Where does growth come from? One of two places: new customers or returning customers. Here’s how to harness that knowledge to accelerate your growth.
This was originally published in the No Best Practices newsletter on 1.30.2022.
Throughout the course of my career I’ve observed a lot of confusion about what actually drives growth for an eCommerce business–especially from marketers. And unfortunately a lot of that confusion comes from popular narratives in the media, often perpetuated by 3rd parties with something to sell.
It’s time to set the record straight. To do that, we’ll take a first principles perspective on where growth comes from and use that to create a framework for building growth strategy that actually works.
Where Growth Comes From
If you run an eCommerce business your daily sales are coming from one of two places: new customers or returning customers.
Your Facebook ads performance may improve, but those sales are coming from customers. Your web conversion rate may increase, but those conversions are coming from customers. So any decision you make related to your business should be viewed through the lens of acquisition and/or retention.
Acquisition is convincing new people to shop with you, and retention is convincing them to purchase again. Every business has a baseline level of acquisition and retention that would happen, even if you walked away from the site and turned off all your marketing. Growth tactics are only effective if they improve this baseline profitably.
Every growth tactic you pursue should be evaluated on its ability to drive incremental revenue and conversions, profitably. You may spend $5 on ads and get $25 back in revenue. But if those customers would have purchased anyway…you just wasted five dollars. That’s why ROAS is not a great metric for evaluating advertising effectiveness.
Every business typically has a “set point” for the amount of incremental revenue they’re able to drive for each dollar invested. The set point may shift up and down seasonally, but it’s difficult to improve dramatically with “business as usual” tactics.
Two big factors influence this set point: the size of the business and the product it sells. To accelerate growth you need to find ways to get more for your money. As a marketer you can do this in one of three ways:
- Cut costs without impacting top line demand–for example, negotiating contracts with vendors to reduce fees.
- Make your existing marketing more efficient–for example, increasing the clickthrough rate on an ad or the conversion rate on a landing page.
- Find new marketing channels that are more efficient than the existing mix–for example, starting an influencer program or testing TikTok ads.
There are other ways to get more for your money that are typically outside the scope of control for most performance marketers. For example, you can re-engineer the product or assortment, or you can turn the brand into a cultural touchstone. These are outside the scope of this post.
Every new initiative you pursue should fall into one of those three buckets, and you should have a framework for measuring success.
For cost cutting, you need to track performance to make sure your decisions truly did not impact the top line. For marketing efficiency, you should use holdout testing. For new channels there are a number of ways to measure incrementality using statistical modeling, but (again) that’s out of the scope of this post.
Where Confusion About Growth Comes From
If the components of growth are so simple, then why is driving growth so complicated? And why do brands, especially big brands, so often pursue “growth initiatives” that do nothing to drive incremental revenue? A few reasons:
Shiny Object Syndrome
If you have the words “eCommerce” or “digital marketing” in your job title, you probably receive a flood of cold pitch emails each week. These emails promise “20x ROI” and “100% increase in conversion rate”. Case studies published in popular newsletters and websites make the same promises, and are often sponsored by the same vendors.
This makes it feel like everyone but you is out there scooping up free money. But these vendors can rarely explain how they generate their returns in terms of acquisition or retention.
If you let these “compelling” offers dominate your priorities list, you will shift existing demand around, but you are unlikely to grow the whole pie.
Channel-centric Thinking
There are some organizations that don’t think of their sales goals in terms of acquisition or retention. Instead, they take the annual goal, break it out in terms of marketing channels, and then create a list of tactics for improving each channel’s performance.
This can work if there is an underlying acquisition engine driving new shoppers into every channel. But in today’s eCommerce climate that is rarely the case. So what winds up happening: channel performance declines as the relatively static audience within each channel gets “tapped out”, but no one can explain why.
