Episode 44: Boosting Your Business With Customer Segmentation, Part 2

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Boosting Your Business With Customer Segmentation, Part 2

Geek out with Drew Sanocki and Michael Epstein on the Nerd Marketing Ecommerce Podcast. In this two-part series, The Ones About Whales and Minnows, you’ll learn the single most effective way to grow your business, why focusing on conversions (any conversions!) can be a losing strategy, and how blazers and bras can be bait for high-value customers.

More About Drew Sanocki and Michael Epstein

Drew and Michael have successfully turned around three nine-figure brands, including Karmaloop, worth around $100 million. They now are the co-CEOs of PostPilot, #1 Shopify app for direct mail. This season they’re sharing their expertise on how to grow your ecommerce store to profitability on the Nerd Marketing Podcast.

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To recap, last week we went over database marketing and just this general idea that not all customers are created equal, that you've got good ones and bad ones. We're going to call them whales and minnows. Whales drive the business. And that growth becomes a heck of a lot easier if you focus on increasing your whales, acquiring more of them, getting more of them to purchase from you. So that was last week.

If you can watch this on video, we've got slides. Otherwise, we're going to do our best to kind of describe the slides with the occasional voice. This week, I want to talk about the how, okay, which is probably what you should all be asking. How can I increase my whales? And 100 years of catalog marketing and call it 20 years of database marketing teaches us there's really only three ways to increase your whale percentage at your business or the number of whales that are buying from you. The first is acquire more of them. The second is retain them. So if you keep the whales buying longer by nature, you're going to have a higher percentage of whales buying from your business. And the third would be turning a minnow into a whale. We're going to call that whale GMOs. Like, can you beef up a minnow?

So let's start with acquisition. Whale hunting. The first thing to think about when you want to acquire more whales is you start to look at your acquisition channels. This could be your channel report in Google Analytics or your source medium report or your ad groups or your keywords or your Facebook ad groups. No matter the acquisition source, you can start to detect patterns. And the patterns you're looking for is certain channels are going to drive a disproportionately high percentage of whales. So this was eye opening to me. If you're watching at home, you're going to see a bar chart. And I'm essentially comparing two different acquisition sources, source A and source B. And source B has more whales. Source A has a higher percentage of minnows.

The idea here is you're not just looking at conversion rates off of these sources. What you're looking at is at the type of customer you're acquiring. In part one of this presentation, we talked about this general idea that more often than not, the cost of acquisition is the same for a minnow and a whale. Not always the case, but usually. And if it's the same, why not put your marginal dollars against acquiring more whales thanmore minnows? I've heard so many people talk about this and probably not even realize that they're conversation where they're talking about, you know, how's TikTok performing? And they say, oh, I'm acquiring a bunch of customers, but then I track them over time and realize that they're all one and done customers. So you think you unlock this channel and then you realize you're actually not acquiringthe type of customer that you actually want.

People have talked more about lifetime value now, you know, than probably 20 years ago when I was running my furniture brand, nobody really ever called it anything. What we're getting at with the whole whales and minnows thing is lifetime value. And the more you could stack up the predicted lifetime value per channel, per source, per ad group, per email campaign, the better, right? It's not just looking at one side of the equation, which is your cost per acquisition. You got to look at the other side of the equation too. The spreadsheet I've been talking about through both presentations, which you can download on the podcast page, it's a pull from Google Analytics. It's essentially my source medium report. I'm comparing that whale segment that we built last week with all sessions on the site. And you see in this case, Google CPC driving so much more revenue disproportionately from whales.

So for this brand in particular, you'd really want to lean into CPC and you probably want to do that exercise of figuring out which campaigns are doing the heavy work. So Mike, I know that's like literally your first quarter at AutoAnything was sort of building out those models to tie lifetime value back to ad spend, ad campaigns, promos. Yeah. And product purchased. All those different cohorts, we saw such disparity. You had Auto Anything, you had these people that were coming in and buying a floor mat for 50 bucks and then you'd never see them again. And then you had other people that just bought themselves a new truck and they got the tonneau covers and the running boards and they spent like $3,000. And it informed how we messaged people, it informed the types of ad campaigns we were running, the type of search terms that we were bidding up on. It's exactly as you said, you can really tailor your marketing and messaging around attractingmore of that type of customer. The big unlock. Another way to sort of stack the data. So first you can look to your campaigns or your first product purchased or your offers. You can look at the percentage of whales and minnows that each one of them drives. You could also flip that on its head and do it on the customer level. So or the customer group. Let's create a group of whales, a group of minnows, and then look at how they, you know, the source of their first visit or what they purchased first. The current slide shows the nine figure apparel brand we've been talking about and just how they've broken up their segments. You know, they've created quintiles of customers. The top quintile is the whale, the bottom quintile is the minnow. And you can see here, each one behaves very differently in terms of how they've come to the site. And the whales disproportionately 70% come from direct traffic and branded search. So that tells me right there, like they buy into the brand.

