The Question of Drop Shipping

In my experience, I’ve had a lot of success at drop-shipping. Though, it comes at a heavy process cost and relies heavily on partner compliance. The obvious biggest benefit to drop-shipping is not absorbing inventory costs and expanding your offering (aka long-tail).

Yet, be weary and be strict on your process. Otherwise any short term gain will be at the experience of your customers and you will end up as an “arbitrage” middleman with not much of a value proposition.

Here is a short summary of the surface issues you’ll quickly experience if you go into drop-shipping unprepared:

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Those of you who aren’t familiar with drop-shipping, it is when a retail store offers a product that ships directly from the manufacturer’s warehouse. Often, the manufacturer offers this to a few (or many) retail stores. The steps are generally:

The customer places an order with a retail store.

The retail store takes the order and passes the item and shipping information to the manufacturer’s warehouse.

The manufacturer then ships the item to the customer.

For a full explanation, wikipedia offers a great review.
http://en.wikipedia.org/wiki/Drop_shipping

The obvious advantages for retail businesses are they are able to offer items without having to stock them. Thus, they can offer sometimes hundreds, if not thousands of items. Suddenly stores see lots of dollar signs:).

Drop shipping also benefits customers by offering them incredible choice of products that otherwise aren’t available many places. An example of this is that there are many, many online baby stores that currently offer dozens and dozens of diaper bags that they don’t carry themselves.

Yet, there are often several cons/costs that directly affect customers. This is why we have been so weary of offering drop shipped products. Here are some of the main cons:
It is very difficult for manufacturers to let their drop ship retail stores know accurately what their stock levels are. In other words, when a manufacturer runs out of stock on one item, it could be several days before they tell all their retail stores that this item is no longer available and not to offer it to their customers.

This causes retail stores to take customer orders that they can’t fulfill. Obviously, this is an inconvenience that ultimately affects customers, not stores. The usual scenario happens: customer orders a diaper bag; retail store takes order and sends it to manufacturer. Manufacturer processes order and finds out they no longer have item. They send back news (not always) to the store that they can’t ship the item. The retail store then credits the customer back and notifies them that they can’t ship the order. This whole process can at times take well over a week.

The retail store trusts the manufacturer to handle and ship the order in an accurate, timely fashion. So much of customer service is captured in the previous sentence. And, it is often the case when manufacturers are excellent at making products, but not shipping them. Ask yourself how often your current suppliers ship your POs on time?

This is largely due to the fact that manufacturers are used to making products in bulk quantities (let’s say 100) and they are used to selling products to stores in other bulk quantities. Using the above example, a manufacturer may ship 40 of one item to store A, 15 to store B, 20 to store C and 25 to store D. Boxing them in bulk and shipping them within few weeks. If the product runs late, no worries, it just means that the store is unable to “sell” them.

Yet, when manufacturers get an order for 1 product going to customer A that needs to be there within days, often problems can arise. There warehouse is stacked with huge bulk shipments and just a small box, well….it’s importance gets lost.

How does the retail store know the item has shipped? Or better yet, how does the customer know the item is on its way? Usually once manufacturers ship the item it takes them several days to inform the store…if then. Retail stores often only contact the manufacturer for shipping information after the customer has asked the store. Again, this process can take days for a response. This leads to how you get this shipping info into your own internal systems?

How do you handle returns or exchanges? Often, these products are either non-returnable. Or, the customer has ship the item back to the retailer, who then ships it back to the manufacturer’s warehouse. Of course, costs add up quickly….and these costs are often passed back to the stores customers in general.

Obviously, the above usually implies a trade off between offerings and controlling your customer service, experience.

Email and Database Marketing post in Click Z today. Great read, simple to follow by Al DiGuido.

Read Here (make sure you "take the test")

The best aspect is Database Marketing is really the goose that laid the golden egg. It’s absolutely amazing how many companies don’t look at or capture their best segmented customers and look at a retention strategy.

Everyone knows it costs much less to retain customers than to attract new ones…in the long run. Apply this to your email efforts! No more shoot gun marketing. Target.

Are you a Tweak(er)?

How to handle site improvements?

