Felix Erhardt is a seasoned investor and has been helping dozens of high growth ecommerce companies to be more data driven and grow even faster. He’s now working as an independent investor and advisor.
You’ve worked with many e-commerce companies in the past, and your main focus has been to help them become profitable, more digitally minded, and data driven. Black Friday, and the holiday season in general, is a major season for ecomms. What are some of the biggest mistakes most make when creating their sales strategy?
The easiest answer is probably not planning for Black Friday; just going into it and hoping for a big sale - not planning what the actual goal is that you want to achieve and what the purpose of the campaign or the season is.
[Many e-commerce brands] make a lot of their yearly profit during the Black Friday season, and I think that therefore it requires a lot of planning. Many companies start in the spring because it’s not just about marketing it’s about getting everything aligned. You need to get the photo shoots right, you need to prepare the material that’s going out, and you also need to see that the inventory is in place. It’s a bad idea to promote products that are not available.
So it’s a lot about planning and having a picture of, where do we want to end up? What’s the top figure we want to have, or the bottom figure? It all depends on what goal you’re focusing on.
Let’s talk about product and pricing strategy; which products are best to mark down for Black Friday, and which ones are best to save for the Christmas holidays? And then which ones do you completely avoid marking down, if any?
The easiest way to do Black Friday is to lower everything. What you actually should do is look and say, ok what are the goals? Say one of your goals is to lower the inventory levels, if that’s the main goal then you should look at which products that you have in the inventory that are the slow movers and which are the fast movers.
In retail you talk about the “never out of stock” products, and that’s like your white shirt - never goes on sale, there is no reason for that because everyone buys it anyway. So you should focus on the slow movers [and not the “never out of stock” items] to release inventory.
So, release capital from the inventory, that’s one goal. Increase the basket size, that’s probably another goal because that increases the profitability a lot. Especially during Black Friday because you have the same amount of people working, you have the same fulfillment costs, in many ways you have a lower marketing cost because people are ready to shop - so you don’t have to push marketing as hard. And also during Black Friday people buy a lot so you can also increase the average order value, or basket size, more easily than compared to other seasons.
You say Black Friday could actually be an opportunity for people to lower their marketing costs, which is quite surprising. Do you think there are a lot of companies that actually do that?
I don’t think there are a lot of companies doing that, but I think a lot of the smarter ones are thinking about doing that. One example is, it’s not uncommon that e-commerce websites go down during this time, and that’s a big no-no because then you can’t sell anything. And the way to handle that can be to say, ok this amount of traffic is coming in and we’re buying 30% more. Ok now the traffic is getting too high, let’s take away some of the advertising.
Also, many of us are in a buyer state during Black Friday so you might not need to push that last advertisement at that last step. So you can lower the marketing cost and still get the purchase because people will be there anyway.
How do you determine which overall goal is the best to focus on for your business?
I think it’s about company goals. And there are typically 3 main goals, lower the inventory and get cash to buy new products, build top-line, or to build profitability.
If you take growth versus profitability; if you go with profitability, it’s a lot about getting the average order size up and also keeping the margins. It’s a good timing to do that because you can work with add-ons, you can bundle products, etc. And people get a bargain but are still willing to spend more - so they get a discount but they put in $1000 instead of $500.
If the main goal is to increase the top-line, or, in the end, the number of customers I think it’s a lot about considering what type of customers do you want? Because you don’t want the bargain hunters, if that’s not your business idea, but in many cases you want to have your best customers - those are the ones you want to attract. So you need to do the analysis in your customer database and see which ones are the ones that have purchased the most and have a good return rate. And then seeing which channels they’re in, how old are they, what are their interests?
If the company’s main goal is to focus on growth for the season, what should be their main KPIs be?
Sales growth and customer growth. Those are probably the most important KPIs for the company focusing on growth. I think, again, it’s important that when you think of customer growth, it’s important to think about what types of customers are you getting. You want to have look-alikes to your best customers, these are the ones you really want to attract. And having a KPI on that can be good as well - it’s not super easy, but I think some of the [demographic] points can be very good to use to get an idea for this KPI.
If a company’s main goal is to focus on profitability, what should be their main KPIs?
Net profit, but I think the more advance companies follow on each profitability level. So you have Gross Margin 1 (Revenue - COGS (cost of goods sold)), Gross Margin 2 (Revenue - COGS - Fulfillment costs), Gross Margin 3 (Revenue - COGS - Fulfillment - Marketing Spend). So as long as you get customers that are profitable on a Gross Margin 3 level you will improve the profitability of the company.