The Digital Commerce Landscape
When it comes to traditional retail, price is everything. Whether selling through bricks and mortar stores or online markets, vendors of physical goods define success in terms of the amount of money derived from each individual sale versus the cost of goods and extra expenditures. Online merchants selling virtual or digital goods, however, focus the bulk of their effort on driving traffic to their sites and converting visitors into buyers. Whether you’re selling content like videos, online games, or software and services through subscriptions, in the virtual world your digital inventory has no relationship to sales volume. The warehouse is always empty as your goods are virtual, electronic. Because of this, every increase in sales you can make from your traffic goes right to your bottom line.
To many people, economics seems daunting and complex. But the concept of virtual economics is fairly straightforward. The digital revenue model is built upon four basic pillars; the intersection of their dynamics delivers maximum value.
These pillars are:
- Close rate
- Average order value (AOV)
Let’s start with traffic and close rate – and the conversion of desire to action to purchase a virtual good. While traffic can vary greatly, your close rates need not. By removing hurdles in the online purchase process, such as problems with different currencies, languages or payment types, merchants can increase closure rates and significantly boost revenue streams. This is especially important when selling globally, as you want to cater to many different audiences across the world. Additionally, advanced techniques such as single-click buying and user-experience tuning can impact the bottom line. With the vast majority of shopping carts still being abandoned during the online shopping experience, traffic alone is no guarantee of success.
Maximizing the average order value (AOV) per consumer conversion results in greater success. Online merchants need to ensure they do not miss any opportunity to turn a browser into a buyer by connecting with the buyer when his or her wallet is open and they are eager to buy. The best way for merchants to do this is to learn more about what makes their buyers tick. When do they shop online? Who do they primarily shop for – themselves? A spouse? Friend? Co-worker? By understanding the shopper, and taking steps to address his or her needs, online merchants can take advantage of shoppers’ time and convert the sale. Offering an added value during the checkout process or appealing to an impulse purchase, simply adds revenue to your bottom line.
The last step, retention, is not as easily factored and measured, but holds just as great an impact as the previous factors within this equation.
Retention is the key to growth. Keep your old customers and grow with the addition of new ones. It is nearly an urban myth that the costs to acquire new customers can run five to 10 times more than the costs to retain them. Truthfully, these costs will vary by industry, product and company strategy, and are impacted by the rise and fall of economic cycles as much as anything. Any implications can be drawn from this simple definition: Customer retention comes from the vendor and is built on retaining the customer without the need for a change of heart or mind (and thus the customer becomes loyal). Retention comes from providing incentives for the customer to return (and restrained from leaving) in the face of competitive actions. Reward the faithful by creating a retention benefit program that recognizes repeat customers. Today’s most effective perks programs do not involve much financial investment, however, every little bit of appreciation shown to the customer pays dividends. It’s important that once the initial transaction is conducted, the seller continues to evolve the relationship with that buyer, developing a business transaction into an emotional bond.
Putting it all together, we’ve got the recipe for converting browsers into buyers. In simplified mathematical terms, the model can be defined as:
(R)evenue (e)quals = (A)verageOrderValue x (C)loseRate x (T)raffic.
We call this the ReACT model and it shows how any business can flex its marketing strengths to drive online revenues. By using pre– and post– sale promotions to increase AOV, multivariate testing on the checkout page and direct consumer management experience, sellers will build higher Total Lifetime Value from their customers. Leverage the ReACT model and online merchants will successfully increase their close rates, AOVs and revenue rates.
Author: Simon Jones, Vice President of Strategic Solutions at Plimus, Inc.
A Silicon Valley veteran, Simon has worked with software companies like Interwoven, Hyperion and Adobe for more than a dozen years in a variety of strategic marketing, sales and development roles. Simon ensures Plimus’ solutions are strategically positioned to meet the needs of e-Commerce 3.0 and the evolving e-Commerce marketplace.