Online Shoppers Expect More from Sellers

Ecommerce sellers may be delivering a sub-par shopping experience and not even know it, according to a survey of 1,000 American consumers.

The survey from Deloitte Digital in October 2023 is a good reminder of the longstanding gap in how merchants and shoppers perceive the ecommerce experience.

Online merchants often overestimate customers’ admiration of shopping experiences.

Perception Gap

If the Deloitte Digital survey is accurate, about 80% of brands selling online “believe consumers are impressed by the online shopping experiences they provide. Yet fewer than half of consumers actually are.”

While that may seem shocking, it is not new.

One could argue that there has always been a gap between the perceptions of business leaders and their customers.

For example, a September 2015 Gartner article stated, “Employees are still seeing a vast gulf between the design and usability of the software they use outside work and the software they use in the workplace.”

The article noted that user-friendly consumer software had set new expectations among employees in the workspace.

Accounting and inventory management software are examples. Makers of that software thought the user experience was good; customers (employees) frequently did not.

Scholars and executives have long sought frameworks to identify the gap. Examples include W.E. Deming’s principles of Total Quality Management in Japan during the 1950s, SERVQUAL (assessing “SERVice” and “QUALity”), Six Sigma, and Net Promoter Score.

Why a Gap?

Having acknowledged the perception gap, we can wonder why.

The likely answer is that customer expectations quickly change. L.L.Bean and Amazon reset expectations when they pioneered free shipping. Soon, free shipping was not enough. It also needed to be fast. Then “fast shipping” evolved from five days to two days to one day, and now even the same day in some locations.

Online merchants — or really ecommerce platform developers — that improve the shopping experience set a new standard for their customers, thus the perception gap.

Take Action

The fact that shoppers always seek a better ecommerce experience should spur businesses to action for two reasons.

First, the gap could widen. Ecommerce sellers and platforms that do not meet shoppers’ expectations risk revenue losses or worse.

Second, closing the perception gap is a competitive opportunity. The Deloitte Digital survey found that “customers spend 37% more with brands they find deliver consistent and positive commerce experiences.”

Hence online sellers should regularly measure shoppers’ perceptions and update features accordingly.

Focus on Fundamentals

Taking action, however, does not mean chasing fads. Focus first on the essentials.

The Deloitte Digital survey identified four key ecommerce features where a perception gap exists, suggesting a selling opportunity.

For each of the four “gap” features, Deloitte reported the percentages of ecommerce businesses that believed shoppers were impressed versus the shoppers who agreed.

Sellers should research why they overestimate the shopper’s favorable views.

Take “Accurate Search and Discovery,” which had the smallest perception gap in the survey.

A July 2022 report from the Baymard Institute, a customer-experience research firm, noted that 42% of the 133 “major” ecommerce stores it reviewed had site search issues, such as allowing shoppers to search by product type, i.e., a couch versus a chair.

So even a small perception gap creates opportunities to improve.

Profit Boosters from Repeat Buyers

Businesses love new customers, but repeat buyers generate more revenue and cost less to service.

Customers need a reason to return. It could involve inspired marketing, outstanding service, or superior product quality. Regardless, the long-term viability of most ecommerce shops requires folks who purchase more than once.

Here’s why.

Higher Lifetime Value

A repeat customer has a higher lifetime value than one who makes a single purchase.

Say the average order for an online shop is $75. A shopper who buys once and never returns generates $75 versus $225 for a three-time buyer.

Now say the online shop has 100 customers per quarter at $75 per transaction. If just 10 shoppers buy a second time at, again, $75, total revenue is $8,250, or $82.50 each. If 20 shoppers return, revenue is $9,000, or $90 each on average.

Repeat customers are really happy.

Better Advertising

Return on advertising spend — ROAS — measures a campaign’s effectiveness. To calculate, divide the revenue generated from the ads by the cost. This measure is often shown as a ratio, such as 4:1.

A shop generating $4 in sales for every ad dollar has a 4:1 ROAS. Thus a business with a $75 customer lifetime value aiming for a 4:1 ROAS could invest $18.75 in advertising to get a single sale.

