Master's Series: Identifying Your Best Customers
Successful commerce involves two important components: products and customers to buy those products. In the previous installment, I gave you information on sourcing your products. Now, it's time to discuss the second important piece: customers.
This post is the third in a new series by eCommerce expert, Bret Williams. In this installment he discusses how to identify the best customers for your online store.
Customer Types
As you traverse the world of eCommerce, you'll learn that businesses define themselves as either Business-to-Consumer (B2C) or Business-to-Business (B2B). Sometimes, you'll see B2C referred to as D2C, meaning Direct-to-Consumer, but it's the same except that it more discretely — or properly should — refer to businesses that avoid a middleman and sell directly from the factory to the end-user. I've seen B2C and D2C muddled in their distinctions, though. For our purposes, we'll use B2C to refer to sales to end-user consumers and B2B for wholesale transactions with resellers. Those resellers could be B2C or another wholesale, B2B, level. You should also be aware that often times merchants will use B2B simply because their end consumer is a business, such as in the case of an accounting firm that is hired by a corporation. In our discussions, we'll make it easy: B2C is for end-users and B2B is for resellers.
The B2B Marketplace
First, let's talk about some numbers to get things into perspective. Let's say you sell a product that any American adult might purchase. In the USA, there are approximately 240 million adults over the age of 18. You could say that if any adult might want your product, you have a potential customer base of 240,000,000 buyers. Wow! The reality is, of course, that you won't sell to every adult. Even the most popular products in the country sell to a small percentage of the overall population. While it seems almost every man and woman has a smartphone, a smaller percentage owns an iPhone versus a Galaxy versus a Pixel. If you're Apple, you want to capture as much of the market as possible, but you also know, with competition, you won't get everyone. So, what does this market mean to you? The size of the USA market, alone, means that you, as a small or medium-sized merchant, have a very large pool of which you only need a few drops in order to be profitable. Here's an example. Let's say you sell women's casual wear. Moderately priced so as to have potential appeal to all women, regardless of income level. At last count, there were about 125 million women in the USA. Let's also say that, based on the calculations you did in the installment on products, your average profit on an average sale is $25. Let's also assume that your goal is to earn $200,000 in profit. That means that you'll need to complete 8,000 sales during the next 12 months ($200,000 / $25). If every customer is a new customer (not repeat buyers, which, of course, you will have), you need to convince only 0.0064% of all women in the USA to buy from you. That's 1 in every 15,625 women. You can see that you don't have to be a mass marketer to reach the profit you're seeking. You simply have to convince a very small percentage of customers to buy from you. Whew! What a relief, eh? Now, don't get me wrong. It's still challenging to seek, find, and convince 8,000 customers to buy from you, but the challenge is a lot more manageable. Imagine large retailers who have to drive millions and billions of dollars through online sales — what a huge challenge they must have! With the low cost of entry for you, you're actually in a much better position to be profitable!
Profiling Your Customers
The real challenge for you is identifying who, among the broader market, are most likely to want your products. Even if you are selling casual women's wear, your styles, prices, and sizes most likely reduce the overall market to a smaller number of potential buyers. By profiling your customers, it's not as important to consider the reduced size of the market, but, rather, learning how to attract the buyers you need. In other words, until you really know your customers, you can't begin to craft the branding, product presentation, marketing, and content that will best convert potential buyers into actual buyers. Even if your products are broad in appeal (e.g. t-shirts, iPhone cases, throw pillows), you need to get very granular in your descriptions of your ideal buyers. This is done by creating personas. Think of personas as descriptions of your ideal customers. Each persona might represent many people, but the more specific your personas, the more you'll be able to target the customers you want. Even if some customer profiles are very similar, except for things like income or age, create different personas for each.
ACTION STEP
Create several personas to represent your ideal customers. For each, complete the following:
Name. Sometimes, we actually use names like "Sam" or "Gloria." Other times, we use more generic titles, such as "Middle-aged Woodworker" or "Ms. Office Professional." We use these names when mapping out Marketing strategies (which will be discussed in more detail in a later installment).