nine-figureThis is a brand and they've done a good job orienting the brand towards the whales. You compare that to the minnows, 43% for direct traffic and 6% for branded search. The minnows aren't coming in off of the brand. They are coming in, I mean, for those of you who can't see it, they're coming in off of social disproportionately. I think it was the swimsuits that the minnows bought. They're sort of seeing something going on on social. They come in and buy the swimsuits and they're done. Exactly. The whales interact with the brand. They come in from a very different perspective. They spend $13,000 and they repeat. So this is the kind of exercise you want to do for your own brand to kind of get a sense of what's the difference. You probably don't have to go weeds and compare every quintile, but at least that top and the bottom one are really helpful, we found. To build these kinds of reports, there's probably a lot of people listening is like, I want to build a report. How do I build a report? You got to start logging things with every order. This is where transactional data analysis comes in. Probably do a whole other podcast on how to do that. A whole other completely boring podcast on transactional data analysis.

What's important is to start logging things on the transactional level. In this case, log attribution information, log promotion, log the coupons that they've used in that because it's going to start showing you very different things. Increasingly now, you can get this stuff out of the big players out there. You can get it out of Clavio. You can get it out of Triple A. You can get it out of Lifetime. And in fact, here's the Lifetime report. It's a Shopify app. You plug it into Shopify. It's going to do a lot of the transactional data analysis for you. This is for Overtone, which is one of our portfolio companies. And you see here, it's kicking out essentially what we talked about two slides ago. It's telling me the top positive drivers of LTV and the top negative drivers of LTV. So substitute the word whales for LTV and you see what is driving the whales and what is not driving the whales. Not everything in here is relevant, but they've got first marketing channel, organic search. So the customers coming in off organic search, more likely to be whales versus the customers coming in through CPC in this case. You could also see discounts in here. So customers that came in with this two for 20 discount are actually more likely to be minnows. That's not surprising to me because sometimes when you acquire customers on discount, they're worse customers. So I would encourage you to play around with this kind of thing. It's probably the first thing when you think about increasing the whales at your business, the first thing you should do is acquire more whales.

See what is driving the whales and what is not. Forget about the ones you already have, go acquire more. And to do that, start digging in, going weeds on your marketing channels and your offers to figure out what's driving the whales and put your marginal dollars there. So that was acquisition, acquiring more whales. The second way to get more whales in your business is by retaining them. We're going to call it whale herding. You keep your current whales around longer and by nature, you will have more whales. So it's a retention goal. And I've got a slide up now of the customer lifecycle. Basically, many businesses have some version of this bell curve where customers engage with a brand. They start buying. They increase their purchases over time, higher frequency of purchase, and then they taper off and then they're no longer a customer again. That's the lifecycle. For some brands, it might be 60 days, others, it might be three years. But the general idea is, can you extend that lifecycle to be longer? If the whales came in and left in 60 days, can we make it 90 days? So that's the general idea here. There's a lot of ways to do that. Essentially, we're talking about three ways to increase the retention of your business. There are really only three ways in e-commerce. The first is to sell the right merchandise. The second is to have the right shopping experience. And the third is the right promotions and the right promotional strategy.

If we look just at merchandise, the first way you can increase retention, we go back to that nine figure brand example. The big difference, the whale that comes in and spends $14,000, they're spending it from a number of different categories, except for swimwear. And then the minnows are only buying swimwear. So right there, you should start to think like a merchandiser. Something's going on with the merchandise. It could be, for example, that swimsuits have a bad customer experience. And so anybody who comes in and buys swimsuits does not like them and doesn't become a retained customer. Whereas the other categories are stronger. And this is more analysis from the same brand. So here we've looked at the actual customer quintile we talked about before, comparing whales and what they buy to minnows and what they buy. And the first thing that's evident on this slide, if you can't see it, is that blazers, men's blazers, the whales buy the blazers. Okay, the minnows don't. Blazers are a harpoon product. Get it, Mike? Seafaring analogies. I love it. Okay, so you use a harpoon to kill a whale. Get it, Mike? I do. Okay, so the whales are buying blazers. This brand knows whales buy blazers. I will now feature blazers as a harpoon product in my email, on my site, in my store.

