How to Hunt (and Catch) “Whales” with Customer Segmentation Analysis

If your business isn’t growing as fast as it could be, Drew Sanocki is here to explain the power of segmenting and targeting customers to optimize your business.

Presented first at our eCommerceFuel Live event in Nashville, Drew talks about the best practices for finding and attracting the customers that can drive a huge part of your business and how you can exponentially grow the business by focusing on and delivering value to those folks.

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(With your hosts Andrew Youderian of eCommerceFuel.com and Drew Sanocki of NerdMarketing.com)

Andrew: So we’ll take a break from the live show. This week, it’s a great talk from Drew. Hope you have a wonderful post-Thanksgiving shopping weekend. I’m guessing a lot of us are probably in preparation still for Cyber Monday coming up. So hopefully that goes well for you, and I’m going to go ahead and let Drew take it from here. We’ll see you next week with another live episode, and I’ll talk to you then.

Let me start with a question here, and it’s: Is your business growing as fast as it could be? I was in the Navy before I started my business, so the obligatory Navy shot. This is what I’m going to talk about today. If you’re not segmenting and targeting your customers, you are wasting time and energy and unnecessary working. You’re really leaving money on the table. What I try to do here is distill all my knowledge of eCommerce, I started my store in 2003, into this one presentation. You guys are kind enough to give me an hour of your time, and so I think this is really one of the more important things you can do.

I find that when I came to conferences like this, I’d leave and I would be both motivated and stressed out at the same time. Motivated obviously because you meet a lot of inspiring people, but stressed because I would have a laundry list of things I needed to do. It was like SEO, I need to do this, conversion rate optimization, AdWords, and every hack and tip and trick, I wanted to try. It really kind of stressed me out, and I think the answer to that is that…I call that tactical maneuver hell, but to get out of tactical maneuver hell, there’s some strategies that let you prioritize what to focus on and it’s basically the 80-20 rule. But I’m here to argue that if you’re going to focus on one thing that brings all these different tactics together, it’s going to be hunting whales. Your best customers are your whales, and you should do everything you can to kind of build your business around those best customers.

Before I go into that anymore, a little bit about who I am. My name is Drew Sanocki. Andrew basically told you who I am. I just rebranded my blog from drewsanocki.com to Nerd Marketing, because nobody could spell Sanocki, and I’m on Twitter @drewsanocki.com.

Drew: There are three reasons I think I’m probably relevant to your experience. The first is I was in your shoes. So I started designpublic.com in 2003, drop ship retailer, about 500 different bands, grew it for about 8 years, 9 years, sold it to a small private equity fund. We went from zero to a million in revenue in about a year and a half. And if you go to nerdmarketing.com/starthere, there’s an email sequence where it kind of walks you through what I think the top reasons why we did that are. The second is that it wasn’t all easy, so I’ve kind of been there. Everything that Paul talked about yesterday. We had good periods and we had bad periods. This is not our warehouse but it was an inventory list model, which of course people start returning sofas and they don’t go to the vendors. They go to your little office in San Francisco, and you don’t know what to do with the sofa so you put it in public storage across the street. We had all that, but we overcame it. The way we overcame it and grew the company and formed my thinking about how to grow eCommerce companies…and like Andrew said, I started consulting with private equity firms and then I became what’s called an operational partner at a private equity firm. And what that is it’s like you’re their operational bench. So if they’re looking at a deal, you do the diligence on that deal and help say, “Okay, well, if this deal went through, this is how you’d grow the company, or it’s a good deal, it’s a bad deal.” And then if the deal goes through, you might take on an operational role at that company and help implement your strategies for like six months or eight months.

So I’ve worked on a number of eCommerce companies over the past three years that are in these logos here. I want to draw your attention to Karmaloop, because that’s kind of what I’m working on now. That was $100 million streetwear brand that went bankrupt maybe a year ago, and we bought them out of bankruptcy in the summer. And now I’m working there as the CMO. So that’s my current project. And the idea there was like, “Hey, this was $100 million company now doing a third of that. Can we get it back to its glory days?” This is what I said at the beginning.

I think the most important thing you can do is to hunt whales, and you’re now asking what the hell is that? What does that mean? Is anybody actually thinking that? You all know what that means? Here’s my early days, right? Overwhelmed because there’s way more stuff that you think you need to focus on than you have time to focus on, uncertain because you don’t know what to focus on first and indispensable. Our team at its height was 20 people, but it’s like the dirty little secret about eCommerce, if you have a seven-figure eCommerce business, you don’t really have enough revenue for middle management. So it’s often like you and then it’s everybody else. So I found the most stressful thing is you can’t really delegate down a lot of management functions. There’s no intermediary level there. So in many ways, you’re indispensable to grow your business.