But $18.75 would drive few customers if competitors spend $21.

That’s when shopper retention and CLV come in. If the store could get 15% of its customers to buy a second time at $75 per purchase, CLV would increase from $75 to $86. An average CLV of $86 with a 4:1 ROAS target means the shop can invest $22 to acquire a customer. The shop is now competitive in an industry with an average acquisition cost of $21, and it can keep new customers rolling in.

Lower CAC

Customer acquisition cost stems from several factors. Competition is one. Ad quality and the channel matter, too.

A new business typically depends on established ad platforms such as Meta, Google, Pinterest, X, and TikTok. The business bids on placements and pays the going rate. Lowering CACs on these platforms requires above-average conversion rates from, say, excellent ad creative or on-site checkout flows.

The scenario differs for a merchant with loyal and presumably engaged customers. These businesses have other options to drive revenue, such as word-of-mouth, social proof, events, and contest marketing. All could have significantly lower CACs.

Reduced Customer Service

Repeat shoppers usually have fewer queries and service interactions. Folks who have purchased a t-shirt are confident about fit, quality, and washing instructions, for example.

These repeat buyers are less likely to return an item — or chat, email, or call a customer service department.

Higher Revenue

Imagine three ecommerce businesses. Each acquires 100 customers per month at $75 per average order. But each has a different customer retention rate.

Shop A retains 10% of its customers each month — 100 total customers in month one and 110 in month two. Shops B and C have a 15% and 20% monthly retention rates, respectively.

Twelve months out, Shop A will have $21,398.38 in sales from 285 shoppers —100 are new and 185 are repeat.

In contrast, Shop B will have 465 shoppers in month 12 —100 new and 365 repeat — for $34,892.94 in sales.

Shop C is the big winner. Retaining 20% of its customers monthly would result in 743 customers in a year and $55,725.63 in sales.

To be sure, retaining 20% of new shoppers is an ambitious goal. Nonetheless, the example shows the compound effects of customer retention on revenue.

Omnichannel Retail Will Accelerate in 2024

Retail prognosticators have long predicted the convergence of physical and online selling. From the first book sold on Amazon in 1995, there has been a slow blurring of the lines, so to speak, towards multichannel and omnichannel.

Occasionally the change has been abrupt. The pandemic drove demand for buy-online, pick-up in-store services. That triggered the rapid development of software connecting online ordering with brick-and-mortar locations. Post covid, the demand has waned, yet the infrastructure and software remain, representing an omnichannel leap.

Here’s why omnichannel retailing will accelerate in 2024.

Customer Experience

In 2024, the first significant merging of ecommerce and physical retail could be immersive customer experiences.

Augmented reality fitting rooms, interactive displays, and in-store robots are now live in real shopping applications, explained Aron Bohlig, a managing partner at ComCap, an investment bank, in an email.

Augmented reality allows shoppers to virtually try on shoes.

The AR or virtual fitting room market could reach $3.17 billion worldwide in 2024, on its way to more than $6 billion by 2027, according to Business Future Analysis, an India-based research firm, in a LinkedIn post.

The investment in virtual fitting rooms is based on at least some initial success. A Shopify Plus case study with the fashion brand Rebecca Minkoff reported that shoppers were “65 percent more likely to place an order after interacting with a product in AR.”

Pop-ups and Partnerships

ComCap’s Bohlig also noted that online brands are experimenting with physical locations, including pop-up shops, experiential events, and partnerships with brick-and-mortar stores.

According to Bohlig, online-first brands want to cultivate direct customer relationships and gather immediate feedback.

Notable examples include:

• eBay’s “The ’85 Shop” retail pop-up store in Chicago,
• Shein pop-ups in Los Angeles, Toronto, and Birmingham, U.K.,
• BarkShop’s live pop-up shop in Manhattan’s SoHo district.

Consumer Outlook

U.S. and global inflation has declined, and consumer confidence has risen since mid-2023.

Nonetheless, some 12.6% of Americans surveyed in December 2023 expected their incomes to decrease in the short term, according to a report from The Conference Board, a nonprofit business think tank, while 18.7%  expect their incomes to increase, up from 17.7% in November.

