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February 10, 2009

Episode II - Introducing the ChannelAdvisor Ecommerce Framework (CEF)

This is Episode 2 in a 4 part series.  Here is the outline for the series:

Episode I - Q408 in-depth analysis - available here with Q+A covered in an addendum (IA) here.
Episode II - Introducing the ChannelAdvisor Ecommerce Framework (CEF) (we are here)
Episode III - eBay, Amazon and the CEF (coming soon)
Episode IV - How to fix eBay (coming soon)

It is strongly encouraged that you read them in order as they assume the reader has been following along as they build on each other.

The ChannelAdvisor Ecommerce Framework

ChannelAdvisor is a software company whose customers are online retailers of all sizes.  We have over 6,000 customers and on a daily basis interact with literally hundreds of retailers from the big top 100 retailers all the way to very entrepreneurial businesses carving out their niche online.

Through the years you start to notice some trends (or patterns as we call them in the software world).  What you start to notice is that retailers think about there strategies in different, yet in a way similar, ways.  What products are you going to offer? What is your pricing strategy? What kind of buyers do you want to attract? Does your brand stand for great deals, great service or ?

Internally we've codified the five core areas of ecommerce that we've found and call that systematic way of thinking about an ecommerce business the ChannelAdvisor Ecommerce Framework.  The CEF gives us the ability to talk to customers and prospects in a coherent fashion and understand rapidly where they are today and what their goals are going forward.

In this episode, we'll introduce readers to the CEF and then use the CEF to think about a couple of internet retailers (specifically NOT eBay and Amazon yet) to get a feel for how this framework works and how it helps you think about the various aspects of internet retailing.

The CEF - Five Pillars of Ecommerce
When thinking about an online retailer's overall strategy, positioning and business model (and thus their brand) there are five pillars of ecommerce that make up the CEF:

  1. Selection
  2. Value
  3. Ease of use
  4. Trust
  5. Merchandising
It's important to note that not every retailer has to excel at all five dimensions to be successful as you'll see in the case studies.  However, I have observed that for a retailer of any size to be successful, they need to decide what their strategy is for each of these areas, stick to the strategy and let buyers know what that strategy is.  In many ways these decisions embody the retailers brand and how they are perceived by their customers.

Let's first dig into each of the five parts of the framework and then go into some very specific case studies to see where various internet retailers sit within the framework and you can see how the CEF can guide how you analyze internet retailers.

Selection

First, and most importantly, consumers love selection.  If they are going to spend their time looking for something online, they have an expectation they will find it (seems simple right?).  How many times have you driven to 2+ stores on a weekend looking for a product to not find it.

Brick and mortar retailers are constrained by the physical shelf space which is extremely expensive and therefore has to hold 'top sellers' to achieve the necessary monetization rates to support that expensive retail space.  Online retailers move that physical aspect from an expensive store front to the substantially cheaper warehouse or distribution center (DC).  

Thus online retailers are able to offer orders of magnitude broader selection.  A very important concept called the long-tail, comes into play.  There's an excellent book by Chris Anderson available here, that I always recommend everyone in ecommerce make sure they read. Chris also has a great blog I recommend you follow as well here.  In a nutshell, this is a way of thinking about the 80/20 rule.  20% of your products will drive 80% of sales, but what about the other 80% of products?  With the offline model, you focus on the 20%, maybe even 15% because of the space constraint.  But online, with virtual inventory nearly costless, you can look at trying to approach 100% selection and thus address that last 80% long-tail products.  In many markets, the 80% long-tail is big enough to be a multi-billion dollar opportunity.

Even with the internet model, selection can get expensive on the DC-side. For example, can you afford to have something in your warehouse  that you only sell one of a day?  a week?  a month? a year?  As you go down the long-tail, the volume decreases and thus inventory 'turns' decrease along with selection and inventory costs and locked-up cash go up.  

When discussing selection, most retailers think about the products you are offering, or SKUs which can include a variety of sizes, colors and other attributes (styles).  But it's important to note that selection can also mean different conditions (new, used, refurb) or even pricing models (auction, fixed price, negotiate/offer, mark-down).  In today's world, consumers want options and that means not only product options, but 'purchasing options' as well.

For some products, 'delivery method' can also be part of selection.  For example, is the software/music/book/movie available via shipping, or download?

Value

The concept of Value ties directly to an internet retailer's business model.  Do you want to be a Nordstroms - high service, with high gross margins without discounting or do you want to be wal-mart - have the best prices and focus on volume vs. gross margins?

In today's ecommerce world, consumers are very savvy.  They know how to price shop, they know where to find coupons, they understand the implications of free shipping and yes, they are smart enough to add the core price and shipping price and compare that to other offers on the internet.

