Wall Street Journal : 5% jump in online sales for holiday season of 2009

The original article is behind the pay wall. You can access the Comscore press release mentioned in the article here.

Below are my findings from the two articles -

Online sales for the 2009 holiday season (November 1 – December 24) was $27 billion. This is a 5% increase compared to the same period for 2008.

However, we had a additional shopping day this year since Thanksgiving fell on Nov 26 (compared to Nov 27 in 2008). Adjusting for the additional shopping day the increase was only 3.5%.

If you consider year-to-year change, the holiday season online sales had fallen by 3% from 2007 to 2008. So this 5% growth is a positive change for online retailers.

However, there is more to it than just this aggregate number. On the down side, Comscore says that amount spent per buyer was lower in 2009 compared to 2008.

They attribute the 5% jump to the following factors -

1. Overall increase in the number of people buying online. (Resulting in lower spending per person)
2. The snowstorms during the Dec 19-20 weekend helped online sales.
3. Free shipping by retailers helped. (Read more about free shipping here)
4. Large retailers outperformed small businesses. (See more on this below)
5. Aggressive marketing by merchants.

The product categories that had strong sales this year were -

• Consumer electronics – Growth of 20%
• Jewelry and Watches

Large retailers outperformed small businesses

Dallas Morning News points out that 55% of online sales this year was conducted through the top 100 internet retailers. Big online retailers such as Amazon and Walmart fared better than small business online retailers this year. These big companies are performing better on pricing. They also have higher customer satisfaction ratings because they have the spending power to improve web shopping experience.

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Differentiate through product packaging – The Pangea story

How do you stand apart if you are selling just soap? How do you differentiate yourselves from the dozens of other soap sellers?

The key to selling anything is to first identify a small group of customers, and to then offer them something that is better than what they can otherwise have. Marketing experts call this segmentation and differentiation – the two central pillars of marketing. Here is what they mean.

Segmentation

Segmentation involves dividing the entire market into customer segments with different needs. Once you divide the market into these segments, or slices, you then target a particular slice with a particular product. For example, if you are selling breakfast cereal, then you may segment the market into – kids, adults, and health conscious people. Why segment the market? Because, once you segment the market into these slices, you can address each slice with a specific product. You can also target your marketing efforts more precisely with different approaches towards different segments.

For example, here is what Kellogg’s does -

• Kids love sugary things – So Frosted Flakes for them.
• Adults prefer less sweet food – So Corn Flakes for them.
• Health conscious folks like high-fiber and low-calorie food – So Special K for them

Another example is the market segmentation used by Gap Inc. The company uses three brands –  Old Navy, Banana Republic and Gap – to address the needs of different customer segments.

• Old Navy – Families and bargain minded customers.
• Banana Republic - Affluent, fashion conscious customers.
• Gap – College age customers and 25 to 35 year olds.

However, it is not just enough to slice your market into different segments, you must also offer a product that differentiates you from your competitors in each segment. And that is where the second pillar comes into play.

Differentiation

Within each segment of the market, you need to offer a product that makes you stand apart (differentiate) from every other competitor in that segment. For example, Apple differentiates itself within the laptop buyer segment by offering a product that is easy to use and robust, compared to every other laptop vendor. Walmart differentiates itself from other supermarkets by offering a shopping experience with a wide variety of goods at low prices under the same roof.

To reiterate, here are four steps for successfully selling any product  -

1. Segment your market into slices
2. Choose a slice to participate in
3. Identify all your competitors within that slice
4. Offer something that is different from what your competitors offer within that slice

However, this idea is not always easy to implement. More so, if you are selling a commodity product like soap. And that is why the story of Pangea Organics is interesting.

The story of Pangea Organics

Pangea Organics is a Boulder, Colorado based company that sells body care products : soaps, creams and lotions. How do they succeed in a market crowded with hundreds of body care products?

First, Pangea segmented the market of soap buyers and chose to participate in a slice where the consumers are eco-conscious, and socially responsible. Once you identify the segment that you are targeting, you can then craft your entire business model around the needs of the consumers in that segment.

In Pangea’s chosen slice, consumers care not only about the physical product, but also about the business practices of the company. Pangea’s mission, as explained on their website, will strike a chord within their target segment.

Buying Pangea Organics products does more than make your body feel good. It means you’re supporting sustainable agriculture and culture – everything from fair trade sourcing and organic farming to living wages and the use of renewable, recycled and recyclable resources.