Measurement Challenges
Measuring the incremental impact of a marketing campaign at the customer level is actually pretty challenging, especially compared to the “gold standard” of Google Analytics last click attribution. You need to design a valid test, and then you need to partition the audiences and land on a method for tracking their behavior over time
There aren’t any free tools that I know of that enable this kind of testing. So you’re asking marketers, many of whom were trained on GA, to adopt new processes and pay for the privilege. It’s a hard pill to swallow.
Poor Incentives
@Shreyas shared this graphic and the corresponding thread about product management, but it also applies to marketing. If the activities that get people promoted aren’t the same activities that drive growth…you’re not going to grow.
What You Can Do About It
If you recognize any of the growth blockers above in yourself, your team or your company culture, do your best to nip them in the bud. It’s easier said than done, especially if you don’t have control over incentive design.
If you want to enter 2022 feeling confident about your growth goals and your ability to hit them, you need to find a way to block out the noise and return to the basics of acquisition and retention. Here’s how you can do it:
A 3-Point Plan For Growth In 2022
Establish A Baseline
The formula for calculating growth rate is: (new total – prior total)/prior total
If you don’t have a solid understanding of your prior total, how can you determine if you’re growing? It’s easy to say “our revenue went up”. It’s harder to say “I am 95% certain our revenue went up because of these three actions we took”.
To set a baseline you’ll need to understand:
- What percentage of sales typically comes from new and returning customers each year?
- How many new customers will I need to acquire this year to hit my sales goal?
- What are my average and projected CAC and AOV?
- What is the incremental impact of my key marketing activities (email, Facebook Ads, etc)?
Note: I wrote about how to get many of these stats in a prior edition of this newsletter here.
These baseline metrics will help you understand how you’ll need to balance acquisition and retention to meet your goals, and what audiences and channels provide the largest opportunities.
Typically, you’ll be presented with the challenge of acquiring more new customers than last year with less budget. To achieve this goal you can do a few things: improve retention where possible to take some pressure off acquisition, cut costs in channels that are not driving acquisition, or make your acquisition channels more efficient.
Prioritize Opportunities
Remember our growth levers from the top of the post:
- Find ways to cut costs without impacting top line demand.
- Make your existing marketing more efficient.
- Find new marketing channels that are more efficient than the existing mix.
The growth initiatives that you focus on should tie back to one of these three levers directly. Some examples:
“I am going to cut costs without impacting top line demand by reducing return rates from new customers acquired via FB ads by 10% YoY.”
“I am going to make my affiliate channel more efficient by reducing spend with partners who do not drive new customers to my business by 20% YoY.”
Each of your initiatives should have a measurable goal and, at this point, should not cover specific tactics, vendors or technologies.
Before you move on to the tactics, think through exactly how you’ll track your success for each goal. What tests will you need to run, what metrics will you need to collect, etc. Make sure you have the systems and processes in place to do what you need to do.
Select Your Tactics
Now, finally, close to 1,000 words into this newsletter, it’s time for “the fun stuff”. You can list out all the tactics that have the potential to bring your initiatives to fruition. Tactics might be new technology, or they might be optimizations to existing processes or platforms.
Let’s use the affiliate goal from the last section as an example:
“I am going to make my affiliate channel more efficient by reducing spend with partners who do not drive new customers to my business by 20% YoY.”
By this point, you should have an analysis of new vs returning customers and spend for each of your major affiliate partners. A list of tactics might look like this:
- Reduce commission rates for returning customer transactions where possible.
- Institute a ceiling of 5% commission for partners where <50% of revenue came from new customers. Terminate relationships with partners where >75% of revenue came from returning customers.
- Sign with a vendor that blocks the use of coupon site plugins at checkout.
Estimate how each of these tactics would contribute towards your overall goal. Then rank them based on the level of effort required to complete the goal. For example, the first bullet might require you to upgrade your affiliate tracking pixel, while the second bullet is a simple settings change.
Hopefully you have enough tactics to drive the desired result. It’s also good to have a backlog in case your highest priority tactics are less impactful than you thought.