Jun 05, 2013
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Despite the constant stream of media attention, building an ecommerce or subscription based online business is incredibly difficult. There will always be outlier success stories, but the majority of all companies will struggle to gain traction and acquire users.
Whilst you need to focus on your core competency of producing the product that you sell, creating a successful online ecommerce or subscription business requires you to have a multifaceted approach. The landscape is too competitive to blindly hope that things will fall into place for you and your company will be a roaring success without putting the effort into marketing and customer acquisition.
In this article I’m going to look at why ecommerce and subscription companies are difficult, what is the multifaceted approach, and how you can start working on this opportunity today.
I think it is a bit of a misdemeanour when people assume ecommerce is the easier option for online companies. Consumer applications are often criticised for only ever using the advertising business model to generate revenue, and so actually selling things online seems like it should be relatively easier to execute.
But ecommerce is much more difficult than that.
Taking the actual design, manufacturing and distribution of your product as a given, being successful in ecommerce still requires you to become an expert in a number of other fields. For example, you need to intuitively understand the nuances of online marketing and how to capitalise on opportunities. Offline marketing and online marketing are totally different and so skills from one area don’t transfer over so easily.
One of the big problems with ecommerce is, it is extremely difficult to build a repeat customer base. The majority of all transactions will be a one-off single point of contact relationship. It is far cheaper to sell to a repeat customer than it is to acquire a new customer, but building a brand and creating repeat relationships with your customers is not an easy thing to do.
Subscription services are easier than pure ecommerce in that it is a continuous recurring stream of revenue. Subscription services allow you model customer acquisition costs, life time value and churn and so you have a much better understanding of your relationship with your customers.
However, both ecommerce and subscription services both suffer from the difficulty of differentiation. With so many competing companies and services popping up around you, what makes yours better than the rest?
I’m a big believer in content first marketing for online business. I’ve already covered The intersection of Content and Commerce in the past, so I will only provide a summery here.
The power of content first marketing for ecommerce companies is that it builds brand recognition. You are likely immersed in a saturated market, competing against other new upstarts as well as large incumbents. Differentiation is going to be critical to ensure consumers choose you over your competitors.
I believe there are two very distinct forms of content marketing for ecommerce companies.
Firstly, there is content marketing that is created and measured like any other form of marketing such as cost per click. In this instance, the content is written to directly sell a product and is measured with quantitative return of investment as the measure of success or failure. Whilst I’m a big proponent of experimenting and measuring the results of marketing campaigns, I think this is the wrong approach.
To make content a real differentiating factor for your ecommerce company, you need to treat it as part of your product. The beauty about many of the most successful content commerce companies is that they have built community around their product.
Thrillest Media for example, started out as a newsletter that recommended things to young urban males. By creating a brand that produced content aimed at that particular market niche, Thrillest was able to build trust in it’s recommendations and products. Thrillest acquired a small independent clothing retailer called JackThreads in 2010 because JackThreads was spending their entire marketing budget at Thrillest. Now JackThreads is one of the fastest growing online brands today.
Whilst Thrillest could be an outlier in this situation, I think this example gives a clear road map for building a lifestyle brand.
Now if you have already read my post on the The intersection of Content and Commerce, none of the above will be new to you. I think content based commerce is extremely powerful for building lifestyle brands around specific target demographics. In certain opportunities, I think the slow burn of building a relationship through delivered content over an extended period of time is the best way to build that engaged customer base.
However, it is not the only way.
Despite all of the benefits and the big opportunity that content and commerce creates, there are just certain situations where it is doomed to fail. A painfully obvious example is if you are targeting a demographic that is just not inclined to consume content on the internet. In this situation, it doesn’t matter how much you invest creating the perfect content for your target audience, if consuming your content does not fit into their lifestyle decisions, this form of customer acquisition will fail.
An interesting alternative to content based commerce is utility based commerce. This is where you create a product that is based on a utility and give it away for free. You can then create a related ecommerce opportunity from this traction. It’s easy to think that this is the real life version of in-game purchases, but I think it is a much bigger opportunity than that.
A very promising company that is using this strategy is The Honest Company, an online retailer for all things baby. Honest is a partnership between Hollywood A-lister Jessica Alba, and Brian Lee who is currently the CEO of another women’s lifestyle brand, ShowDazzle.
Before I focus on what Honest is doing with their utility product, it’s important to note that the company is actually trying to do multiple strategies simultaneously. Whilst I’m sure they are using Search and Social to acquire users, Honest also has a very clear and active content section of their website that shows they are also employing this strategy to fuel growth.
