!)? If so, you have a revenue concentration problem.
While things might look promising right now, you are putting your company’s future at risk:
- If the main product category starts dropping in sales (which will happen sooner or later), you will likely lose a significant portion of your revenue and profit, and be forced to cut costs (layoffs, marketing, etc.) just to stay in the business.
- You are probably putting a lot of focus on the main category, which eats capacity (and budget) from other categories you could be developing.
- Your customers will sooner or later start associating your brand with this category. This could cause problems when trying to expand your portfolio (and sales) into other categories.
- It’s almost impossible to increase purchase frequency and customer lifetime value if your revenue depends on a single category.
- By focusing on a single product category, you are likely attracting only a single customer segment.
How to Calculate if You Have a Revenue Concentration Problem?
To analyze your product category revenues, open your Google Analytics account and look for a Product Performance Report (switch the primary dimension to the Product category). If a specific product category represents more than 20% of your revenue in a single month, that’s totally acceptable. But when a product category consistently represents more than 20% of your business, you are taking a huge risk.
In some industries there’s a huge ROPO effect (users are researching products online, but making a final purchase in stores). In that case you should take the ROPO factor into consideration as well.
There are many reasons why your ecommerce business might be facing a revenue concentration problem. Here are the most common ones:
- Lack of product offering;
- Lack of marketing;
- Price competitiveness;
- Focusing on a single marketing channel;
- Focusing on a single target group.
How to Fix a Revenue Concentration Problem?
While the revenue concentration problem could have a significant impact on your company’s performance, there are steps you can take to fix this situation:
- Create a list of your main categories. Calculate the percentage of revenue each category is generating.
- Analyze the shopping behavior. Open your Google Analytics account and analyze pre-purchase behavior for each of the main categories. See if there are any huge drop-offs in any category. For instance, if one category is getting only 15% of Sessions with Product Views, this might indicate that your products are not appealing enough for your visitors. Consider changing your pricing strategy or widening your product offering.
- Search for gems. Look at your product category performance to see which categories have the highest Basket-to-Detail Rate and Buy-to-Detail Rate. It might be smart to invest some more budget in those categories.
- Evaluate your marketing channels to see which ones might help you bring in additional customers. If the majority of your traffic comes from one marketing channel, it’s worth spreading your marketing efforts to other channels as well. Additionally, try to focus on new target audiences that might be interested in your product offering.
- Calculate your in-market reach. See if there are any categories in which you are not reaching a significant number of the people who are currently in the market.
- Look for ways to cross-sell your customers. Selling an additional item to an already engaged customer might seem easy but it requires lots of insights. Use the customer insights you have gathered in the past to recommend the most appropriate product to a user. Recommendation algorithms might help.
- Invest in customer experience. A great pre- and post-purchase customer experience will hugely influence your customer retention and loyalty. Once again, use the data from your customers to increase the frequency of transactions and cross-sell to them.
4 Tips to Prevent Revenue Concentration Problem
- Don’t bet on one category. Too many ecommerce companies are building around one product or category. This is extremely risky. Each product/category/market goes through a maturity curve and sooner or later the market closes. You need to be ready for this. I recommend building between 5 – 10 categories, so a single category won’t be too big, yet still manageable.
- Create dashboards to monitor the category revenue percentage. You might add some additional metrics to help you monitor shopping behavior as well. Track this on a monthly basis so you can spot problems early on.
- Know the customer segments for each category and how they overlap. This will help you cross-sell your products to your existing customers. Regularly evaluate the size of those segments and calculate your market reach and market share.
- Accelerate your marketing. When one category starts approaching 20% of your revenue, increase marketing investments in other categories. You might also invest in new marketing channels as it will help you reach new users.
If you have a revenue concentration problem, don’t be too hard on yourself. It’s a common problem and many ecommerce managers face it. The important thing is that you’re now aware of it and can start working on fixing it. And if you’re not sure how to apply this at your company, you can always contact us for help.