How to Double Your Business Without Spending Another Cent (Part 1/3)

Written by Mark Patchett, founder of The Ecom Academy, ex VP of Growth Resident (Nectar Sleep), ex Marketing Director Trouva.com

In this three-part series, I’m going to run you through how to double your revenue while increasing your profitability by 245% – sound good?

Before we get started, let’s take a peek at the best part; what your numbers are going to look like. Take particular notice of the profit growth on the right – that’s all cream!

Whether you’re selling tracksuits for chihuahua’s (actually a business I started), beautiful boutique skincare products, fishing gear, knitting needles or anything in between – this will work for you.

Let’s dig in.

Under The Hood of The Growth Machine

With traffic being the fuel, there are three main levers in the growth engine. These are:

• Contribution margin (including AOV)
• Conversion rate
• Repeat transactions

If you’ve been in the space for a while, you’ll mostly likely know these levers – BUT have you mapped out just how important they are when pulled individually or…most epically, when pulled together?

This is what will happen when you start getting it right…

In order to double your business without spending another cent, we don’t actually need to double anything individually, but instead just increase each of the three levers by just……26% EACH!

Now, you may have done the maths and noticed that 26%*3 = 78%? WTF’s going on? Fortunately, I don’t have my math wrong. The magic here is in the power of compound impact. This lovely theory was coined as Geometric Growth for Exponential Results by the mighty Jay Abraham – who’s marketing prowess is almost as impressive as his hair.

Introducing, the levers:
Lever 1 Contribution Margin (CM)

A definition from our friends at Harvard Business Review: “When you make a product…and deduct the variable cost of delivering that product, the leftover revenue is the contribution margin.” hbr.org

CM is so often neglected as a core KPI, despite being the lifeblood that determines how much $$$ we keep per transaction.

People get massively fixated on trying to drive more and more transactions without considering the importance of increasing the profitability of each transaction. When you start pulling apart what goes into each transaction you discover that not every dollar drives the same value or has the same cost.

The first step to peeling back the layers is to separate the fixed and variable costs.

Fixed costs are anything that we get charged for at a flat rate, regardless of the transaction value, e.g. components of transaction fees, pick and pack fees, packaging, some shipping fees, etc, and then there are variable costs which are primarily the costs of the goods inside of the box/bag. Then of course, there are the marketing costs that helped us get the order. For this model, we’ll assume marketing costs remain flat.

So what’s our overall aim here with Contribution Margin?

Our aim is to increase the revenue of an order while keeping fixed costs as flat as possible and the variable costs at the same or an improved gross margin %.

For example, could you fit a higher value item in the same size package or perhaps even add additional items in the same box? When fixed costs remain the same, yet the overall value increases, the percentage of profit you make from that additional revenue increases.

Let’s take an example:

For argument sake, let’s say that you have a consistent 50% profit margin and your current Average Order Value (AOV) is $70. Our aim is to boost AOV up by 26% while keeping fixed costs flat. Think we can do it?

• Here’s the breakdown of our costs in our current transaction:
  Transaction fee: 2.5% of revenue, plus 25 cents fixed fee = $2
• Packing and shipping: $8
• Cost of goods: $35
• CPA (marketing cost to drive the sale): $15
• Total costs: $60
• Gross profit: $70 – $60 = $10

As you’ll know from running a business, there are plenty more costs that we haven’t included, such as returns, operations, staff, Krispy Kreme’s etc. Unless you’re driving huge volume or it’s just you and you’re pet axolotl running the business from your parents basement, $10 isn’t a hugely exciting amount of gross profit to work with.

So what are some options to send AOV heading north, and…to stay there?

9 Ways To Increase Your Average Order Value

1. Get new inventory that attracts a higher price:
Seems obvious, yet business owners often don’t realise what people are willing to pay. Are there related products that you could be stocking that attract a higher price tag? Are there opportunities to release special limited edition ranges, premium quality versions with better materials or ingredients or even bigger volume/sizes (think Cosco)?

2. Optimise onsite merchandising:
Dig into your Google Analytics Product report to hunt for products that are selling with decent relative transaction volume and at 25%+ above your AOV (that also have solid profitability). Next, tweak your category listing to ensure that these products have more prominence. Also consider using call out labels on the tactically selected products, such as “most popular”, “best seller”. You can also take advantage of featured collections and onsite banners (sidebar, topbar, bottom bar) that drive people to these targeted collections.

3. Leverage channel mix dynamics:
This fella is often neglected. Run an analysis on your average order value by channel. If you’re selling a range of products, you may find that certain channels, e.g. Google Shopping, attract a lower AOV than say Facebook. You of course need to take into account your channel level CPA (cost to drive the sale), as a channel may have a lower AOV but also a lower CPA, which net net, means that the channel is a winner. Regardless, make sure you do some digging in here, as certain channels may present opportunity or be pulling you down more than you realise.

4. Jack up the prices on your existing products:
This will really depend on the type of products you’re selling. If you’re selling branded products where people can easily price compare, it’s going to be tough BUT if you’re selling your own brand, you’ve got plenty of control here. It’s normal to feel hesitant when considering increasing your prices, but you may be amazed to see that conversion rate stays the same, or even increases (due to higher perceived quality).