I was just on Seth Godin’s blog (excellent source for motivating, business chatter) and his latest post on tweaking some improvements (whether in software design or home design) was very interesting:

About tweaking he states, “I'm talking about turning an arrogant checkout into a useful one by turning off the button that automatically resets to opt in to the spam list every single time I return to the checkout. Or changing the size of the product photo from 144 pixels wide to 500, because making the product the star can triple clickthrough.”

Seth Godin

Two quick take-aways that I got from the small post…which got me thinking.

First Take-Away: This is iterative, user-centered design which mitigates development risk and quickly garners user acceptance or lack there of.

I agree with the nature of Seth’s post. Tweaking is good in that I firmly believe any long term strategy for development (particularly an E-Commerce site) should be iterative, spiral in nature and continuous. This means that you (and your team) should be continuously gathering user and market feedback, along with industry trends and then plan for small site improvements in strategic areas of your site. Examples can be how to display your product, how your inventory index updates to your WHS, how you categorize or layout portions of your site, how your search function works, etc.

Using a project management voice, “You should always have something in the beginning, middle and end of your pipeline”. Basically, be documenting your conceptual plans (prioritizing per resources and opportunity), be actively working on a system improvement and have something that just released or is about to (and follow it closely for the feedback loop).

This approach is obviously helpful in that you pick up low hanging fruit, get impact-ful results in weeks rather than months and you get true uncluttered feedback. But, this is largely a great approach because the last thing you want to do is what GAP, Banana Republic, Old Navy did last year (See USA TODAY)…..because who else besides GAP inc could afford it? What they did last year is basically take down their entire websites for over a month during the busy back-to-school season to launch “ground-breaking” AJAX heavy functionality and design. They could do this because they have the $$$, they have the steady customer base willing to work through the confusion and they have a plethora of stores. Yet, this illustrates that who can afford huge, change?

The bigger the change, the harder your team will have releasing it “bug-free”. Expect many, many delays.

The bigger the change, how do you isolate what is working and what isn’t?

The bigger the change, who will get it?

The longer you wait to introduce change and new functionality, the harder and more costly it will become to replace your “old” system.

Lastly, the bigger the change, are you being responsive enough and really listening to your customer base?

Second Take-Away: Don’t drink the TWEAKING KOOLADE!

I’ve worked in environments where our team tested EVERYTHING. And, no change was ever made without an exhaustive scientific approach (minus the hypothesis). The way we went about this is really the extreme and not the rule. But beware, it is a slippery slope. Here’s what happened:

Before releasing a new button, new page layout, new text, etc. we would A/B and multi-variant test it. For example we might want to change the shape, color, text and placement of a certain button (e.g. the add to cart button). We weren’t really sure it the button change was warranted, but we just wanted to see if there was a better way (Flag, have a reason to change, don’t just change).

Next, we would say the button would be 5 different colors (red, green, blue, yellow, purple), 5 different shapes (roundish, circle, square…you get the idea). Couple this with 5 different text on the buttons (“add to cart” “add” “buy”, etc) and 5 different placements and you get 5 to the 4^th power. Or, 625 different variations to test. Remember, going into testing, we didn’t have a “reason” to believe change would be a good thing.

We would run “rules” software package that would display each variation to a portion of our web traffic and, depending on traffic exposed to each variation, we would gauge if certain variations produced more sales/conversions.

Usually what would happen is that out of the 625 variations 2-3 would produce slightly better results than the rest of the variations. For example variation 34 and 123 would produce a 2.7% conversion result rather than our normal 2.2% result over a 6 week span. Extrapolated out over an entire year, this could be lots of $$$. Next, we would take these 203 variations and do A/B testing; exposing 50% of our traffic to version A and the other half to version B. This was done for validation purposes of the first testing period.

Finally, with a clear variation (no we didn’t always have a clear “winning” variation) we would roll this out to every one of our website visitors. Unfortunately we weren’t necessarily sure why this variation one and inevitably 3 months later someone would want to test orange, dark blue and gray for the buttons. And, of course, we would….

Now this is all fine and dandy. And, it’s hard to argue with increased conversion results…even when you don’t know why they are happening. Yet, this makes you such a TWEAKER and so myopic…that you loose site of the larger picture…which is WHY DO your customers value your site/product/service and why are they reacting they way they are. The above approach turns your entire team’s attention on so many small details that you loose the PROCESSES.