Honest’s utility product is their HonestBaby iPhone application. This application is aimed at new mothers by allowing them to track everything to do with their baby. From feeds and sleeping patterns to major milestones, HonestBaby is clearly trying to be a mother’s companion through the journey of having children.
You can of course manage your Honest account through the application, stock up on essentials or supplies and manage your subscriptions. This is clearly what the aim of the app is, but I can imagine as a stressed out new mother, being able to quickly reorder more stuff from an application is probably much better than firing up the computer or actually going to the shops.
Whilst having a mobile application is not a new thing for ecommerce companies, I believe creating a utility product is. Companies like Fab have created glorious catalogue experiences within their app, but that is a very different experience to what Honest is trying to do.
I think creating a utility product is a real opportunity here. Previously I have written about moving your product from a fad to a utility. When a product becomes a utility it moves from a short lived craze to “The state of being useful, profit-able, or beneficial”. It is at this moment that you begin to generate growth through repeat customers.
Utility products also produce a wealth of passive data. This kind of data can lead you to create incredibly accurate recommendations. Amazon has created immense competitive advantage and the ability to suggest insightful recommendations from your past purchase history as well as the purchase history of millions of people just like you. Imagine what kind of recommendations Honest can make for young mothers through the passive data of her baby’s actions as well as the data from all other mothers who use the application and are in the same situation that she is?
That seems like a crazy big opportunity to me!
So how can you create this kind of company too? I think this opportunity basically breaks down into 5 key objectives.
The first key thing to think about is, who exactly is your target demographic? At this stage you really need to focus on a very specific target audience, I think the more precise you are, the better chance you have of succeeding. Establishing a beachhead is one of the important takeaways from the acclaimed business book, Crossing the chasm.
By becoming the most well known and respected company within a tiny niche, you can start to expand into adjacent or bigger opportunities. However, without that initial beachhead, you won’t be able to target other demographics.
Also, I think it is extremely important that you pick a demographic that you can relate to. It can be tempting to target a very lucrative demographic even though you have no affiliation with it, but I think it will not only be much harder if you can’t immerse yourself into that niche, but it was also be no where near as much fun.
Next you need to find a problem that your target demographic has which can be solved using a utility product.
Ideally, you want to create a product that the more you use, the more value a user can derive. This is not only good for creating a recurring relationship, but it also adds a big barrier to entry for your competitors as the cost of switching would be much higher.
By solving a big problem, or creating a product that can produce a great deal of value for the user, you can create a utility product that can gain real traction.
Now that you have decided on your demographic and the utility product you will create, you need to think of what is the natural ecommerce or subscription based opportunity. Without this key component of the business model, you are really just another consumer application.
There are many different ecommerce opportunities these days, many of which have been in reaction to Amazon’s low cost strategy. For example, companies like Birchbox are doing interesting things with subscription services, whilst Warby Parker are taking an interesting approach to the traditional opportunity of glasses.
Above all, you need to pick an ecommerce or subscription opportunity that fits with your product and your demographic. It can be painfully obvious when this doesn’t work.
Whilst this strategy is focused on creating a utility product, I still believe content will play a pivotal role. Content remains the best way to create inbound interest for a company. By writing engaging and high quality content, you can build an audience and create a community.
Cost per click advertising in either search results or social websites might allow you to supercharge your traction, but I believe content marketing is the much better, longer view play.
Although this is the fifth objective, it should not be the final thing you do. You need to get out and start talking to your demographic to understand their problem and their needs as soon as possible. If you delay talking to your target audience, you will end up creating something that you think they want, rather than what they actually want.
Customer Development forms a critical role in Steve Blank’s The four steps to the epiphany and The startup owners manual. By talking to your target audience at the very beginning, you create a feedback loop to make quicker decisions with less risk. This individual communication is probably also the best way of acquiring customers for life.
In the cut throat world of ecommerce, it can be incredibly difficult to build traction. I believe that building a community around your company should be very high on your list of priorities. Without this community, you will suffer from one off purchases and the constant struggle to acquire new customers.
For a long time I really believed that content based commerce was the only answer to this problem. By creating content, you build a brand of trust and respect from your target audience.
However, I believe creating a utility application that is closely tied to both content and commerce is an even better way of attacking this opportunity. By creating a utility application, you create an opportunity to be constantly engaged with your audience, to create value for them and to build up the ability to recommend or market to them with timely product offers based on their historical data.
I think it is relatively easy to build a consumer utility application, and it’s relatively easy to build an ecommerce company that fumbles along without traction, but when you combine the two, you create a powerful opportunity that is just waiting to be exposed.