Groupon says its focus is on the bottom line, rather than top-line growth.
Paul Shrater, co-founder of Minimus.biz, discusses the path he takes to evaluate vendors’ services.
The world of online retailer has become increasingly sophisticated, with a growing number of companies offering add-ons to enhance various aspects of the e-commerce experience—both for internal management and for the external customer. How does an e-retailer determine which ones are worth it?
When Minimus.biz was listed in the first Internet Retailer Second 500 Guide in 2011, I became keenly aware of how many vendor services are out there because nearly all of them contacted me. Just about everything sounded like it would work wonders. Unfortunately, just about everything was priced so that my estimated return on investment would likely be less than zero.
We began selling travel-sized packaged goods at Minimus.biz in 2004 using an all-inclusive software package known as StoreFront, eventually moving over to BV Commerce. Both packages were great in that they included numerous components rolled into one package. But, as time went on, vendors developed interesting new services that went beyond our software.
Repeatedly tempted by vendors’ offerings, trial and error has taught me how to evaluate services and vendors. I’ve learned that most vendors target a certain sweet spot of e-commerce clients—those whose traffic levels, conversion ratios, average order value and average margin per sale fit their pricing structure. Unfortunately, while Minimus.biz often fits some of those criteria, it often doesn’t meet all of them to be a good fit. For instance, I spoke with a terrific vendor that worked on a revenue sharing model that takes a 12% cut of every sale it helps produce. That didn’t make sense for the low margins we earn on travel-sized toiletries.
I’ve found that exploring these parameters with a potential vendor up front is a great way to find out if there might be a proper fit. Or, at the very least, it helps lead to an honest discussion about my need to test the product before I commit.
When determining whether a service makes sense, I first look at the ROI the service needs to achieve to break even. I look at the service’s cost, and then knowing my net margin on an average lifetime customer, I figure out how many initial sales I would need to break even. I then look at the typical increases vendors say they’ve seen in sales volume from their service, or make estimates based on my own experience. Lastly, I talk with our developer to see how a custom-made solution might compare in cost.
The choice we make depends on how this evaluation equation plays out. For instance, we built our own order management system after finding that vendors’ software programs were packed with extra features we didn’t need. Instead, our developer programmed an output process to bring order data down from our web server and into our local FedEx software to print labels. Paying our developer once for a solution that did exactly what we needed was more cost effective than using a vendor’s product.
But when it came to our e-mail program, outsourcing worked really well compared to a custom solution. We found that an add-on to our old software package that used our hosting company’s shared e-mail server to trickle out messages wasn’t getting all of our e-mails through to customers. When we began working with Vertical Response, which used servers with a much better deliverability rate, we immediately saw double the number of sales come through after a newsletter e-mail went out.
Here are just some of the other services we’ve explored with vendors, to mixed results:
Product videos: We signed on with a vendor that generated a video for each product based on product attributes we provided it through an automated feed. However, after a few months, while people who watched videos had a much higher purchase rate, we did not see an increase in our overall purchase rate, or an increase in sales. That led us to believe that the consumers who watched the videos were already the most likely shoppers to buy. The vendor worked with us on tweaks, services and price adjustments during the three months. While its metrics showed it was working, we were not seeing any incremental sales lift from it, so we discontinued the program.
Coupon pop-ups: To draw attention to products that we have on sale or that are overstocked we tested a service that presented customized pop-ups based on certain customer parameters and/ or pages they were on. It worked beautifully, and the coupon codes and links that we’d have pop up were used, somewhat, but not enough to justify the monthly cost of the service. We nixed it after a free one-month trial.
Pinterest: Having seen that being an early adopter of social media can be rewarding, we wanted to expand our visibility on Pinterest but didn’t have the time to manage it. I found a service called PinLeague to manage our Pinterest boards. It also has a service that targets both our Pinterest and our Facebook opt-in users from our regular mailing list with specific e-newsletter content that it authors based on its knowledge of our site. It saves me a tremendous amount of time, and the ROI has proven worth the fees.
Overall, I’ve learned that always trying new things and looking for ways to make improvements helps make sure that Minimus.biz isn’t leaving growth opportunities on the table. That said, testing those offerings first is always the best way to go.
I’ve also learned to look beyond the hype. That’s because what works for one retailer might not work for another. For instance, I believed the hype on retargeting only to try it and find that our results were far below the provider’s expectations. I’ve seen it used effectively with other types of products and services, but for us it wasn’t a good match.
Time is one of the most critical assets of entrepreneurs. We have to ask ourselves how much time we should spend trying something new, paying heed to that offering’s potential return over time, while also considering those potential gains against other areas where we could be devoting time. I am sure there are many areas where some added time could provide improvement, but at what opportunity cost when there are potentially more lucrative projects that need attention?