The RUSH Development of Niche Shopping Blogs/Villages

We are all well aware of arbitrage sites that strictly attract “cheap” traffic by any means and then pass it to higher paying channels. These types of sites do well by the simple fact that “users” would rather click on a link than:

1. Click the back button
2. Type in the actual URL of the site they want to visit.

Well, one step up from these ARBITAGE sites, there is a bevy of new blogs that are trying to “cash in”. Don’t get me wrong. These sites are aren't arbitrage; in fact they often engage users and funnel highly targeted traffic onto advertisers. Yet because there are a few, select, very successful ones (see Celebrity Baby Blog for example), there is now a proliferation of “Style” blogs out there….ready to charge advertisers....be weary. Typical signs are Blogs with Big Images in their posts with little text and hardly any user postings. If this is the case, then your advertising dollar can quickly become lost.

For an example of this trend, I thought I’d highlight the development of blogs/websites specifically trying to cater to professional/high income woman/moms who value chic designs and fashion.

Do potential publishers and advertisers “get” that Woman do the surfing and chatting online? I think so! (side note, how many woman go online shopping for “their” men…makes you think?;)).

Here is a sample list of NEW WOMEN shopping blog/sites from big to super small

http://www.divavillage.com/

http://www.glam.com/

http://www.thriftyboutique.blogspot.com/

http://www.celebrity-babies.com/

http://www.poshcravings.com/

http://www.mommieswithstyle.com/

http://www.connectingmoms.com/

http://slavetotarget.blogspot.com/

http://www.ivillage.com/messageboards?ice=iv,mp,rn,mb

http://hotmomsclub.com/

These types of shopping blogs particularly focused on:

Fashion
Celebrities
Moms WAHM

Small mention of the development of social marketing sites check out:
Style Hive
This Next

Now from my experience from the last couple of years of watching this particular market very closely; this is the typical, rough lifecycle you get from a shopping Blog:

1. Beta version. Typically on Blog Spot.
2. Move to a dedicated site or wordpress/typepad
3. Incorporate guest writers or feature writers
4. Splash text ads on both the left and right sides.
5. Start to cover events rather than report on them. Start to create stories or reviews, instead of report on them.
6. Heavily try to develop an email list by attract sign ups. Work with small group of vendors/stores to have “product giveaways” for free ad spots.
7. Incorporate a “Shopping Section”.
8. Use a banner ads service (remember linkshare;))
9. Start to specifically post about where you can get the products they feature (paid testimonals and free samples).
10. Hire there own account sales teams.
11. Actively attract stores/advertisers with relatively low rates for their shopping section banner ads.
12. Then once they have attracted 40-50 stores, positive feedback occurs to the point that advertisers are competing against themselves for banner placement.

Here’s some of the advertising services that allow BLOGGERS to get into the game:

Web Blog Ads
Vibrant Media
Ad Brite
Ads to Go
Kontera

….Oh and of course the almighty Google’s Adsense.

Sample of their Email Campaigns

Posh Carvings Sample Email

So, should you participate? Yes/No. If you can afford the bigger sites, give it a trail period and learn quickly if it is working or not? Yet, ask yourself…have you invested in your own Forum or Blog development?

Heres’ a great example of a Manufacturer that is really getting this:

They have their own Yahoo Forum (developed by customers)
G Diapers Yahoo Forum

And there own Blog:
G Diaper Typepad Blog

What’s Your Online Marketing Budget?

Everyone’s heard the example of the marketing pro that say’s he knows for sure that half of her marketing campaigns are working; she just doesn’t know which half. Yet, it’s now become a given for online marketing traceability and performance can now be measured. With ROI tracking activities tied into PPC (thanks to 2003 purchases of San Diego area analytics providers Keylime for Yahoo and Urchin for Google) and analytics at the client level (Omniture, Webtrends, Fireclick, etc), the data is available to see what’s working. This extends to search engine comparison sites (Shopzilla, Price Grabber, Smarter, etc) as well as just about any online traffic source (e.g. organic traffic, banner campaigns, affiliates). So, it’s now very difficult to hide behind the “shot-gun” approach of spreading your budget across multiple online vehicles to ensure that whatever your business is included in “whatever” is working “out there”.

