After my last post about losing money, I figured I would give you another doozy.
Before I get into it, I should say that I am an online retail rookie. Actually, I am an internet business rookie. For those of you that don’t know, I bought my business 8 months ago with ZERO knowledge or experience in small business internet entrepreneurship. Did I mention the business I bought does 7 figures in sales? Yup….I am that guy who goes all in and says F it. I can figure it out.
Oh yeah, I figured this one out.
Discounting and the internet. They seem to go hand in hand. So much has been written about why you shouldn’t discount that you would think I would know that already. Didn’t I learn about this in “Discounting is for Dummies 101″ in Business School. Didn’t you learn about the addictive nature of giving and getting discounts where JC Penney was the prime example of why you shouldn’t discount? One would think so.
A few months ago I started to focus on email marketing and cart abandons. Mainly, we had no drip campaigns and no cart abandon program (email program to sell to customers who leave stuff in their cart). We needed more fresh emails and our abandon rate was pretty high.
What’s the best way to get emails and people to buy more stuff? DISCOUNTS! 10% off if you give us your email. 10% off if you come back and buy from us. A sale is a sale, right? No, not all sales are equal.
I look at month one P&L. Not all that but you know what, we are invest spending in the business. It’s the cost of doing business. Month 2. WTF is going on with my profit. It is X and should be a hell of a lot more. One thing I have to say about my former life as a consultant is that I really do have the toolset to figure out what is going on with numbers. I learned how to dive in and dissect financials to see where the bodies are buried. So this is what I did. Unfortunately, I found a couple of stinkers and once again its my fault.
Back to the story.
I start digging in and doing some basic analysis. My gross profit percentage is taking a dive. To say it simply, I was making less money on each sale. Now this could be a few things:
- A shift in product mix; i.e. i am selling less profitable products
- A shift in items that cost more to ship; a spinoff of #1 where i am selling lower cost product but my shipping revenue is masking that
- My numbers are incorrect
- Someone is shaving money/ cooking the books
- Some combination of the above
In consulting, to figure out the answer you use something called the hypothesis driven approach. The gist of it is that you never know what the answer to a question may be. You great a set of “hypotheses” which when proven true or false will give you the answer to your question. In my case the question is “why am I making less money on each sale”? and the hypothesis are numbers one through five above. I didn’t actually write this all down but its the process i went through.
I already knew that #3 and #4 weren’t the answer. We just went through a Google Analytics upgrade so I could easily triangulate. If either were true, something would pop in the data. Besides, the only person who could realistically cook the books would be my bookkeeper and that would be so far out of left field I would have to question my very existence (note to all…if you have one person you need to trust, it’s the person who does the books)
This left #1,#2, & #5. #1 was the most likely culprit in my opinion. I start diving in and the product mix has not shifted substantially. We had a couple of things that moved slots but nothing of this magnitude. I start looking at last year for a comparison. hmmm…that’s interesting coupons were used on 50% of sales. Whats this year? 72% Holy S@!t What’s worse is that the overall discount % to sales went up by 100%.
I am not kidding. I almost had a hear attack. Now granted, it was 3.5% to 7% but we are talking a lot of money and its all PROFIT!!
Hey partner….we gotta talk. Remember that discounting program we were testing. Yeah, that has to stop…losing too much cash.
Sure Matt, lets look at conversion. I would hope we are making enough cash so don’t get ahead of yourself. Ummm….nope. conversion is actually slightly down.
So let me understand this. We discounted and conversion didn’t go up at all? Yup. How about figure something else out.
Here is where is starts to get crazy. We start testing discounting vs. a trust message (we are rated A+ by BBB). Guess who wins with 15% more conversion and 10% more AOV (average order volume)…the trust message! Wow. people don’t want a discount they want to feel good.
I was relaying this story to a bunch of friends and they all looked at me like I wasn’t all that bright. Basically the comments were “Of course you will convert more with trust. You are not Amazon so you need to assure people you are a real business.” “Truthfully at the point of a sale, giving me an additional 10% doesn’t mean that I will buy, it just means I spend less money”.
Once again, I guess its a lesson I had to learn. If Discounting is for Dummies, what does that make me? 😉