We recently explored the shift that’s underway among ecommerce businesses—from a strategy centered around customer acquisition to a strategic focus on driving profitability among existing customers. Today, we’re going to explore another topic outlined in our recently published whitepaper, Three Investments to Drive Ecommerce Growth: how rising customer acquisition costs are taking a huge bite out of ecommerce profitability and how to deal with that.
According to new research, losses from sales to new customers –this is, the difference between the amount of each sale and the cost of acquiring the customer– have grown 3x over the past decade. And, since customer acquisition costs have also risen significantly during this period, brands and retailers have started to look more closely at their margins. That combination drove us to new times: the Era of Profitability.
We’re living in an Era of Profitability
Merchants have experienced three different eras of commerce in just the last five years:
1. Era of the Old Normal: Before COVID-19, ecommerce was predictable yet often considered an afterthought with inadequate funding and staff.
2. Era of Growth at All Costs: Despite the difficult circumstances brought on by the pandemic, by mid-2020, ecommerce, and eventually, brick-and-mortar commerce, were experiencing rapid growth. Business emphasis during this period was on growth, even if it meant making some risky investments.
3. Era of Profitability: This is where we are now—in a hangover of sorts after the ecommerce growth party has ended. Ecommerce leaders are expected to improve on record-breaking sales even though inflation has crushed margins and consumer demand has declined and shifted.
You can read more about these eras in our whitepaper.
How to drive profits in the current scenario
With shrinking margins, profitability has become the top priority for merchants. Research shows that the best source for driving profits is doubling down on existing customers. In fact, sales among these customers have become 36% more profitable over the past decade.
Building on this reality, we analyzed VTEX clients’ actual orders to identify where merchants should focus within the existing customer base to generate greater profits. Our findings are compiled on a proprietary tool called “Customer Profitability Matrix,” which has been helping many of our thousands of clients to drive profitable growth.
The Customer Profitability Matrix
The most effective metrics to judge the value of existing customers are:
- Direct and Organic Recurring Orders (DORO): Organic repeat purchases that are not originated from paid media.
- Average Order Value (AOV): A customer’s average cart/order amount.
When dividing a retailer’s customers into quadrants based on their average DORO and AOV, we get the Customer Profitability Matrix, which segments customers into four categories: Necessity Shoppers, Impulse Buyers, Discount Shoppers, and Brand Champions. To learn more about the four quadrants and how to leverage them to your business, download the Three Investments to Drive Ecommerce Growth whitepaper now.
To better understand the makeup of their customer bases, every brand and retailer should create their own matrix, which will differ depending on the merchant’s category and price point. Despite these differences, all merchants can benefit significantly from making the right moves to relocate their customers to more profitable quadrants.
Though this approach is as intuitive as it gets, merchants often struggle with it and, instead, chase growth among new customers. We challenge you to develop your own Customer Profitability Matrix and align KPIs to cohorts of customers in each quadrant. Doing so is a quick path to improve profits.
To learn more about the Customer Profitability Matrix, as well as the best ecommerce investments for driving ecommerce profitability, we invite you to download VTEX’s new whitepaper, Three Investments to Drive Ecommerce Growth.