Setting Your Budget
The classic approach to setting a marketing budget is to go through a customer lifetime value, placing customer acquisition and customer retention as to distinct life stages and then laddering towards customer loyalty. To drive loyalty you then segment your customer database into quads, etc. (check out any classic database marketing book)

For example:
What activities will drive new customer acquisition?
Upon initial purchase, what activities will drive a repeat purchase?
To get a customer to X purchases what special activities can we apply?

This also looks at the propensity of certain customer events to “likely” outcome to a loyal customer. For example, if a customer purchases 3 times within x days, it is very likely if we do XYZ, they will purchase 10 times within the next X days.

The above is why I love this quote, that I can’t remember where I pinched it from, “We don’t count customers as customers until they’ve ordered twice!”

Yet, I’m going to avoid going into detail. Instead, I’ll describe just on the surface an:

Online marketing budget cheat sheet (rules of thumb). Yes, this has flaws, this is why it is a cheat sheet.

1. Look at your % of New Customers versus Repeat Customers, monthly.

If you have anything over 60% repeat customers monthly, then your retention activities are working well. To drive increased business you should apply new marketing budget funds towards customer acquisition. New funds towards acquisition will likely not achieve the same increase results.

Then, ask yourself how many new visitors do I get monthly? How many repeat? What is the percentage breakdown? Again, if your repeat monthly visitors is extremely high (let’s say over 40%), then you should look at getting new visitors. If not, then you have site issues that need to improve how they communicate to those users not familiar with your brand, products or site.

Then look at your sources for new traffic, look at which are driving the most traffic and correlate to CPA or purchase (optimally with true purchase amounts figured).

Here’s a secret…that supports the lazy marketers increase SPEND ON GOOGLE.

Most retailers I know have not maximized their PPC spend. This largely accounts for 50% of their current new acquisition budget. They often have to enforce minimum daily spends to ensure they have PPC coverage for the entire month. And, given most retailers neglected SEO activities, PPC becomes every more important (for the short-term view…and not many marketers are rewarded on long-term:)).

Here is an example for example only sake:

PPC: Need to build more keywords & broader terms often off.
Google Daily Spend 1,000 CPA $5-$15
Yahoo Daily Spend 100 CPA $15
Other Engines (sorry MSN) 100 CPA $30

Affiliate Program (built into CPA) 15% or let’s say $15

Shopping Comparison 50 CPA $30

Looking at the above, often your PPC campaigns (specifically Google) are under optimized needing new keywords and often your campaigns (even when time controlled) run out or are grossly under bidding. Hence, most online marketers can get away with just spending more on Goggle and achieve growth results. I’m not advocating doing the due diligence and measurement before setting your new marketing budget, I’m just saying that many marketers don’t and get the same results by simply spending more on GOOGLE. This is only one of many reasons why GOOGLE is a rolling in the $$$$$.

Pageviews - Is this an overstressed stat in analytics?

I ran across an excellent blog: Commerce360. Read their post on the Death of Pageviews. Very compelling. Yet, I have to share a couple of ways that Pageviews per visitor can be very helpful in relation to E-Commerce sites.

Use it as a Barameter:
One thing to highlight is the thought of pageviews being a barameter. In my e-commerce experience, the higher the pageviews per visitor, the more likely you'll make a sale (or the visitor will return) from being a "new" visitor. You don't want to go overboard and strive to make this # huge (say 40 pageviews), but you should set an expectation.

For instance 6 to 8 pageviews per visitor is a good qualifer of an engaged shopper who understands your site and is actually "shopping".

Once you set an expectation (6-8 pageviews per new visitor).... Then you can act in a couple of ways from your data that may be helpful. 1) Reference pageviews to traffic source. Especially if you are paying for that traffic source. Why pay high PPC for a KeyWord that correlates to subpar pageviews. This is a way to measure some "branding" that may likely produce a repeat visitor....though this is somewhat soft logic.

2) Look at pageviews per landing page. This works well in tandem with bounce rate....which won't catch users try clicking something on the page to escape, but then kill their session. Very helpful for specific page redesign.

To Build or Buy?

This is a question I have struggled with a lot. When examining/planning the backend of an e-commerce operations (included their front end website) this is the first fundamental question. And, I must admit, I struggle with this one probably because I’ve seen too often what a few great programmers can accomplish.