In ’03, there was nothing on eCommerce online or online marketing for that matter. So this w as my marketing education in five Google searches, how to do online marketing. I quickly discovered permission marketing and Seth Godin. There’s something about building up this permission asset, people who have asked to hear from you, and that quickly led to how do you mine customer data because I knew catalog companies got sold based on the size of their list. I spent a lot of time researching catalog marketing, and really the principles we use now, they date back to the ’50s. They come from the catalog period when people had to figure out who to market to and who was cost effective to market to.

So database marketing was where it ended, and that’s kind of where I found everything made sense to me. And I read a lot of the books here on database marketing, which were written in the ’60s, but they really tell you how to grow your customer asset and your company. And there were two key takeaways from this world of database marketing. The first is this idea of customer heterogeneity, right? Not homogeneous. Basically your customers aren’t all the same. They’re not created equal. If you had to stack up all your customers and you probably all know this, anybody who’s been in business over maybe six months, you’ve got your minnows like your small ones who order once. They order a small AOB product and they never come back or maybe they return it. They take up customer service time. You’ve got your whales who come back again and again, will buy at full price, super high lifetime value and then the fish is kind of everything else.

So the first insight was that your customers aren’t all the same, and to start thinking about them as like, “Okay, is this a whale or is this a minnow?” Draw your attention here to the first purchase AOB column. Their whale customers spend on average $13,000 on their first purchase, and the minnows spend $37, right? And then you look at their total spend for the year, like how many times they buy, and this is – my speaker notes I do voices here – so like, “I’m a whale. I just got my bonus from Goldman Sachs. I’m buying a suit,” versus, “I need to go to the beach. I want to get a little swimsuit to go to the beach.” So whales, this is 9:30, no jokes are going over. This is from Karmaloop. The same phenomenon here. A couple months ago, you see one percent of the sessions. I created this whale segment which really was nothing. It was just two orders in the past 90 days versus 1. One percent of the session is driving 43% of their revenue. This is what happens in digital. Almost every business here has this. If you’re selling through Amazon, a lot of times you don’t see, because you don’t see your own customer data. But if you’re going direct through your site, you will see this.

You can create segments in Google Analytics and here is a simple segment I created, which is everybody who bought twice. If you are looking at creating a whale segment for your own business, do something like people who bought twice what your AOB is. We call it whales. Or maybe bought twice or three times in the past. You know your business better than I do. It’s going to be different business per business, but again, you can go down and pull out the users and you see in this case the number of whales versus the total number is so small. And then the next thing I’m going to show you is their impact, and this is Karmaloop’s case. It’s something like one third of the sales are coming from those customers.

So good customers are good. So what? Right? Like who cares? There are good customers and bad customers. This is the second insight from database marketing and it’s that often the acquisition cost for a whale is the same as a minnow. And it’s not always the case. It’s not going to always be the case forever, but it’s true enough that it’s going to happen at times and you can act on that. And if you spend a dollar to bring in the guy who spends $13,000 and the guy who spends $37, the choice is clear on who you want to spend money acquiring. And think about this retailer. If they want another $50 million in revenue and they had their same customer nets, they need to acquire another 100,000 customers. But if they only caught minnows based on that really small, I need a small AOB, they need to get 300,000. But if they went for the whales, they only have to get 9000. Nobody likes the voices.

This is not only cheaper to do this, but think of the mental stress. I got to go out and get a third of a million customers now versus 9000. And they all hang out in different places. This is so much easier, right? It’s part of getting out of tactical maneuver hell. In that demo which I will write up an email and forward to you so you can play around with it, I do this for your business so you can figure out who the whales are, who the minnows are. And I show you that if you want to double your business, it’s vastly cheaper to focus on the whales instead of the minnows.

Quick recap thus far. Andrew asked me to do recaps. Customers are different. Whales are better than minnows. You can grow the whales, so easy enough. Right? Now we’re going to talk about how. How to grow the whales. There are three ways, I think. I like to put them in three buckets, three different strategies you can use. First, you just acquire more of them. You just go out and get them. Let’s call that whale hunting or fishing. It’s what you do in water instead of hunting. There’s retention. Okay? I’m going to keep the whales around longer and we’re going to call that whale herding. Then there’s development. Development is can you turn a minnow into a whale? We will call that whale GMOs, because I have no better . . . The analogy totally breaks down at that point. But focusing on acquisition first. I’m going to walk through all three of these.

