E-Comm Funnel Optimization 101
If you’re not selling online (but you want to) this is the article for you.
If you’re in the ECommerce business, you probably ask yourself the same question thousands of other entrepreneurs are asking themselves every day: How can I sell more?
In past years, that answer might have been to seed your product into more stores, and in front of more customers. But particularly during COVID, more people are selling most of their products online. You have to, now: Stores are closed and consumers are nervous to go into the shops that are open. They trust the online shopping experience, and if you’re not yet selling directly to consumers online, there’s a lot of revenue you’re probably missing out on.
You could put in long hours and grind yourself down trying to get your product in front of consumers? But why not work smarter, instead of harder? That’s called optimizing your ECommerce business, and in my experience working with dozens of companies, I’ve seen that most clients and agencies go about the optimization process the complete wrong way. And they’re all making the same wrong choices. No matter what they’re selling — from cold brew coffee to chips made out of cricket flour — the problems these companies face and their inability to optimize their ECommerce funnel are amazingly uniform and homogenous.
During my consulting sessions to fix broken and inefficient ECommerce funnels, I find myself saying the exact same thing to every single client. And while nothing works 100 percent of the time, the rules I’ve devised have a pretty solid rate of success, and what I’m about to lay out for you almost always works for most of my clients.
How to Understand Your ECommerce Funnel
If you think of every step of the ECommerce process as a funnel, it’s easy to understand where potential customers drop off along the way. At the top of the funnel are all of the people in the world that could have interest in your product, and in ECommerce, you tend to target them to visit your site through Facebook and Google ads, SEO, anything where you're sort of putting a tendril out into the world and saying, “Hey, we are selling something you might have interest in.” The consumer reaches your site, clicks around, they might add one or two of your products to cart, and then they might initiate checkout — the goal is to have them actually making a purchase. And at any step in that process, they can churn, meaning they can change their mind and not hit that final checkout button and pay you money.
A lot of entrepreneurs — and I say this without judgment because I’ve done it, too — spends too much time at the top of the funnel, and trying to get people’s attention in an internet full of noise. They think that if they spend enough money on ads, enough people will come to their site and they’ll make enough sales. So they shout from the mountain top about their amazing product, but most of those ads will likely reach people who have no interest in your product anyway. That’s not being very efficient with the use of your voice or your ads, and that's where a lot of people go wrong — and why a lot of people lose.
Way more insidious is when you're able to make sales, and you think you’re generating revenue… but your customers don’t come back. You might spend a hundred dollars on your customer acquisition cost — also known as your CAC — getting a woman to buy a shirt that costs $120, which means you’re losing $20 in a one-time sale. If she comes back, you'll make $200 and that's profitable. But if she never comes back again, you just wasted a lot of time, energy, and money getting a customer who won't come back.
What this boils down to is the difference between first-time revenue and repeat revenue, which means you've found a customer who really trusts and likes what you're doing. First-time revenue just means that you had a compelling ad and you convince someone to try it out. If your business is reliant on first-time revenue, that likely means the minute you stop spending money on Facebook ads, your customer numbers will plummet and you’ll go out of business.
Understanding the Lifetime Value of Your Product
A good formula to remember — in both entrepreneurship and life — is this: Lifetime value, or LTV, over CAC is greater than or equal to a certain number, which will be different at different phases of a company’s life and goals. If a woman buys three shirts from your company in her lifetime and pays you $300, and you spent $100 acquiring her attention as a customer, then the relationship between those numbers is three. If you spend a hundred dollars getting her attention and she spends 50 bucks and never comes back again, then it's 0.5, which is really bad. Keeping the ratio between LTV and CAC high is key to entrepreneurial success.
It doesn’t matter how much money or resources a company has — if the LTV and CAC ratios are poor, your company is going to bleed money. A lot of venture-backed companies — from Uber to Airbnb to Casper mattresses to Sweetgreen are not profitable. They spend more money acquiring customers than that customer will pay them back in their lifetime.
Of course, LTV is going to vary from product to product: the LTV of a mattress should be different from the LTV of a salad you pick up for lunch. In some ways, selling a product with a low LTV, that people shouldn’t be buying much of, makes it easier. If you know your product doesn’t offer a lot of upside for lifetime value, then you shouldn’t chase it, and you should try to be first-purchase profitable. If you focus on that, the only lever you have to adjust is customer acquisition costs because you know what your lifetime value is going to be over the course of however long your product is supposed to last.
Building Your Customer Base from the Bottom Up
Most people think the bottom of the ECommerce funnel is when a customer hits checkout and buys your product. But that only creates first-time consumers. Instead, I focus even lower than that on the ECommerce funnel, which is where repeat customers and so-called “weird” customers live.
A repeat customer trusts your product and might have bought two or three things from you.
A “weird” customer has bought an outsized amount of product from you.
For some entrepreneurs, that could be 27 purchases of the same product. For others, it could be five. I recommend reaching out to those people, and hearing from them directly about who they are, what they like about your product, and how your product fits into their lives. What do you have to learn from your hyper-engaged customer? What do they say? What are their observations about your product and what do those observations have in common with one another? And then the second thing is, what do these people have in common with one another? Ideally you find some commonalities in who these people are and what these people say, and you can adjust your messaging accordingly — from the ads you run to your website experience to the emails you send customers.