However, even in this market segment, there are many competitors. Just Google search for “organic soap fair trade” and you will find many of them. So how does Pangea differentiate their products from the competition? They went a step further.

Innovative packaging with implanted seeds

Pangea addressed the packaging of their products to make them stand apart from the crowd. In collaboration with an organic seed producer, they created a compostable, seed implanted carton for packing their products. Soak the box in water for a minute and plant it in soil. In a few days, the seeds will germinate, and you will have your own herb garden in your backyard.

The result? Sales at Pangea rose from $250,000 in 2005 to $5.8 million in 2008. That is a 2300% increase in just 3 years.

Pangea Organics Packaging

Understanding your customer’s needs

More than the idea itself, what interests me is the thought process that resulted in this innovative idea. In order to create this idea, the people at Pangea must deeply understand the mindset of their customers. Said another way, they must truly understand the product they are selling. Pangea is not just selling soap, or fair trade organic soap for that matter. Instead, they are selling a promise of healthy responsible living, and of nurturing the environment. In their words -

We only want to make things that make things better. Which is why we promise to always be true to the people our products are made for – you. And to the place our products come from – the earth.

The customers who buy from Pangea are seeking to express their ideals by supporting a company that shares their beliefs. What differentiates Pangea from other organic soap producers is this promise to be eco-conscious and socially responsible, and the extent to which they will go to support those ideals.

In order to fulfill their promise, Pangea must not only restrict the ingredients of their products, but also their manufacturing process, their supply chain, and their product packaging. By transforming their product packaging to be in harmony with their ideals, Pangea has raised themselves from the crowd of competition.

What can we learn from this story?

If you play it right, no market is off limits. We know many examples of new players entering crowded market places and succeeding. Before Google, there were a dozen other search engines. Before iPod, there were hundreds of portable music players. But what makes these products special is that their creators understand their customers at a deeper level. They offered something that their competition just didn’t.

You can’t please everyone. In order to sell successfully, you must segment the entire market and identify precisely the set of people you are selling your product to. Once you identify this segment of customers, you then need to deeply understand their needs. What would make them happy? Why would they buy your product?

The most important thing in business is to understand the mindset of your customer.  Once you understand your customer intimately, you can craft your business model around their needs. You can then create products that they will love and thus differentiate you from your competition – even if you are selling just soap!

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Yahoo! Stores is down this afternoon

Just yesterday I wrote about some of the leading ecommerce stores being down during the holidays.

This just in. The Yahoo! Stores has been down since about 3:00 pm PST today. For latest news go to Yahoo! Small Business System Status web page.

Update: Yahoo reported that this issue was resolved about 3 hours later.

Amazon, Wal-mart, Gap, Yahoo! web outage during Christmas

Amazon, Wal-mart and Gap were all affected by a hacker attack on the west-coast internet traffic.

Folks attempting last-minute shopping at Amazon, Wal-Mart, the Gap, and the travel site Expedia were ankled by outages and slow web browsing as a result of the DDoS attack. Other websites impacted include Salesforce.com and Linden Labs (maker of the game Second Life)….

The websites were only down for about an hour — but needless to say at a very inopportune time for some. Neustar said that it first detected the trouble around 4:45 p.m. Pacific Time (12:45 AM Thursday, GMT).

Two days after Christmas, the Yahoo! Stores too went down for a few hours. I reported that here.

But all of that is minor compared to the Yahoo! Store outage on the cyber monday of 2007.

45,000 small businesses that host their web-stores on Yahoo! Stores lost 4 hours of sales on the biggest e-commerce volume day of the year (Monday, Nov 26, 2007)

Merchants I have spoken to say they noticed a problem with transaction completion beginning at 6 am PST today. At 8:31am, Yahoo posted the first message on its Merchant Solutions website: “Some merchants are reporting that shoppers are receiving an error message indicating ’system unavailable’ during the checkout process. We are aware of this issue and are currently investigating. More information will be provided as it becomes available.”

“It’s very frustrating. It starts with your investment in marketing the month prior to the holiday shopping season as well as how you schedule your inventory position.”

Beginner’s guide to SEO – a slide show

Here is a slide show that explains search engine optimization in very simple terms. Well written and comprehensive. If you are a newbie to SEO, this is a good place to start.

Marketing tips from successful companies

Here is a 2 minute video mashup,  from Inc magazine, of a collection of interviews about marketing. My favorite is the quote from Tony Hsieh of Zappos.