Please note: Price testing can be quite tricky. You’ll need to be aware of things like communicating changes to previous customers, updating prices on other websites that have listed your products (like affiliates), competitor price points, ads and emails that mention price etc, so keep in mind where your price may be listed before making the update.

5. Offer Premium Warranties:
Super fun fact, one of the most lucrative profit centres for major electronic stores is the up-selling of warranties and after sales service. Based on what you’re selling, would there be any opportunity to slice into this pie?

6. Offer Bundles:
Could you be grouping products that would go nicely together? You can either go by gut if you know your customer well or you can analyse the products most frequently purchased together in Google Analytics (some Ecom platforms like Shopify allow you to do this as well). You don’t even always need to give a discount here, the recommendation is often enough. Just think of mannequins…if plastic people can convince us to buy clothes, I’ve got no doubt you can start bundling your heart out!

What about automation? Plenty of good opportunity here that we’ll cover in another post. There is a HUGE amount of value kicking off manually first to learn the patterns and gaps for tagging etc.

7. Cross-selling:
Similar to bundles, yet you allow people to add specific items to their order that go nicely on an à la carte basis. Think of a toiletries bag with a face cleanser, sheets with a bed, pants with a shirt, extra batteries with a camera or that extended warranty with non perishables. Start by thinking of any other product that would be used before/during/after using your product.

8. Launch Up-selling:
If you’ve got multiple models of certain products, the aim here is to push people towards the more premium offering. There’s lots of fun pricing theory at play here. The idea is to make the perceived improvement of the premium product a higher % than the % of the increased cost. For example, say you’re selling blenders, one is The Super Spin 500 at $200, the other is The Hammer Time Ultra Whirler 800 at $279 – who’s going to be able to resist some hammer time?

9. Leverage Post Purchase OTO’s (one time offers):
Testing the above ideas can be risky, as sometimes your experiment may in fact reduce the conversion rate, e.g. if the price increase is too high, less people may buy which could increase your cost per purchase. There is one place to start testing that is as safe as Switzerland; the post purchase page. After someone has made a purchase, you have free reign to try and sell whatever you want without the risk of losing the first sale. It’s also a perfect opportunity to give “exclusive” and “one time offers”, as in order to see this page again they’ll need to buy something again.

Many think that “my customer has just given me all dat money, why would they give me more???” People go through quite a cognitive quest to finally make a purchase. Once they buy, they’ve actually sold themselves on you, so the hard work is done. This means that a percentage of customers will immediately buy something that you put in front of them even without an offer, adding an offer will of course increase this further. Also, unless you’re a single product seller, a percentage of customers will most likely have wanted more products than what they finally checked out with, so offering a sweet little incentive to buy more can work brilliantly.

The ultimate flow for a post purchase offer is to allow them to buy with one click, rather than needing to add payment details again e.g. you can do this with Shopify and Magento. You’ll need to double check your terms of service and privacy policy if you are holding credit card details, though.

Back to the mission…

Congrats, it’s fair to assume we’ve hit our 26% increase in AOV by now. Let’s find out what happens to our numbers:

All our costs stay the same, with the exception of our cost of goods (this assumes we can fit everything into the same package) and there is only a small increase in the variable credit card processing fee.

So the 26% bump in order value takes us from $70 to $88.20, with the cost of goods landing at $44.10.

So $88.20 revenue – $72.15 total costs = profit of $16.05 vs the previous profit of just $10.

Now, $6.05 extra may not seem like much but…if we’re doing 1,000 sales a month, that’s $6,050 in freshly squeezed PROFIT that didn’t exist before!

What’s really magical here, though, is that our order value only increased by 26% but our profit increased by 60.50%!!! All because we took advantage of our fixed and variable costs AKA our efficiency of contribution margin.

Where to next?

Our machine is starting to feel warmed up…but we’re only a 1/3rd of the way there.

Continue below: in the next two posts we’re going to be pulling:

• Lever 2 CRO: the rapid growth approach to conversion rate optimization
• Lever 3 Repeat Rate: how to get customers boomeranging back faster than you can say “A Dingo ate my…”

Add your details below to get updates on all the goodness we release:

About the author: Who’s Mark Patchett?

Over the last decade I’ve been helping 100s of businesses on their journey of growth; from tiny mom and pop shops through to hyper growth startups, like Trouva.com and NectarSleep.com – both who exploded from just a handful of daily sales to become the top fastest growing businesses in the UK and USA respectively, and, both achieving that growth in just a few years.

My obsession is refining the science behind what makes the winners win, and the losers lose.

The cliche entrepreneurs quest may have you believe that success is all about the enduring hustle, blood, sweat, tears, high fives, huddles, strategizing, synergising, low hanging fruit and blue sky thinking, but that mentality is as useful as a Hang In There cat poster. Sure you’ll need to work your ass off but when you optimise your energy and output by working within the right framework, you’ll start ScalingSmart™.