Gender. If you're going to really know the persona, gender is important. This is not sexual orientation unless that is important for your products.
Age range. You don't want the range to be too broad. Keep it within a few years on either side of your ideal: "50-55," "Mid-thirties."
Income range. You could use numerical ranges, or settle on "mid-level" or "upper-income." Since many analytic tools use numerical ranges, it doesn't hurt to describe your persona in terms like "$50-70,000" or "$250,000+."
Social media. Describe the social media and usage habits you think each will have. Do they use Facebook and Twitter? Are they frequent or occasional users? Will they have a large following or engage a lot with others?
Special interests. Explore hobbies, reading habits, music, movies — anything you can think of that better defines your audience. You'd be surprised at the level of information that is available for targeting customers online. Think of these terms as keywords to describe the customer.
Favorite products. Which products within your offering do you feel the persona would most likely purchase? Sometimes, our clients fill this in first, then build a persona to match the typical buyer, which is not a bad approach.
Level of familiarity. How familiar will the shopper be with your products? Do they already know about the brands you sell? Will they know how to use your products? Just how much effort will you need to present, explain and support the products they purchase?
At this point, many of you will ask "but I'm a new merchant. How do I begin to know enough about my customers to build a persona?" I would respond this way:
Do some research. Surf social media and blogs to find others who have bought the types of products you're offering. Learn from their social profiles. Certainly, some will be outliers of the "norm," but these are actual buyers. See if you can identify to whom your competitors are selling.
Ask if you would buy your products. If so, then you represent a buyer persona. Start there and build out other personas.
Create your ideal customer. Whatever your selling, you select products for your store based on an assumption that certain types of buyers would want to purchase what you're selling. Remember, even if your personas don't exactly hit the "sweet" spot of customers, there are lots of customers out there; you only need to sell to a few of them in order to succeed.
Think of B2B Customers as Consumers
Yet another seemingly oxymoronic statement by yours truly! The point here is that if your store caters to businesses, purchases are still made by people. People come to your online store, add products to the cart, and checkout. People will contact you for customer support. And people will praise (or diss) you online based on how well you do your job. Therefore, personas are just as important for selling B2B as they are for B2C. The good news is that they're usually easier to construct as Special Interests and Social Media are more based on those of the company than the individual. However, don't dismiss the fact that you're still selling to an individual. Corporate buyers shop much as they do for themselves. They want great product information, easy site usability, and engaging content that will make it easier for them to make (and complete) a buying decision.
ACTION STEP
Build your B2B personas using the same criteria as above. In addition, answer the following for each:
Payment methods. Will the customer pay at the time of purchase? Will they need payment terms?
Pricing. For the profiled customer, will you need to create special wholesale pricing that is different than for other personas? Does the buyer expect special pricing or select products?
Shipping. When selling wholesale, it's not uncommon to ship by LTL (less-than-load) or other freight methods. Any special shipping considerations based on the persona should be noted.
Don't hesitate to add whatever else you consider relevant to a persona. The criteria I've given you above — for both B2C and B2B — are only starting suggestions. The more personas you create and the more details you add, the more success you'll have attracting and converting paying customers. As you go through this series, these personas will make it much, much easier to make the proper decisions regarding selling channels, fulfillment, marketing, customer service, operations, and technology.
Cost of Acquisition
One of the most overlooked metrics an SMB merchant needs to consider is the Cost of Acquisition (COA). Yet, without knowing how much you spend to acquire a new customer, you're destined to overspend on advertising, discounts, and other customer incentives. Your goal is to determine your target COA and to monitor it month-in and month-out to make sure you're hitting your target.
For more on crucial eCommerce numbers, see my article on The 5 Most Important eCommerce Metrics.
Calculating COA
The process of arriving at a target COA can seem a bit daunting. Let's see if I can make it fairly easy. To begin, we need to determine just a few initial variables. Don't worry if you don't have historical data for these; use your best guess. Or, use new targets based on what you want to accomplish.
