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When we’re thinking about e-commerce a lot of the time we been thinking about and discussing real products, hard tangible goods that you can buy and feel, but a big part of this market is also around selling virtual goods. There are a few things that we need to consider when we’re doing that.
The goods and services which need to be streamed or downloaded must be hosted properly and hosted separately. So it’s important that you use the right providers to help you do that.
It’s very important to have a reliable service so that people can download and stream the product quickly and easily and they get the user experience that they’re hoping for. And this is a huge impact on conversion rates, on repeat rates and on positive reviews. Again, we can all imagine what it would be like if you’re trying to watch Netflix or Amazon Prime video and it was buffering all the time. That’s not a very good consumer experience, so you need to make sure you have the infrastructure in place to give the consumer experience that the consumer needs.
We also need to make sure that you are hosting it correctly and there are some specialist marketplaces that offer businesses the ability to do this hosting through outsourcing. Stream is one example. Amazon Web Services offer this service, as does Apple app store.
Let’s have a look at some of the key metrics that we should be conscious of when we’re selling digital goods. And again, Netflix is one of the market leaders in digital goods online.
This is the cost it takes us to acquire one customer. So suppose you’re using a Google advert to get customers to your website and it is based on a pay-per-click basis. It’s costing you £1 or $1 to get that click to your site. If you have a conversion rate of 1%, then you can multiply that £1 by a hundred and get to your cost for acquisition of £100 or $100. And this cost per acquisition is an incredibly important cost of doing business for you to be aware of.
This is where you divide your total revenue over a given period by the number of customers you have, so you can work out per customer how much you’re getting.
The next important metric is lifetime value or customer lifetime value. This is about how much profit you generate from each individual customer over the lifetime that they use your product. And the interaction between this customer lifetime value number and the customer acquisition value is important. Suppose you can generate more value and more profit from each customer, on average, than it costs you to acquire customers. If your customer lifetime value is higher than your cost per acquisition, then you have an ongoing scalable business, if you can continue that over time and at scale.
So it’s often referred to as reaching product market fit when you have a customer lifetime value that is higher than your cost per acquisition. Effectively you can just keep on spending that cost per acquisition to get more and more customers and then you generate more profit from each of those customers than it costs you to get them. So as a result, your business makes money.
This is the percentage of people that stop buying your product or stop subscribing to your product within a given period. The likes of Netflix will have a certain percentage of people that churn out each month and don’t renew their subscription, and they need to be aware of how much that percentage is so they can make sure they recruit more customers to fit more and fill the gap.
This is where retailers take the number of people who they have buying subscriptions, times it by the value of those subscriptions and that gets to a figure of how much revenue they are guaranteed to make in a given month. They then know how much they are likely to make from those continued subscriptions the following month. And it’s important to note that that figure is about subscriptions and subscription income, but businesses like Netflix and other subscription business will also be trying to generate additional incomes.
So if you take the likes of phone providers, so like Vodafone, Verizon, for example, they all have monthly subscriptions that generate ongoing recurring revenues and that will contribute to their monthly recurring revenue. However, they’re also trying to generate income through the actual phone calls that people make and additional services that people make. Again, TV providers operate in a similar way where you’ve got your standards of subscription, but they might also be offering to try and sell you box sets and box office and all that sort of stuff. So they consciously consider those different revenue streams in two different ways to help them understand their business, but overall looking to maximize both of them to maximize the value of their customers and the profitability of their business.Back to Top
Graeme Smeaton is the founder of Royal & Awesome. Along with a proven track record in defining and delivering marketing strategies that drive significant growth and create real shareholder value, Graeme is highly commercial. He has extensive experience managing PLs and other key financial statements, while being an operational board director of AFG Media Ltd, and has experience negotiating with suppliers, distributors and licensing partners.
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ABOUT THIS DIGITAL MARKETING MODULE
The Applied E-Commerce module will introduce the key concepts of effective e-commerce and will teach you how analytics allows for refinement of the model. You will become familiar with the elements of a successful e-commerce website and the process of traffic generation. The module will also introduce you to various sales tactics, including channel selling. Finally, you will recognize how the e-commerce Customer Relationship Management (CRM) systems can help you maximize user experiences.
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