Zappos – the hot e-commerce company with 11 million customers – was acquired by Amazon recently for a valuation of $928 million.

Tony’s approach to marketing?

Our philosophy is to take most of the money that we would’ve spent on marketing, and instead put it into the customer experience, and let our customers do the marketing for us through word of mouth.

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On free shipping, women customers, and measurement-driven-marketing

Recently, I read an interesting interview of Patrick Byrne, the CEO of Overstock.com. He suggests that women customers (presumably on his site) are more sensitive to shipping charges than men. He also suggests an interesting way to offer more free shipping -

Women [customers] care about the two primary things, the shipping cost and the quality of customer service. If you’re selling a product that is oriented towards women, you have to make sure you’ve got great customer service and you got to do something about your shipping.

If you’re selling $100 product and you know it’s going to cost you $10 to ship it, you are probably better off just saying it’s $110 with free shipping. That’s better than saying it’s $100, but there’s $10 charge in checkout.

This is an area that online merchants must pay attention to. According to a recent study, 63% of online shopper population are women. In addition, online shoppers are getting more sensitive to free shipping offers. According to Comscore, 42% of all e-commerce transactions in Q3 2009 included free shipping. From the chart below, you can see that free shipping has been on a steady rise over the past two years.

Free shipping is on the rise

To understand this phenomenon further, they surveyed the e-commerce shoppers with the following question: When making a purchase online this holiday season, which of the following statements best describes how important free shipping is to you?

They also found another great data point from the survey. Orders that include free shipping were an average of 15-20% higher priced that orders without free shipping. This phenomenon is in sync with the idea proposed by Patrick (described above) – to include the shipping costs into the product price and then offer “free shipping”. I can see how such an offer will have a positive psychological impact on the customer. Or as Comscore puts it -

The consumer is satisfied knowing that he or she “got a deal” on their transaction.

Here is another example of how the merchants can use a free shipping threshold to entice the customers to round up their purchase to a higher dollar value. The author suggests to first calculate the average order size, and then to set a free shipping threshold at 10% above the average order size. This is a good idea to encourage customers to buy a few more items thus increasing the average order size.

Importance of measurement-driven management

In his interview, Patrick also highlights the importance of measurement-driven management.

You may have a 1000 customers and you’re getting $200,000 of revenue. [May be] 50 of those customers out of the 1000 are giving you all your profit and the other 950 people that you’re serving are actually costing you money… people who are figuring out how to find those patterns and harness them are able to strip so much cost out of their system

Obviously, big companies such as Overstock.com heavily use metrics to run their daily operations. I strongly recommend small businesses identify a few metrics that they can easily monitor, and measure them frequently to learn about the general health of their business.

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My favorite sites for small business e-commerce advice

Here is a list of the small business e-commerce blogs that I regularly read. I plan to update this list often and not let this be a static blog post.

1. Practical Ecommerce – They regularly review shopping cart solutions. The site also has guest articles from e-commerce experts.
2. Small Business Trends – A wide collection of articles for small business in general. Not limited to ecommerce.
3. Lexiconn blog - Though this is specific to merchants who use Shopsite shopping cart, the blog offers good suggestions applicable to all small online merchants.
4. American Express Open Forum contains guest articles on small business management.
5. Wall Street Journal’s Small Business section is a good resource as well. But this one is behind the WSJ paywall.
6. Wall Street Journal’s How to Guide for Small Businesses. This one is NOT behind the pay wall.
7. ProBlogger.net – This one is a great resource if you are also promoting a blog as part of your marketing strategy.
8. Google Merchant Blog – This is a must read for every ecommerce owner. Has lots of tips on optimizing your webstore to get found in Google search.

Badcustomer.com – Legitimate? Appropriate?

Strangely enough, lately I’ve been getting some traffic with the google keywords “badcustomer.com scam”. Because the google index points to an article I had written a few weeks ago about fraud related chargebacks. In that article I had just highlighted how badcustomer.com can be used to detect chargeback related scams.

Naturally my first reaction was to verify whether badcustomer.com is indeed a legitimate site or not. So far, based on the following links, it seems legitimate enough.

Here is an article from AOL…

Brien Heideman, the founder and CEO of BadCustomer.com, also believes he can help take friendly fraud con artists off the Internet. He has developed a free service for merchants where, if you suspect you have a dishonest shopper, you can report them to BadCustomer.com. Retailers, meanwhile, can run their own customers through BadCustomer’s database, to see if they come up as a chargeback risk. Customers are refused service and told they’re in the database — although, interestingly enough, they can pay $99 to be removed from the list.

