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How To Build The World's Most Valuable Ecommerce Business Model

build-ecommerce-businessThere are lots of amazing business models in the world. In ecommerce, subscription models are quickly gaining a foothold. Ecommerce marketers are investing in advanced personalization, enhanced marketing automation, educational content, and all the great aspects of inbound marketing. While all of these tools and tactics are key to empowering ecommerce marketers to help transform their businesses into inbound companies, there's one key, common characteristic that unites these tactics into the most valuable business model you can build.

Learning From Netflix

Netflix is a subscription based model where people can access thousands of movies either by mail-order DVDs or by streaming them online or to their various supported devices (including smart TVs, such as the one I have Battlestar Galactica playing in my ear as I type this).  They've had their issues in the past, including service outages, alienating their core growth base of streaming users by trying to raise prices, as well as their infamous Qwikster debacle -- but hey, no one's perfect. However, given all their shortcomings, they've recently recovered in spectacularly dramatic fashion. Their stock price is up over 600% from their low at the end of 2011, and they've recently passed rival HBO in terms of subscribers (source).

How was Netflix able to weather a storm that would have shredded other businesses? Their business model has the one key characteristic we should all try to emulate: Being their customer gets more valuable over time. Not because it gets any cheaper -- that's one way that some companies use (particularly insurance companies whose prices are primarily based on risk assumption and who therefore lower prices over time for "safe drivers") -- but because their service actually improves the more you use them.

At this point, I've rated over 700 movies and TV shows at Netflix. Although it's still not perfect, at this point their system knows me pretty well. Instead of saying "You like sci-fi, here's more sci-fi", Netflix is able to say "you like gritty, sci-fi war whistleblower movies that take place at night on alien planets featuring a strong female lead". With an inventory reaching into the thousands of options, Netflix is able to successfully help me make a decision about what I want to watch -- and therein lies the key.

There's a great deal of data and psychological study around the paralytic impact of too many choices on people's ability to make decisions. I'm famous in my group of friends for my ability to take any two options at all (such as what restaurant to go to or what movie to see) and make a decision. With almost no outside or contextual information, I'm pretty good at picking oranges over apples. Yet even I, when presented with such a staggering catalog of options as is offered by most ecommerce companies, become paralyzed and enter a long, drawn out research and consideration process that I -- along with up to 95% of ecommerce website visitors -- just never complete at all. In fact, a study by a Columbia University professor showed that you could increase conversions by up to 600% by offering 75% fewer choices.

This enormous value that Netflix has built for me, by getting to know me and helping me overcome an impossibly complex decision about what to watch, is why I can cancel HBO every year between seasons of Game of Thrones, yet I keep paying Netflix even when I'm not using it (I had Season 4 of JAG on DVD sitting in my apartment for four months before I returned it -- I could have just bought it at that point given the Netflix subscription cost).

We've talked before about how customer LTV is one of the most important metrics that an ecommerce marketer can be optimizing for. In a subscription model, this means preventing people from canceling their subscription. Netflix has managed to do that by making staying with them worth more than switching. 

Helping People Choose

Netflix has primarily accomplished building an increasing-value business model through its ability to help me make choices. The longer I'm their customer, the more valuable their service becomes to me because the easier it is for me to discover TV shows and movies that I will love -- and may otherwise never have found.

Netflix doesn't need to simplify their inventory to help consumers overcome the paralysis of choice. In fact, doing so would decrease their value proposition and ability to help me find exactly the right movie for me. The hypothetical grocery store trying to emulate the results the Columbia University experiment wouldn't want to slash its inventory entirely either. They want to have a long-tail of inventory -- as long as possible -- so that people can find the exact product that will delight them the most.

However, what they need to do is help them make a decision. One of my favorite business quotes of the modern era is an anecdote from Jeff Bezos, CEO of Amazon.com, who said:

"Inventing and pioneering requires a willingness to be misunderstood for long periods of time. One of the early examples of this was the customer reviews. One wrote to me and said, “You don’t understand your business. You make money when you sell things. Why do you allow these negative customer reviews?” And when I read that letter, I thought, we don’t make money when we sell things. We make money when we help customers make purchase decisions."

For a company infamous for constantly driving prices lower (much to the chagrin of those of us without such a long-tail of product inventory or such a massive economy of scale), this may sound surprising. However, Amazon's primary focus is solving this problem -- the massive inventory of options and the decision-paralysis that creates. Amazon was one of the first companies to pioneer product recommendations over a decade ago, and now they're taking a Big Data approach to helping people make purchase decisions.

They're not always, of course, successful. Because they're relying on a Big Data approach instead of the narrative buyer persona approach that most modern inbound marketers rely on, their recommendations are only as good as the data inputs and correlations that feed their analysis.

For example, they tried to recommend deals for me and had some significant misses. I promise you, there's nothing in my Kindle reading history that would indicate that I'd be interested in a "Chasing His Mate (Lycan Romance)". Also, I neither have kids nor am I in school, so I'm really not even the slightest bit interested in back-to-school specials.

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I'll wager that "Assault Troopers" is probably something I'd enjoy, since -- as Netflix so adroitly identified -- I'm a fan of all kinds of bad science fiction. However, all the rest of their email communication with me is around deals and discounts. For an inbound ecommerce company with a more manageable challenge than Amazon's (that is, without millions of potential product options to sell me and probably thousands of the macro-personas for buyers -- when most of us have only 3 or 4 of), we know that's a mistake and that they should be focusing on where I am in my pre-transactional lifecycle for a given set of products, but Amazon's challenge is much more massive than most marketers and they haven't been able to find a way to fit in the laser-targeted relationship benefits of narrative buyer personas into their economy of scale.