You might find that you have an even mix of customers who are interested in different elements of your product, and that’s totally fine. The next step would be to use targeting tools that allow you to tell people what they want to hear about your product, and only what they want to hear. It’s all about efficiency. If you’re selling iced coffee, and you know that half your customer base buys your product for the caffeine, and the other half buys your product because it’s organic, the customers who are interested in caffeine should get emails and messages about caffeine, and they shouldn’t get emails and messages about the way your coffee beans are grown.
If you waste your breath talking about the things people don’t necessarily care about, you might attract people to try your product once. In that case, the LTV will likely be very low. Instead, I recommend that brands know what they are. Optimize your selling experience to only those people that are looking for your product, and love you for you.
Letting Your Customers Tell You What Your Product Is
At the end of the day, as a consultant and someone helping your business, my opinions don't matter. I'm also going to go a step further and say that as a founder and entrepreneur, your opinions don't matter, either.
I understand that you probably started the company for very personal reasons and if you have a reason, it means everything to you. But if you think that other people will love your company for the same reasons you do, you are very wrong, and you need to take your ego out of it. Don't build a company about an N of one, meaning one person’s opinion, build it around the opinions of your most passionate customers who bought your product five or 10 or 15 times. Back to the cold brew analogy: I understand if you started your company because organic coffee is important to you. But if your “weird” customer is buying your coffee for its caffeine, constantly messaging about how organic your beans are isn’t going to resonate. You’ll be shouting from the mountaintop for all the wrong reasons.
The only reason you wouldn’t focus on your “weird” customer is if you just launched and you simply don’t have them yet. It’s then that you’re going to have to ask yourself some questions: Why do you think people will like your product? Can you try this marketing campaign, or this ad? I caution you not to get too comfortable with those guesses, though: Definitionally, that's inefficient work because some of your guesses will be wrong.
To work more efficiently, stop worrying about the top of your funnel. Have conversations with your eight most passionate customers. Take the time to optimize your site around what they said and around what tools like Hotjar, which maps heat or interest on your website, shows you in terms of data. Take the time to set up email sequencing so that you can email people intelligently after they become customers to increase lifetime value. None of those things will affect sales right away, but they build a long-term sustainable, healthy business.
Once you do all of that, you should cultivate repeat customers, and you shouldn't be stabbing in the dark anymore. You should be using their words as a guiding principle, and selling to other people like them, but you shouldn't be running random tests or trying to appeal to people that you think might like your product, but haven't tried yet. Focus on the people that already know what they're looking for.
Don’t waste your time on customers that aren’t sure you’re a fit yet. Spend your time on customers that already know what they want.
What To Do If You Really Don’t Have Any Customers (Yet)
In the beginning of setting up their business, a lot of entrepreneurs tend to work from arm’s length. You might want to run Facebook ads because that doesn’t involve actually touching other human beings, but the more you can touch, the more you learn. And the closer you can get to customers or potential customers, the more you learn about what consumers want and the faster you’ll find product-market fit.
One way to work more efficiently at the outset of your new company is to focus on time, rather than money. Instead of focusing on CAC, I like to think in terms of something I made up called TAC, or time of acquiring a customer. Using your time, you might set up an experiment, such as DMing a thousand people on Instagram who fit certain demographics or show interest in hashtags related to your product. You can send a few different pieces of copy to potential customers, and track their follow-through rate using custom bit.ly links that track engagement for you. Whether you’re trying to isolate which specific copy generates the most interest, or which group of people overall are more receptive to your product, you’ll know which target is the best for your product.
In the early stages especially, founders often have more time than they have money. And at some point that flips: You either generate revenue or you raise money, and suddenly you have a team of 20 people and all these meetings where you once had time. But whether you have time or money, you can use free or low-cost tools like UTM parameters, Google analytics, and other software to keep track of where your traffic is coming from. This is where entrepreneurial hustle comes in — it’s all about getting in the dirt and playing with the tools at your disposal.
Of course, you can also bring in specialists to help you if you have the money to decipher your tools for you. If money were no object, you bring in someone like me, who's going to run the whole process and diagnose your entire funnel, and then bring in a specialist to fix each specific issue. Or if you’re working on a budget, you might ask for a consultant’s opinion and execute the changes yourself. It’s also worth remembering that one begets the other: If you work on a budget and can make your funnel 50 percent more efficient, that doubles your purchasing power, and you might be able to hire someone later.
Through all of this, remember that you have final say. If you don't like what you're saying or how you're saying it, you can always have editorial veto power. It takes a certain kind of founder to look at the data and admit that you’re seeing very clearly that you’re wrong about what your customer wants, and you’re going to override it anyway and make a personal decision that your to present your brand however you choose.
But it's my job as the consultant to show you the data, which doesn't care about your feelings. It’s very liberating as an entrepreneur to let the data speak, and then you adjust accordingly. If you don’t want to, you don’t have to – but you’re doing your most dedicated customers a disservice if you don’t at least give them space to tell you what they want.