The minnows aren't even buying them. So maybe that's a problem with they don't see them or they don't value them. You know, I don't know the answer to that, but they would have to dig into that. But that starts to send you in a direction and a knowledge of how to improve your retention. We need to start playing around with blazers. That's what this brand did, by the way. They lead with the suits.They lead with the blazers. Think about how that even informs your ad strategy, right? Like, you could choose to put any product in your ads.Why wouldn't you choose to feature the products that you know are going to attract the best type of customer? Yeah, I think most brands think in terms of conversion rates. And they're just like, I want this to convert. Exactly. You're not going to convert as often for a blazer or for a suit. But when you do, you're acquiring a whale customer that's going to stick around a lot longer. Right. So many brands might put a swimwear product in their ad because, as you said, gets the best conversion, gets the best engagement. But that's not actually helping your business. And what's missing from this picture? I don't see any swimwear in that picture. I don't see any swimwear. For those of you at home, I'm showing a picture of a apparel brand with no swimwear in it. If you can imagine that. Great. So that's merchandise. I say this as a marketer, the best way to increase retention is through merchandise. The second way is the right shopping experience.

So naturally, you have a good positive experience. You know, you have great customer service. Things like that really increase your retention. You know, I think of Zappos in the early days and certainly subscription products do really well here. Like, can your shopping experience, can your website experience promote a subscription product like a coffee subscription? The more people that subscribe, the better your retention is going to be. Subscriptions are really interesting because they can kind of bite two ways. I don't know if you remember ShoeDazzle, Mike. It was around 2010 or so. Yeah, I remember the commercials. Yeah, Lightspeed Company. So this was like they noticed this is, I guess, the danger of subscriptions. Like they wanted to implement a subscription plan because women buy shoes and they're thinking, let's make a subscription plan here. It's going to turn us into a SaaS business. Probably one of the first that did it. And the subscription plan almost killed the business or in fact did like led to their sale.

And the reason was, do you know the reason? I don't know the reason. What was the reason? They capped their whales. So in other words, they had women coming in and buying five, ten pairs of shoes. Not all their customers, but their whales would come in and buy five to ten pairs of shoes a month. They roll out a subscription plan where it's a pair of shoes a month. All of a sudden, the whales join the plan and stop ordering the five pairs a month. So just I think a word of caution on shopping experience. I mean, if you're going to deploy a subscription plan to theoretically increase the number of whales at your business, it can backfire if you're not careful. That's real interesting. Right. So we talked about merchandise. We talked about shopping experience, the last way to increase retention. Near and dear to my heart as a marketer is the right promotions. Right. Lining up our promotional strategy in a way that encourages the whale customers to buy longer. And this gets to the highest ROI thing you can do, literally hands down, highest ROI thing you can do as a CMO. You can have your CFO doing backflips and that's winning back your defecting whales.

So I've got that whale customer, maybe a ShoeDazzle, the woman who comes in and buys five a month. And typically she buys five a month for, you know, four months and then she's burned out and she defects. If I can keep her buying for six months, seven months, it's the highest ROI use of marketing dollars, typically for me as a marketer. And we talked about this extending their lifecycle over time. My story here is I think I made a quarter million dollars in an afternoon at Design Public when I adopted this mindset of winbacks and how I want to engineer them. So this was a brand we were just doing spray and pray every day. Same offer to the entire list. And I moved from that to implementing some winbacks to keeping my whales engaged longer. The first thing I did was this kind of analysis. I looked at what's called intra purchase latency. So you look at the typical behavior of a whale. For those of you who can't see my screen, I've got an intra purchase latency report for overtone that I pulled from Postpilot. So you can access these kind of reports in Postpilot. And it basically shows that 75 days is the average between the first and second purchase for my whale customer. You know, if I know she comes in and and she's spending X thousands of dollars a year on hair color, she's buying on average 75 days between that first purchase and the second. The second to the third is 64 days and the third to the fourth is 56 days. So light bulbs should be going off. You should be seeing this. You should be salivating. This is gold. It is gold. It's what tells you where to set the triggers to win these types of customers back. This is literally where you should deploy your marketing effort.