Hence the U.S. consumer economic outlook is mixed. And consumers’ views of the economy will influence everything from inventory management and pricing strategies to technology investments.

Walmart, for example, will reportedly close as many as 150 underperforming physical locations in 2024, potentially shifting resources toward ecommerce. Walmart’s online sales grew from $25.1 billion in 2019 to $82.1 billion in 2023.

When physical retailers prioritize ecommerce, and vice versa, they can allocate resources for maximum profits.

Shopper Behavior

More than half of American shoppers (54%) use search engines to research purchase decisions, according to an April 2023 survey from eMarketer. And 43% search the Amazon marketplace and other retailers’ websites for products.

The same eMarketer report projects ecommerce to represent 20.6% of total U.S. retail sales by 2027.

Bottom line, most shopping journeys start online now and even more moving forward. Expect physical retailers to hasten online experiences in 2024.

Organizational Structure

A final milestone on the path toward omnichannel selling is the organizational structure of retail businesses.

A decade ago, most ecommerce functions at large retailers were nestled in the information technology or marketing departments. Managers of in-store operations reported to different executives than their ecommerce counterparts.

Those siloes have changed.

Ecommerce and brick-and-mortar managers now typically report to the same retail operations execs. This leads to daily collaborations and a unified sales channel — true omnichannel retailing.

How to Break Even on Customer Acquisition

Last year I reported my research showing that brands on average lost $29 for every customer acquired — up 222% in a decade. The size of the loss spotlights the dual importance of subsequent sales to recoup the initial costs while replacing the 40% customer churn in some sectors.

Can merchants lower the acquisition cost to breakeven on the first sale or even a profit? Is making an initial profit the right goal?

For most brands, getting close to breakeven is good enough. Brand shouldn’t aim to turn an initial profit as it suggests too-low spending on acquisition, hampering growth. Certainly there are exceptions, such as brands with $1,000 average cart values, but breakeven should be the goal for most.

Acquisition Math

Say your average order is $100, product cost is $50, and shipping and handling is $32. That leaves a gross margin of $18. But if the acquisition cost is $35, you’re losing $17 for every acquired customer.

Reducing the CAC to around $18 gets to the magical first-order breakeven, likely from three levers:

• Cut advertising costs,
• Increase advertising performance, or
• Increase the margin from first-time buyers.

Let’s look at all three.

Cut advertising cost

Strategies for cutting ad costs include targeting lesser-known audiences and even shifting to direct mail. Neither is perfect. Smaller audiences rarely move the overall conversion needle. And direct mail effectiveness for acquisition is hit and miss depending on the product, list quality, and timing.

Social media is where consumers hang out and thus the top acquisition channel for brands. The competition to reach those consumers will likely increase. The explosion of AI-generated content has already reduced organic search traffic to many ecommerce brands. The coming launch of Google’s Search Generative Experience could reduce it even more. Thus brands that relied on traffic from Google could migrate to social, driving up ad costs.

Increase advertising performance

Within the advertising acquisition process of “creative,” “targeting,” “landing,” and “conversion,” targeting is more restrictive owing to increasing privacy rules. Conversion optimization continues to improve, but only incrementally.

That leaves creative and landing as the routes to focus on. Sometimes creative is called “the new targeting” because of the impact influencers can bring with their followers. And landing is “the new conversion” because the experiences — what consumers see in a promotion versus what’s on the advertiser’s website — are invariably poor.

Increase first-order margin

Increasing margin materially typically requires changing the product mix or elevating average order values. The latter is easier and more realistic for most merchants.

And the best way to increase acquisition AOV is to get first-time buyers to explore the brand more widely. It’s the antithesis of a product detail or landing page where the focus is a single product with minimal distractions.

Yet an approach of discovery that encourages new shoppers to explore the brand and adjacent categories is a proven winner. Direct your merchandising on what visitors typically buy first, and couple it with a minimum order value free shipping offer. The result is higher AOVs.

That tactic alone can fundamentally change the economics of an ecommerce business.

Are Cross-selling and Personalization Now the Same?