Marketing as a Service

All of this leads us inexorably towards a brand new challenge for ecommerce marketers. We've rested on our laurels for a long time while optimizing parts of the purchase process that benefit us significantly more than they benefit the consumer. We've invested more in abandoned cart nurturing than we have in helping consumers make decisions. We happily spend tens of thousands of dollars on pay-per-click campaigns and then balk at spending a few thousand dollars creating content that helps educate people.

I'd even argue that content, such as blogging, is only the minimum-viable-product for an inbound ecommerce company. Blogging has the lowest barrier to entry, requiring only the ready-made technology and the internal will to do so. The next level of inbound marketing is investing in additional experiences and tools that add value to your consumer.

Netflix has taken an interesting first step in this direction with "Netflix Max", a personified user interface that asks you a simple series questions (such as offering a choice between Drama, Buddy Cop, and Action movies along with asking for ratings of some options within whatever category you select) and then tells you one specific movie you'd probably like watching.

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It really is quite an interesting user interface that we can take a lot of lessons from, but the most interesting and fundamental aspect is that they built an additional tool to help people make decisions. This is the next evolution of inbound marketing. Some ecommerce sites, such as Fab.com, are already embracing this with their personalization engines and increased focus on gathering explicit, permission based feedback from consumers.

However, few companies are investing in technologies that empower consumers' decision making processes. Our industry has been kicking around the ideal of "Marketing as a Service" (MaaS) for years now, trying to find a way to build a relationship with consumers where our marketing is actually adding value to their lives instead of being considered an annoyance or hindrance. Ecommerce marketers need to start thinking -- and acting -- more like software companies, who constantly seek user feedback about their interface and build tools to help people use their system more effectively.

We need to start investing in building tools and experiences that help people make truly informed decisions about what to buy.

Unlike ecommerce companies, Netflix doesn't even actually make money off of the decisions their customers make, they're a recurring revenue model. Empowering decision-making for them is a value-added service that they know will make their system more valuable to consumers facing an impossible inventory of options.

Product Adoption: The Forgotten War

The one fact that all recurring revenue models (such as Netflix) know is that product adoption by their customers is the key to revenue retention. Simply put, people who don't use your service are less likely to continue paying you for it. Since recurring revenue unit economics are really easy to calculate (their LTV has only two variables -- average recurring revenue value and the percent of that revenue that cancels their subscription in a given period), cancellation has been something they invest heavily in. Since B2C ecommerce unit economics are significantly more complicated and have more variables, we haven't been solving for the customer life time value as aggressively.

Because of this, B2C ecommerce marketers have typically not invested heavily in the post-purchase phase of the customer relationship. Once someone buys something from us we're done with them -- as long as they don't to return it. The next interaction that we have with them is trying to sell them a related product.

Amazon has a very different mindset about this. They sell their Kindle devices at near break-even costs and rarely try to upsell along what Jeff Bezos calls "the upgrade treadmill". Instead, Amazon focuses almost exclusively on getting customers to use the Kindle more. Since their primary business model for Kindle is in selling the related products of electronic media rather than new and improved Kindle devices, they care much more about becoming a platform for a person's media consumption life and then focusing on retaining their usage of the product.

For example, Amazon offers a number of titles for absurdly low prices (often around $2) and even offers millions of titles for free. For Amazon, the individual transactional value isn't the primary objective; it's the continued usage of Kindle that's the goal. They know that if someone reads a free book on Kindle today that it's significantly more likely that they'll buy a book or magazine on it tomorrow.

What can ecommerce marketers learn from this? Amazon and Netflix have led the way by creating a model for us to emulate where we invest more heavily in how our customers use our product post-purchase. Even if someone doesn't try to return an item, their satisfaction (or delightion as we'd call it) is something we should invest in if your goal is to retain them as a customer.

Getting to know your customers

I lamented earlier about Amazon's misaligned reading recommendations for me -- seriously, Lycan Romance? They might ask themselves though -- how are they supposed to know? How can they know what I will and will not like given their massive inventory unless they offer each one to me and see how I respond? Doing so would certainly be the most effective way; simply continuing to send me product options and continually remove categories that I don't respond positively to, but it makes for one hell of an annoying user experience.

People want touch points in their relationship with the company to be easy and value-added. Netflix Max is a great example. Prior to me making a decision, their user interface analyzes my past behavior as well as asking me specific questions and getting specific answers. They effectively leverage the two types of psychographic data that you can collect around your customers -- implicit (their behaviors and what that implies) and explicit (things they specifically tell you).

Most of us ecommerce marketers are over-reliant on implicit data, using pages viewed and cart interactions to dictate the relationship with the customer. Very few of us actually take the time to just ask the customer questions that help us help them. You'd be surprised how much people are willing to tell you if they know you're going to use that information to make their lives better and their relationship with you more valuable.

This is, to a great extent, the most valuable opportunity afforded ecommerce marketers in the pre-transactional phases of the buying cycle. As people are taking quizzes with these awesome user interfaces we're building, or downloading PDFs of content we've created to educate them, or downloading comparison content to help them make a decision, we can ask them qualifying questions the same way that a real live salesperson would that helps us guide their buying experience in a more customized and contextually relevant way. Our shopping carts have the same challenges as a real salesperson, and they need the same tools to be as successful.

I willingly rated 700+ movies for Netflix because I understood that they were trying to make my life better with better entertainment recommendations. Because of the investment they made in getting to know me from the very beginning of our relationship, a Netflix competitor could even create a better viewing experience that's cheaper and Netflix would still retain me as a customer.

What piece of information do you most wish you knew about your customers? Tell us in the comments below -- let's brainstorm how to ask them!

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Photo credit: TheBostonChow

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