Another one from CNBC

Badcustomer claims that customers who’ve used chargebacks before are nine times more likely to use them again, compared to customers who resolve billing disputes directly with stores. The company provides its service free to merchants who hand over their own list of chargeback customers.

And finally from Yahoo answers

“Web of trust” lets you know is a site is safe, check it out?

Based on all the information above, I am fairly certain that badcustomer.com is a legitimate site. But is it a good service for the merchants? I am not so sure.

Why does a service like badcustomer.com exist? According to National Retail Federation, retailers lost about $11.8 billion to return fraud in 2008. During the holiday season of 2007, the return fraud was $3.6 billion. So a service to tackle this problem seems like a good idea.

Here is how badcustomer.com works. If a customer processes a charge back, the merchant can report that customer to badcustomer.com who then maintains this customer’s information in their shared database. Other merchants can use this central shared database to pre-screen their customers for charge-back risk. The customer who has been blacklisted can request badcustomer.com to remove him/her from the list by paying a $99 service fee.

The author of this Information Week article clearly is not happy with the idea that “Customers are unaware they are even being checked against the database unless they’re on the list”. However, the more important issue is that of privacy. If every transaction is to be pre-screened by badcustomer.com, they will be collecting a large amount of credit card information.

Indeed, the World Privacy Forum discussed these privacy issues related to badcustomer.com with the Federal Trade Commission on November 6, 2009. (Access the detailed report here)

… to get off the badcustomer list, consumers must supply detailed information online. How are consumers supposed to hear about every database list like this? How is badcustomers.com using the consumers’ information after receiving it? Is this company doing more than just taking people off of the bad customer list? We suggest that consumer data collection is out of control, with no balancing consumer rights orrequirements for transparency to counterweight the collection and usage activity.

Is the service legitimate? Yes. Is it appropriate? I am not so sure. Read the comment from @Erik below for another interesting perspective on this service.

When to use an early payment discount?

In this article I will explain the standard terminology used to describe early payment discounts. I will then present a simple approach towards deciding whether to use early payment discounts.

What does “2/10 net 30″ mean?

Early payment discounts are often described using a phrase like “2/10 net 30″. What does it mean? “2/10 net 30” means that the payment is due in 30 days, but the payment is made within 10 days then the payee will get a 2% discount.

Let us break this down in terms of measures we all can easily understand. Let us say a vendor offers you “2/10 net 30″ payment terms. Let us say that there is an outstanding invoice from that vendor for $10,000. In other words, you owe the vendor $10,000 to be paid within 30 days. But if you pay the vendor within 10 days, he is going to give you 2% discount on that $10,000 (equal to $200 in discount)

Early payment discount can be described as an annual interest rate

Once you agree with that, what is the annual effective interest rate for such a bank account. Let us see. For 20 days, you got 2%. Therefore, for 360 days, you will get 2%*(360/20) = 36% interest. In other words, a vendor that gives you a “2/10 net 30” term is giving you an opportunity to earn 36% annual interest on your cash. That sounds like a great deal, but is it really?

Should I accept an early payment discount?

Here is where the cost of money argument comes to play. As I explained in an earlier article, cost of money of your business is the average interest rate on the money supply into your business. Let us say [based on the calculations explained in the previous article]  your cost of money is 8.67%. In effect, you are borrowing money at 8.67% from your creditors, and then depositing that money at the vendor, and earning an interest rate of 36%. Does that sound like a steal to you? That is because in this case it actually is.

Should I offer an early payment discount?

Now let us reverse the roles and see. What if you are the vendor who is offering “2/10 net 30” terms to your customer? In effect, you are providing the customer with a bank account that provides 36% interest rate. Your business is already borrowing money at 8.67% from your creditors. And now you are offering to borrow money from the customers at 36%? Is that a good deal to you? If you can keep borrowing money from your creditors at 8.67%, this clearly is not a good deal for you.

But if you are running out of cash, and are unable to borrow any more money at 8.67%, then try if you can find another source to borrow money at a rate less than 36%. Offering early payment discounts should be your last resort, if you can no longer borrow money for anything less than 36%.

As explained above, before you take up an early payment discount from your vendor, or before you offer an early payment discount to your customer, think about what the cost of money for your business is.