Ecommerce product-recommendation technology is blurring the lines among merchandising techniques, making it difficult to know cross-selling from personalization.

We are in the midst of a software revolution. Machine learning and, especially, generative artificial intelligence have gone from the realm of data scientists to the commonplace in what feels like barely a year, and these technologies are changing how ecommerce websites work.

This “Frequently bought with” section on BestBuy.com is an example of cross-selling. It appeared on the lower section of a MacBook Pro product page. Click image to enlarge.

AI Everywhere

Since ChatGPT was released on November 30, 2022, generative AI has become so ordinary that it can be found in almost every online editor, app, or search result. It has even made its way into ecommerce product recommendations, with the bleeding-edge AI tools on the cusp of adjusting the copy used to describe a product to match what it knows about a shopper’s navigation history.

This level of personalization is amazing. But does it change what it means to merchandise an ecommerce store? If every recommendation, every part of navigation, and even the products shown as the result of a search are AI-personalized and manipulated, does cross-selling have meaning?

To answer, consider how cross-selling and ecommerce personalization were defined before the widespread use of machine learning and AI.

Ecommerce Cross-selling

Cross-selling is a merchandising technique wherein a website offers shoppers complementary items as they navigate and visit product detail pages.

Classic examples are offering batteries with electronics or a case with a laptop computer. Thus ecommerce cross-selling often makes suggestions based on items frequently purchased together or what may logically complement the primary product.

Even before AI’s rise, cross-selling suggestions could be tailored to the individual’s interests or behavior.

Cross-selling was usually in a “frequently also bought with” section low on a product detail page or during the checkout process.

From the merchant’s perspective, cross-selling aims to increase the average order value by encouraging customers to buy more during a single transaction.

Ecommerce Personalization

Personalization changes the shopping experience to suit an individual customer. Ecommerce personalization is based on that shopper’s unique preferences, past behavior, and data.

While most marketers employ personalization to boost profit, the tactic should make a shopper feel understood and valued. Customers who are happy and comfortable with the buying journey will likely purchase repeatedly and, therefore, have a relatively higher lifetime value.

Personalization requires data collection and analysis. It then uses algorithms and AI to understand customer behavior patterns, preferences, and potential needs. Personalization can manifest anywhere on an ecommerce site, including navigation, category pages, search results pages, and product detail pages.

Overlap

Cross-selling and ecommerce personalization both require analytics, although personalization relies on a deeper analysis. And cross-selling can be a form of personalization when the recommendations are based on individual user data.

The better AI becomes, the more blurry the line, although one might argue that cross-selling is more transactional, focusing on increasing the immediate value of a purchase, while personalization is about fostering a long-term relationship.

Contrasts

An increase in average order size can measure the success of cross-selling. In contrast, many or most ecommerce marketers measure personalization over time through metrics such as customer retention rates, repeat purchase rates, and lifetime value.

Thus cross-selling can be seen as a point-of-sale strategy, while personalization is a comprehensive approach that influences every interaction with the customer.

AI Takeover

AI-powered ecommerce recommendation software circa 2023 already powers both cross-selling and personalization for many or even most online stores. From an ecommerce merchandiser’s perspective, there’s little difference between the two.

So why even bother making a distinction? It is this.

• Different metrics. While both cross-selling and ecommerce personalization aim to improve the shopping experience and boost revenue, the techniques operate on different principles and have different metrics.

• Single-order vs. overall relationship. Cross-selling increases the value of a single order, and personalization deepens the customer relationship over time.

• Mix of both. An effective ecommerce strategy often combines both, leveraging their unique advantages to maximize immediate and long-term gains.

Marketers should not put on-site merchandising on auto-pilot and permit an AI to take over. Doing so could have short-term benefits, but when every ecommerce shop has AI running personalization, personalization will no longer be a competitive advantage.

In fact, the more automatic algorithms and AI become, the more important is the art of marketing — as opposed to the science of it.

Understanding the nuance of cross-selling versus personalized product recommendations could lead one to know that cross-selling should not be personalized in some cases.

It is still a good idea to offer batteries with a toy car that needs them or a case with a laptop computer than it is to offer something completely unrelated based on behavior.