LTV. The Lifetime Value of a customer is the amount you feel you'll sell to a customer over the lifetime of purchasing from you. And while you certainly expect customers to continue shopping from you — and no one else — forever, the reality is that the market evolves. I find it difficult to predict customer habits, technology, and trends more than a year out with any degree of accuracy. Set out an average dollar amount you think your customers will spend with you over the next 12 months (if you wish, you can use 24 months or longer; it's up to you). One way to calculate LTV is to take the number of average order times the number of times a customer might buy again from you over the period used. Note that not all customers will be repeat customers and that you will continue to get new customers throughout the period used. If you feel an average order might be $200 and that a typical customer might buy again 5 times during the next year, your gross LTV would be $1,000. However, you might also assume that one-half of your customers will not be repeat buyers. Therefore, you might want to multiple your gross LTV by 50% to arrive as an average LTV, or $500.
GPM. Next, calculate what you feel is the average Gross Product Margin on your products. This is the amount left over after you deduct the cost of buying products wholesale (or manufacturing them).
With those two variables at hand, we next need to determine our target COA. Multiply LTV by GPM. We'll call this GCP or Gross Customer Profit. For example, if you feel the average LTV for your customers is $500 and your GPM is 25%, then the GCP would be $500 x 25%, or $125. This is the amount of gross profit you anticipate earning from customers over the next year, both new and repeat (if you adjusted your LTV as explained above). Now, you have an estimate that for each customer that buys from your store over the next 12 months (or whatever period you choose), you will make a gross profit of $125 from that customer regardless of their initial purchase. This is important to remember, as you need to base your marketing expenditures on what you expect to make over the lifetime of the customer, not what you make on any single sale. Let's assume that of the $125, you're willing to spend — after analyzing overhead and other direct costs — $25 or 20%. Then your target COA is $25. In this example, your Gross Operating Profit (GOP) (the amount remaining after deducting COA) would be 80% or $100.Remember, COA is the amount you're willing to spend to get a new customer. Repeat customers should require much less marketing expense. Of that $25, you can decide how to allocate your COA:
Advertising. When you buy pay-per-click ads (e.g. Google AdWords, Facebook Ads), and your store is properly configured, you will receive information on how much each sale costs in terms of advertising placements.
Discounts. If, for example, you allocate $10 for advertising, you then have up to $15 you could use to offer a "first-time buyer discount."
Re-acquisition. I recommend setting aside a very small portion for follow-up marketing. If you do your job well, customers will not have to be coaxed to shop with you again. However, some may have forgotten about you over time. You should provide some incentives for customers who have not returned in a while to once again shop at your online store.
ACTION STEP
Write out or build a spreadsheet to calculate your COA, using this formula:
COA = (LTV * GPM%) - GOPLearn to be Numbers Smart
When I've worked out COA with new clients, I've had a small number come back to me after realizing that on some initial sales, they didn't make any profit. I remind them that COA is what they're willing to spend to acquire a customer that will buy from them an average number of times over a period of time. For example, let's say the COA is $25, as in the example above. If an initial order is $100 and the GPM on the sale is $25, then if the merchant spent $25 to acquire that sale, at best they broke even (not including operational costs). However, if the LTV of an average new customer is $500, then the merchant will make a GPM of $100 on subsequent orders. You have to be prepared to forego profit on initial sales as long as your other numbers indicate you'll make it up on future sales. Cost of Acquisition is certainly not the only metric with which you need to be concerned. As we go through this Master's Series, we'll hit upon other key numbers. What is important is that you understand what the numbers really mean in terms of your business. With our clients, we provide automated, weekly reports that outline key site metrics from COA to SEO. We go over these numbers in our weekly calls. The sooner we can find any concerns or — better, yet — opportunities, the sooner we can jump onto the right track for growth. You should be prepared to understand and review your numbers often.