When you think about acquiring more whales, you should basically do pattern detection. And you throw up any marketing source, so say this is Google AdWords and this is Facebook Ads maybe. And you’ll see that, wow, the Facebook Ads really are driving proportionately more whales than Google, so it’s a better channel for bringing those guys in. It’s never going to be totally black and white. It’s usually something more like this. I say Source A and Source B. It could be Google, Facebook. It could also be Ad Group One, Ad Group Two and you can even get down to the key if you’re good at tracking LTV, lifetime value. You can get down to the keyword level. The keyword A brings in crappy, crappy customers and keyword B brings in really good customers. That’s more advanced than you probably need to do at this point, but what I want to show you here is that you export . . . You know the source medium report in Google Analytics? It shows all your acquisition channels. What I was going to show you here is you go into your source medium report in Google Analytics and it’s really good to show you. You export that from Google Analytics. You create your segment basically for your whales and all sessions. You export it. Google Analytics will export into a Google sheet and you can basically see all your . . . Everything here is from Google Analytics. It might look different because it’s in a sheet, but you create a column towards the end where this is the percentage of sessions from on your site that come in through that acquisition source and the percentage of whales that come in from that acquisition source. Does everybody understand that?

For example, Google organic traffic this many sessions came in over the time period versus this many that were just whales came in. If whales came in through every acquisition channel the same amount as your average traffic, you would expect this last column which is percentage to basically be the same. If 50% of overall traffic came direct then 50% of my whales should come in direct. If eight percent of all my traffic came in through paid search, then eight percent of my whales would come in through paid search. That kind of thing. But what you’re looking for is this. If you’re looking at paid search, wow, only 9% of my overall traffic came in through paid search, but 22% of my whales came in through paid search. That’s starting to tell me for this retailer, paid search is driving much better traffic for me. If I have dollars to spend, I’m going to put it towards paid search. This is just a percentage of the users or the sessions to the total that come in. I’ve completely butchered that demo. Let’s chalk that up to a loss and I will write a blog post about the demo.

This is all answering the question, like that Monday morning question you get in the office. You make your coffee and what am I going to do today? I have one more dollar to spend. Where am I going to spend it? Or I’m looking at the tactical maneuver tell of every hack in the book. Where do I start? For that last retailer, it was on paid search. This is the campaign that’s driving disproportionately more good customers than bad customers. Right? So let’s figure out why. Let’s put money there. Let’s put effort there. That’s what that means.

Here’s another way to break it down. This was for another big men’s apparel retailer. You really see here that here’s your acquisition channels: direct, branded, unbranded, display, email, whatever. The whales disproportionately being driven by direct and by branded search, unpaid. This is the minnows who are just driven by social. So that tells me as the guy who runs the company or runs marketing, where do I want to put my money? In social or email or how do I want to decide what this company’s going to be about? You know? What am I going to prioritize? One thing you can start doing I think is really important to do. It’s the first thing when I do coaching or in a Mastermind we have the first thing we do is to log attribution info with each order.

By default, Shopify or Magenta, they just start logging your orders. But if you could get a developer to kind of log the marketing attribution info, like what campaign am I going to attribute this guy to or this woman? Is this order due to search? Is this order due to email? Just start logging that, because that allows you then to go back later on and do this kind of analysis I’m talking about here where you just can say, okay, show me everybody who ordered over $1000 and let’s look at how they were acquired versus everybody who ordered $50 or less and how they were acquired. So just if you haven’t already, I would encourage you to start figuring out how to log your attribution info or if you’ve got the money, there’s probably SAS apps that do that now. Custora, Kissmetrics. I like Klaviyo which is an email software. It does it automatically for you and allows you to build campaigns off it. Or you can just do it yourself and hire a developer to do that. So that’s acquisition.

Moving on to retention. The idea here is this is retention in one graph. This is called the customer lifecycle and it represents how customers interact with a company, a product, anything digital really. Frequency is on the y axis here and time is on the x axis. What this means is I find this brand, I’m wearing it now. I start buying it more, more and more. My frequency goes up until I’m buying a lot. And then my wife starts calling b.s. and people start making fun of me or whatever and I stop ordering. Then I’m no longer a customer. This is maybe in retail it happens over six months. Think about your own interaction with brands. It’s not just brands. It could be with an email newsletter. Like, I’m really into this guy. Or a website. I really like this blog. I’m going to read it more and more and more. And now I’m onto something else. I got burned out. This is just called a lifecycle. It’s common in digital. It’s how people interact. Even subscription products, the lifecycle might go over years, but there’s a period where you’re into it and then you’re not into it. Or with the SAS product, there’s a period where they’re logging in and using it a lot and then you’re not. The idea with retention is you’re trying to do the pink areas.