Yes. It's like I see the standard behavior. A whale customer is coming back 75 days after the first purchase. So if she hasn't come back after like 90 days, she's probably not going to be a whale anymore. So I need to like expend my effort to keep her buying according to this cadence. Work at the deviations. You know, I roll up my sleeves. I go into Klaviyo, I go into Omnisand, I go into Postpilot. These are the segments that I want to target with some campaigns. And really, the methodology we love is called a discount ladder. The idea is most brands discount too much. Just from showing up on a website, you get 20% off. They're giving away an insane amount of promotional dollars by doing that, by having no strategy behind their promotional cadence. What you want to do is that latency report, you want to look at your standard customer behavior, your standard whale behavior, and then deploy your promotional dollars to correct deviations from that behavior. In this case, I threw up a discount ladder example. Say your average customer, your average whale buys every 50 days. At day 60, that's when you want to give a discount. Not before, because before the customer is still likely to come back and buy again. So at day 60, you might give 10% off. At day 90, if she hasn't bought, 15% off, increase the discount. And then, you know, day 120, go up to 20% discount.

If at any time the customer buys, they fall out of the sequence. But that's a discount ladder.And that is kind of what will conserve your promotional dollars and deploy them in the most relevant way possible. See this on welcome sequences too, Drew, where people blast that 20% off just for signing up. Why? Why are you doing that? Start with a lower amount. Look at how long it typically takes for a customer to convert once they've signed up or once they've visited your site.And start triggering those increasing incentives after they pass those thresholds. Right. And this is something we see all the time at Postpilot. When we spec out these core win back campaigns, you know, this is a typical example. You can run tests if you can't see this at home. It's a ROI calculation, right? Like you want to run a test, send discounts at various levels. Each will have a different response rate. You take that all the way through to the net profit. And these kind of campaigns are just insanely profitable for businesses. I would say almost 95% of the brands we work with at Postpilot get that positive ROI on these kind of win back campaigns.

For those of you at home, let me describe what's on the screen. It's dollars raining down on my head. It's a gift that probably took me Saturday to figure out how to make. So just to recap on win backs, we went over, you know, discount ladders as sort of the best way to deploy your promotions. A great way to reduce subsidy costs. You want to test the discount ladders, various segments, timing, offers, and then you want to automate them. You automate them in your CRM. You automate them in direct mail with Postpilot. And it's probably the highest ROI use of your time and marketing dollars is like keeping those whales buying longer. And that brings us to the third way. The third way to create more whales. Your business is to turn a minnow into a whale. Is there a play to turn the minnow that spends $37 on a pair of swim trunks into the whale that spends $14,000 on every other category? And I've seen it. It can be done. I would say bras are an interesting example. You know, my mentor sort of cut his teeth at home shopping club and they figured out that bras like you'd had these minnows come in and they would buy something from some category. I don't know, perfume. And then if they bought a certain bra, they had such a good experience on the bra that it opened them up to their whole knits category and apparel category. It's the gateway drug. So it was a gateway drug. Bras were a gateway drug. So what they realized was like, hey, what we got to do is put bras in front of every perfume buyer.

You know, every minnow needs to see the bra, buy the bra in order to become a whale. And so they worked it into their ads, their email sequences. But I would also say that database marketing teaches us that good customers are typically born, not bred. So it's hard to do. It's hard to take a crappy customer and turn him or her into a good customer. It's way easier to go just acquire more goods. That makes sense. So let's give a recap in this two part presentation. We talked a lot about how Mike and I have grown profits at a number of big, big brands. And it's essentially by realizing, number one, all customers are different. Right. You've got whales who drive the business and you've got minnows and you want more whales. The goal is to grow your whale segment. There's essentially three ways to do this. First, you go out and acquire more. And when you do that, you want to look for patterns in your acquisition efforts, which acquisition efforts are bringing in more whales. Number two, you want to retain more of them, in particular, lean on the win back strategy, right? Win back your defecting or prevent your whales from defecting. And number three, you could turn a minnow into a whale, but it's hard to do. And if I were conserving my time and energy, I would focus on the other two. So Mike, that's the essence of the 80-20 rule. Realizing that 20% of your customers, your whales are going to drive the business, going to drive 80% of your revenue, your profits, and how to go about seeing what that is and then acting on it to grow your percentage of whales. It's for me personally, what brought me from, I would say, struggling at Design Public in 2000 when I started that brand 20 years ago, working long hours, treating every customer the same. And it brought me to where I am today. The successful lifestyle design guy lives on the beach, enjoys his family, has energy, time for travel, focus and fun. And if you're not looking at home at this video, there's a great shot of me just enjoying life as a dad.Is that what you describe here, Mike? Yes. You should see the picture of Drew with the baby carrier on. You too could have this. You could achieve this. So thanks for listening to our two-part series.

This is the Nerd Marketing Podcast. If you didn't catch episode one, it's really good. Go listen to that. Subscribe, rate, and review wherever you listen to podcasts. And be sure to shoot us any questions you have about whales and minnows.See you.

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