First, I look at companies that I admire. Did Amazon start out buying a system to do what they needed to do? How about Backcountry? Last time I checked, Zappos (found by a very smart engineer) is climbing to a billion dollars in sales based on proprietary systems.

I know this is speaking in general terms, but here is a guideline I use…besides budget constraints (which are always considered first). I’ll also assume that you aren’t selling a commodity. Again, this is vetted with small/med retailers in mind (because if you are that big…you’ve already made your decision….which is usually a little of bothJ).

What stage is your business in?

1. BUY: Typically, if you’re a less than million dollar business and/or just starting out, then an Ebay, Yahoo Merchant store or Amazon Seller should suffice. If you are mainly a manufacturer, high a good design company and build a very nice “looking site” that will clearly point customers towards your other retail channels. This will allow you to “learn” the business without the high front-end step up costs. Plus, do you really at this point know how you want to sell online and to whom? If so, go to point #2.

2. BUILD: Have you been online for more than a year? Do you have the analytics data and customer knowledge to clearly have a plan on how you need to connect with “loyal” customers? If so, I’d ask the following:

a. Does connecting mean making the online experience unique? Yes, lean towards build.

b. Do you want to do more than just sell online? If yes, lean towards build.

c. Are you willing to maintain and hire the technical expertise “in-house”? And/or, will you have a “project manager” on-site to do the planning and trouble shooting needed onsite for systems decision?

d. Are you willing to take a risk in people and process or $$? Noting that every great business separates itself from the good companies by placing bets on their people and process…not just spending money at problems.

Systems – It appears that the further the system is away from customer facing, the easier it is to buy a well established package tied into the front end.

Content Mgmt System – Build?

CRM – Build or Buy?

OMS – Buy or Build?

WHS – Buy?

I’m omitting plug-ins and apps such as email marketing tools, intelligent search, security seals, etc. These are usually a buy decision.

What are you selling? Leans towards build.

Do your products have special display requirements?

Are you adding new product often?

Is site navigation & unique filtration important?

Does your product and service need to be seen as a unique experience?

How important is customization and unique look and feel?

If you want to look like everyone else, then “buying” a system will definitely do this. Ever wonder why so many retailers look the same. Besides the fact that retailers are great thieves of other retailers (why think when competitor Y is doing this)….buy decisions usually ensure a “off the shelf” look and feel that fits 90% of the “peoples’” needs. If you are one of the 90%, you’re in luck! Easy decision.

If you need to convey a high-end experience and you want to make “custom” changes to your site….you may be very frustrated with a “Buy” solution…even though if all else is even, the “Buy” decision will allow you to BLAME the software and not YOURSELF.

Stale Blog – Stale Retail Site

One of the greatest challenges of hosting a blog is keeping it current and posting regularly. I can’t tell you how many times I’ve run across blogs….followed them for a while….then suddenly they’ve gone stale. We can obviously expand this to online content on E-tailers.

If you view retail sites, especially their homepages, it becomes apparent that many view their online properties as little more than a monthly direct mail pamphlet. I understand that content:

1. Needs a chance to allow the bulk of their viewers to view.
2. There is also the consideration of branding implications and allowing the message to “soak”.

You Train Your Viewers/Customers

Yet, how often you change your content is training your users/customers on when to come back to your site. This reminds me of the old discount problem…..offer a 20% off sale and you train your customers to wait for the next sale.

Worst yet, is when retailers email their customers (let’s say weekly), yet bring them back to the same stale site. You have a problem if you say, “we’d change our content more often if we could.”

Retail Site Content

1. Look at your homepage (or your top 5 entrance points). Does your content here recognize social or timely events, such as Back to School, the weather, a holiday (Labor day). Google and Yahoo do a fantastic job of changing their logo’s based on random events of the day.

2. Does you content sell “newness”, “fresh”, “recently added”. Does your content sell the fact that it’s current and fits into “today’s” context? Are you promoting new product lines, recently received product, incorporating dynamically updating customer feedback, etc.

3. Does it talk to each of your customer segments?

4. Look at your content creation process? Can you operationalize to increase your turnaround time. Let’s say a day?

5. Does your content on the homepage re-enforce your main navigational categories? Or does your categories speak like your “buyer”.

6. Is your homepage just one big image doing nothing but branding? Current examples:

• Forever21
• Tilly's
• Wetseal
• Guess
• Hot Topic
  

Are You Growing at 30%?

