The Economics of Growth

Posted on Monday, 21. October 2019 in category Growth. 5 min read • Written by

Črt Podlogar

You want to know how to have a successful business? Easy. You need to grow your revenue. You need a growth mindset. You need to target the right audience. You need the right tools. You need a good advertising strategy. You need to plan your advertising platforms.

All true – but these are all tactics of growth – if you really want to make the most out of your business, you need to take it to a higher level and instead of tactics think about the economics of growth. What the sources of your company revenue are, what generates profit and where your company is losing money. I know this sounds simplistic but businesses grow when they strike the right balance between earning and losing money – and that can be more complicated than you think.

Do you know who your moneymakers are?

A typical e-commerce will feature thousands of products on its website but will only have a few dozen or at the most a few hundred best sellers that are making them money. A typical rule of e-commerce is that 20% of products can generate 80% of the revenue; this ratio can often be 10% versus 90%.

Do you know which products are making you the most money? Are you making sure they are prominently featured and always in stock? Are you working your best sellers so that in turn your best sellers can work for you?

Do you understand customer dynamics?

Many e-commerce owners and managers think that the only thing that matters for them is transactions. They are wrong. The only thing that matters is customers. Replacing the concept of transactions with customers will open you up to a whole new way of looking at your sales and how they are structured.

Here’s what changes when you switch from a transaction-centric to a customer-centric approach:

  1. You begin to understand that there are two types of customersfirst timers and returning customers. And you want to acquire the former and retain the latter.
  2. You being to calculate your customer lifetime value (CLV). Average order value? Number of transactions? Number of items in the cart? Who really cares? What you want to know is how much your customer is worth throughout their lifetime with you and how long a “lifetime” really is.
  3. You begin to think about loyalty programs – because loyalty programs are great at keeping your clients active and shopping.
  4. You start thinking about customer retention and owned channels such as e-mail. Because you realize that motivating an existing customer to come back is much easier than trying to convince a new person to make their first purchase.

Are you managing your checkout funnel?

There’s a lot of different ways to grow – this one can make the biggest impact on your revenue in the short term. Once a user has added something to your cart, they have expressed clear commercial intent. You want to get as many of these people all the way down your checkout funnel and you want to make sure they’re buying as much as possible.

Modern e-commerce gives you a lot of options to make sure people successfully move all the way down to the happy ending – a completed transaction. Things like cart abandonment e-mails, special offers, countdowns, cross-sell packages and related products can help you wrap up the deal and potentially even increase its value.

COGS – an e-Commerce Practitioner’s Best Friend

I was living a lie until I found out about COGS. What is COGS? Formally COGS stands for “cost of goods sold” and is the direct cost that can be attributed to the production of the goods you sell. Basically COGS tell you how much of the revenue you’re making is moving down the line towards shipping, purchasing, packaging, product production – so, out of your pocket. 

I suggest you apply COGS to everything. It will lift the veil of fake revenue that is clouding your understanding of what’s making you profit – I know everyone’s talking about revenue, but in reality you should be thinking about profit.

Let me share two horror stories:

In one particular case I had a client for which we were running advertising and the goal was last-click profitability. Before we applied COGS to all transactions and only took into account the actual profit made on each individual transaction, we had a great success rate with 87% of all AdWords campaigns returning a presumed profit. After actual COGS was implemented and we stopped assuming what the average profit across the board was, we realized only 12% of campaigns were profitable – everything else was making a loss.

In another case, after implementing COGS into the e-commerce data, we realized that because of huge discounts and continuous promotions being applied almost all of the top sellers and revenue makers were in fact making a loss rather than profit, and that the actual profit was scattered across less prominent products nobody bothered to advertise or pay attention to.

Do you know your place in the world?

Your growth will be influenced by two huge and influential factors – the size of the market you’re operating in and the strength and aggressiveness of your competitors.

Your growth will have a different curve if you’re in a market with a lot of small competitors where it’s easier to grab a decent market share, compared to markets with a few strong players owning big chunks of the market and masses of loyal customers used to shopping with them.

Smaller markets will be harder to grow in because you will reach your limit faster and there’s fewer customers and less revenue to go around. Smaller markets are typically also more price aggressive – growth through profit is harder and slower in markets where you’re stuck in an eternal war for the lowest price and the biggest discount.

Do you know where you’re losing money?

E-commerce is a tricky business – you can lose money as quickly as you earn it. There are some industries (e.g. fashion) that are at a higher risk of unexpected costs than others; a typical example being fashion retail.

People love to return their products – maybe they bought the wrong size, maybe they want to exchange it or maybe they have changed their mind completely. And their poor choice of size or change of heart will cost you money.

In many cases, higher return rates can be tracked down to specific products, brands or categories – think twice if it makes sense to keep such products in your web store.

What is my to-do list for the next three months Črt?

You will want to start by getting the lay of the land and understand what you’re doing well and where you need improvement. And like any meaningful business change, this one will start with data as well – you probably don’t measure everything you need to make data-driven decisions, so mapping out your analytics will be at the top of your list of priorities. You can refer to the list below for some guidance.

Here’s how to grow your e-commerce business:

  1. Identify your bestsellers and define a hero product management protocol for your team.
  2. Make COGS data easily accessible and import it into your web store and Google Analytics.
  3. When b) is done, forget about revenue as a relevant metric – switch to profit.
  4. Make a list of all the checkout management features you’re using and a wish list of what you need to implement ASAP.
  5. Start identifying your customers and measuring shares of returning customers and their customer lifetime value to get a real sense of your business.
  6. Identify problematic products with high return rates and get rid of them.
  7. Evaluate your market and competition, and plan realistic growth for next year.
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