You’re trying to either keep me buying longer in your brand after I would already have been burned out. Or increase the frequency, so in the same amount of time can you get me to buy a lot more than I would otherwise have bought? These are just a couple ways to improve retention. The right merchandise, right shopping experience and right promotions. Let’s talk about merchandise and shop experience first. On this chart in this last column, very different merchandise or products are driving both customers, right? This guy wants a suit and this guy wants a swimsuit. That informs my merchandising decisions. And you can go even farther and break it down with a customer segment analysis and you see here, look at blazers. The minnows, they barely buy blazers at all whereas the whales buy blazers. Blazers are, to extend the analogy, a harpoon product. A harpoon product is one that you want to feature to bring in more whales.

You’ve all got them. You probably don’t know what they are unless you’ve done this kind of analysis, but the call to action here is you want to feature your harpoons. On the streets of New York, I keep running into eCommerce retailers who feature high converting products. The swimsuits convert. Let’s put them on the home page. We’ll get a lot of orders. But they don’t think through, you’re actually attracting tons and tons of really crappy customers. You sold 200. Great. They’re going to return it. They’re going to call your 1-800 number. Get them off the home page. I know it looks good, because you’re getting a lot of sales, but you want to feature the harpoons or at least work them into the mix. If it’s the blazer and your whale customer buys the blazer, you really want to highlight the blazers. In guy shops, you don’t see the swimsuit out front. You know? You see the suits. That’s your home page. So that’s a little bit about merchandising and shopping experience.

The right promotions is a great way to also approach retention and this is where you get to the tag line of my presentation here. What’s the single highest ROI thing retailers can do that only one percent are doing? Manny. Manny, because he took my course.

Manny: The ROI?

Andrew: Yes.

Manny: Win back.

Andrew: Win back campaigns. See. Manny knows win back campaigns after I . . . I should have told you I was going to call on you. But yeah. The idea is that the campaigns you send right here. This customer is starting to no longer buy from me. Let’s win him back. That’s what a win back campaign is about. In eCommerce lore, you got to start with conversion rates. Conversion rate is the best place to start. You guys hear that lore? I would argue that retention is even better than conversion rates. Specifically, a win back campaign. Is anybody doing these? All right. There’s more than one percent here which is great. This is how I made a quarter million dollars in an afternoon. It wasn’t actually made in that afternoon, but I set up the system to do it. This is how you should do it. You could do it tonight.

You look at your orders and you figure out what fancy name is the intra-purchase latency. Basically, it means how many days between a first and second purchase or a third and a fourth purchase. It’s funny the first time you do it, you’ll see that people will buy on a schedule. You sell beer and stuff, this guy buys the lubricant or whatever on day one. You know? Is there beard lubricant? [inaudible 00:24:23]. Yeah. Thirty days later he buys the next beard thing. Right? And in another 30 days he buys the next beard thing. For my business it was the woman buys baby bedding and 30 days later it’s the crib. And it just was fairly predictable. It’s not perfect, but if you graph it out you’ll see there’s a commonality there and you can do what’s called a histogram in Excel. You find out these are months. Okay, so 50% of my customers who buy twice have done so within one month and another 20% have done so within two months. So if we just draw an arbitrary line right here, say 90% of the customers already bought twice. Yeah. This is second purchase. Sorry. This says between second and third, but I would do it first and second to start. So most of the customers who would have bought twice have bought by month three in this case. You can wing it. If you don’t want to do this analysis, just choose 30 days, 60 days, something like that which you think intuitively makes sense.

The idea here is you want to build this trip wire promotion, so if I’m thinking 90% of the people who would buy from me twice, my multi’s, my whales have bought within 60 days, then let’s start the promotions after that 60 days. Because if I start the promotions before, I’m still giving away margin dollars to people who would have bought anyway. That make sense? So at 60 days, maybe if they get to that 60 day trip wire and they have not ordered again, they’re going to get 10% off. And it didn’t work. They still haven’t bought. At 90 days we’ll send them 15% off. Man, this customer has gone all the way to 120 days. Let’s send him 20% off. The number is going to be different for your business, but the basic principle is use a promotion ladder. You stack your promotions. You make them better and better with the customer’s increasing likeliness that they won’t come back. I was going to show you the original calculations from the first time I did this at Design Public and just kind of show you the ROI you can achieve.