Two latest posts of Quarterly Sales for Online Retailers, thanks to a news source favorite of mine…Internet Retailer:

Williams-Sonoma web sales rise 24% in Q2
http://www.internetretailer.com/dailyNews.asp?id=19847

Gap e-commerce revenue grows 27.1%
http://www.internetretailer.com/dailyNews.asp?id=19849

During my visit in June this year to Internet Retailer conference in Chicago, I was surprised at how many people are getting it! Mostly this is due to the fact that on average businesses are growing 30% online. Yet, it is important to note that this percentage is a qualifier.

This means that if you aren’t achieving at least 30% growth online, then you are definitely doing something wrong. And, if you are achieving well over this….a better question to ask is what is wrong with your baseline to begin with? I know I’m ranting here a bit on a tangent….but it surprising to me how many of these small/med companies that are doubling their online sales for the past 2-4 years, believe this trend will go on indefinitely without making significant investment and laying down strategic business development goals. For example, here is a common scenario I’ve seen of small/med online retailers:

Online Sales

2002 Year One – $500,000 Sales
2003 Year Two - $1 Million Sales
2004 Year Three - $2 Million Sales
2005 Year Four – $4 Million Sales
2006 Year Five – Projecting $8 Million Sales
2007 Year Six – Anticipate Trend Continuing to $16 Million Sales

Yet, when I ask retailers in this situation:

1) How are you achieving this growth? I get “blank stares”

2) What do you need to change to support this growth? I usually get, “do more of the same and maybe invest in a software system such as endeca or scene 7 or ….hey do you know of a good OMS or CRM solution?”

Furthermore, usually the situation is this on the ground level:

1) They’ve got one or two extremely smart person(s) who are great patch workers and have been working well below their deserved compensation. Usually this is a buyer and tech person …..or someone with access to a tech person.

2) They see scale as something they can purchase through buying the “right” software solution.

3) They see the need to hire more “man power”, but not “mind power”. Usually, they will start to segment skilled responsibilities (an online marketing manager, a content manager, a customer service lead, etc), but won’t see the need for strategic managers to plan for business growth and cross integration.

It’s very important that retailers in this situation realize that online sales growth is not exponential. No business growth is. They should:

1. Quickly recognize the “over-work” that current employees are doing and elevate their compensation and reward them for continuing a long-term commitment. It is likely these employees see the exponential expectations; they see no scaling mechanisms and are ready to run.
2. Start hypothesizing why is your business growing. Where is the traffic coming from? Are these the customers we want and who are the customers we need to go after.

TURNING THE LIGHTS "ON"

Many would say that business have long ago (a few years back) heeded the famous words of Jack Welch…paraphrasing, “Either businesses get serious about being online, or they will go the way of the dinosaurs."

Yet, I along with countless colleges and friends, have been mystified by how businesses still how many major online retailers still treat their online operations as either a completely separate business or worst yet….simply another “store”.

But, recent news appears that the bigger boys (or girls) are getting there. Nordstrom’s for one sees the potential and is strategically setting up operationally. See two excellent stories on their recent moves:

Nordstrom’s to achieve a billion in online sales
http://www.internetretailer.com/dailyNews.asp?id=19711

Nordstrom’s & Other’s expand their online offerings
http://seattlepi.nwsource.com/business/260252_nordstrom21.html

Some other traditional retailers in the news to watch are Best Buy, Borders (with their loyalty card online) and Gap. I tend to be biased towards watching Nordstroms probably due to my familiarity of the northwest.

Not sure if this applies to the "big guys". But, in my expereince, operationally, these are the basic areas that I see online retailers (of all sizes) still struggling with:

1) Operational structure to support online channel. WHS, CS, Touchpoints, etc.

2) Merchandising online to support proper product breadth and depth. Backing this up with segmented site design and monetized development goals towards user satisfaction and cvr rates.

3) Integrated channel marketing

Structure-wise I myself have been exposed to several small/med retailers (less than 300 stores and/or less than 15 million online sales) who “wall off” their online operations and make them fend for themselves. Many times these are your typical store centric operations or a hybrid manufacturer/online seller who see the great potential of online sales, but yet don’t see the need to grow/staff a true department that is intertwined with your existing operations. More posts to follow on this one.