Here’s my 10% test. Here’s my 15% test. And I pull in the number of customers I sent it to and I computed the gross margin and profit and how much I actually had to give away and the 10% margin dollars. You know? This had a 500% return and if I annualize that return, it’s a 6000% return which means over a year I spent a dollar on a win back campaign and I made $60 back. I don’t know where you get a better return in marketing than that. This is Andrew’s favorite slide. This is what happens when you do that. You’re psyched. Money’s raining. My wife drew attention to the fact. You know, those are only dollar bills. It’s like $20. I’m like, I know, they’ll get the point. It’s continuously raining $20’s on me.

If you’re going to start with a win back campaign, think of promo ladders as a great way to get over subsidy costs. Subsidy cost is the money you would have to spend to incentivize something that the customer’s going to do anyway. I’m at check-out. I’m ready to buy. I got my card out. The worst thing you can do is say, all right, 20% off. Great. I would have spent full retail, but I’ll spend $20. So that’s called a subsidy cost. The way you get around that is a promo ladder, like just increase your promos with time. You can test them using something like Clavio is great for this. Just build these things out, test them, let them run. You’ll be pleasantly surprised at the results. That’s acquisition. Retention.

Development, whale GMOs. Has anyone here heard of bras? Bras are kind of a fascinating product for a number of reasons. This is a women’s apparel retailer. What we figured out for [deleted] was bras were this key product where women would buy a lot of low priced items and then if they bought the bra, then they would start buying the dresses and the knits and high-priced items. It in many ways was this bridge product from a minnow to a whale. Basically the implication was start featuring bras on the site. We put it in the newsletter. We put it on the homepage. And it served its purpose. It turned an increasing number of those minnows into the whale buyers. So they experienced for whatever reason, I think it was the fit of the bra. They really liked the bra product and because of that they developed such trust in this retailer that they were more likely to buy the dress. One thing I would note, this is very graphic, but it’s 9:30. I was having fun last night. There’s this saying in database marketing that good customers are born not bred and what that means is a whale is usually a whale. You know? They’re born that way. A bad customer is a bad customer and they’re born that way. So I would recommend don’t spend too much time trying to create good customers from your bad customers. It’s much easier to just acquire more of the goods or retain more of the goods. But that third category, the GMO category, probably not worth your time.

The Recap

Here’s my recap. All customers are different. Whales are better than minnows. Grow the whales. Easy. Grow them through acquisition. Use the very convoluted demo I did and use your Google Analytics. You’re going to be able to see which campaigns are driving whales versus which are driving minnows. Put money behind the ones that are driving whales. Retain them. The best way to do that is a win back campaign. Develop whales? Probably not worth your time. I want to leave you with just this thought. Mathematically, there are only three ways to grow retail, right? Increase your AOB. Increase frequency, the number of times somebody buys. Then increase your traffic. And again, I would frequently put every marketing tactic into one of these buckets. Put it into the bucket of SEO, SEM, AdWorks Hack, whatever. I’d find that that was just so paralyzing. What I liked about this customer analysis approach is it’s overarching. It’s strategy. It’s not tactics and it answers this. If you pull in more whales, whales have a higher AOB. They also have a higher F. You want to attract more of them. Just pulling in more whales solves so many of your problems across all these different channels. You should look at things through that lens.

It’s the 80-20 rule as it’s applied to marketing. I hope if you use that approach, you can do what I did and go from this warehouse that was not mine, but looks something similar to how our office was to this, you know, where you’re traveling the world and you have time and energy and fun to devote with your family. This is my daughter strapped to my chest and I’m carrying a car seat. My wife is sipping an espresso. That’s what I do with my time now. That’s all I have to talk about today. This is my new blog, nerdmarketing.com where I think . . . I’ve been blogging at Drew Sanocki just figuring out what I want to do and what I want to focus on in eCommerce. The thing that I’m the most passionate about is customer analysis and data and using data and processes to improve marketing. I thought this brand name was a little bit more apropos than drewsanocki.com.

That’s going to do it for this week. If you enjoyed the episode, make sure to check out the eCommerce Fuel private forum, a vetted community exclusively for six and seven figure store owners with over 600 experienced members and thousands of monthly comments. It’s the best place online to connect with and learn from other successful store owners to help you grow your business. To learn more and apply, visit eCommercefuel.com/forum. Thanks so much for listening and I’m looking forward to seeing you again next Friday.

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