Value is sometimes at odds with both selection and trust/customer service.

Ease of use

Ease of use is a broad category and for most ecommerce sites includes the following major sub-systems:
  • On-site search (one company calls it Finding) - As a consumer can I find what I'm looking for with one search and a couple of clicks or do I have to go through pages of items to find what I'm looking for?  
  • Cart - Does the system allow me to easily shop and keep track of what's in my cart, edit, etc.
  • Checkout system - Do I have to go through an hour long process, or is it fast and easy?   Do I have a number of shipping options to match my timing needs?  Does the system correctly remember my settings from past transactions so I can minimize the data re-entry?
  • Order tracking - Once I've ordered with you, can I track my order, cancel, change?  Can I look at what I ordered in June of 2006?
  • Returns processing - After the purchase how hard is it to return an item or get questions answered about the item?
  • Product descriptions - Are the products available clearly described with all the relevant information you need to 
  • Click and Mortar - For click and mortar companies (offline with online capabilities) - Many consumers want to see some interaction between the two such as online catalogs, circulars, in-store-pick up, shared registry, click and mortar royalty programs, etc.  

Trust

Trust is hard to describe, because it's the culmination of many things that together give a consumer confidence to essentially turn over their credit card or other payment information.  Some of the key elements that can build (or destroy) trust with an internet retailer:

  • Customer service - Does the company take care of you before and after the transaction.  If you email, do they respond quickly?  If you call, does someone with product knowledge answer your question?
  • Security - Does the site have good password security? Does the site use the latest and greatest technologies to protect your information?
  • Returns - Unlike ease of use, the Trust/returns category is more around policy.  Does the site have a policy that makes it hard to return defective products?
  • Privacy - Is the site trying to sell your information to others, or protect your information?  Is the privacy policy clear and easy to read and understand?
  • Spam - Does the site email me incessantly or does it only email me when needed.  If the site has a newsletter, can I subscribe/unsubscribe easily?
  • Ads - Are the sites trying to throw irrelevant ads in your face so they make money vs. helping you find the products you are looking for?
  • Shipping and handling performance - How quickly do your products get to you?  Do you get exactly what you ordered, when they said you would get it?
  • Shenanigans - Are there any shenanigans like forced up-selling ("don't you want a filter kit with that camera?!"), or anything that makes you feel uncomfortable?

Merchandising

The newest addition to the framework, merchandising, used to be something we discussed in the 'ease of use' category as something to keep an eye on. Since 2007, merchandising has become a 'must have' that consumers are looking for.  Full disclosure, ChannelAdvisor acquired a firm in this field, RichFX, last year, so we're eating our own dogfood on this one. 

Examples of merchandising (not comprehensive) are:
  • Advanced imaging - For most product categories, consumers want to be able to rotate the product, see many images, zoom, pan, etc.
  • Recommendations - Technology has come along to the point where ecommerce sites can offer very rich and relevant recommendations that add a lot of value to the buying experience. This topic is worth of a series of blog posts, but suffice it to say that smart recommendations are a) hard and b) a 'must have' now.  
  • Product reviews - There are many studies that show that one of the top considerations for someone buying something online (that most times they haven't seen or touched) is product reviews from peers.
  • On-site price/product comparisons - Advanced ecommerce sites are offering some really interesting ways to compare products, go through some guided selling utilities or even help you make sure you are getting the best price possible.  This functionality substantially lowers shopping cart abandonment rates.
  • Wish/register lists - For many categories, consumers may want to save an item for later in a wish list, or provide it externally via a registry.
  • Social features - share a product, recommend to a friend, who else is buying this?, 

At the end of the day, one of the most important metrics for an internet retailer is conversion rate - the % of visitors that turn into buyers.  Merchandising is one of the single best ways to move the needle on conversions and also helps increase average order value (AOV).


Now let's look at some case studies to examine how three very different retailers fit into the framework.

Case study I - Zappos - "Powered by Service"

I heart Zappos.com

I first became a fan of Zappos thanks to my wife.  After about the second or third package that came with the colorful Zappos logo many years ago, obviously my curiosity was piqued.  Why was she ordering from this company I never heard of?  The answer was: "because with shoes, I want a great selection and great service."  To her, service meant that in the unusual case if a shoe didn't fit or match something, she was able to return it hassle free - actually with less effort than an offline store.  She came across Zappos via word-of-mouth.

Since then, I have to confess, I've been somewhat fascinated, bordering on obsessed with the company, simply because they are so different and it appears to be working.

If you'd like some background on Zappos, here are some things I would recommend:
  • The CEO (Tony Hsieh) and the COO (Andrew Lin) have a blog here
  • Learn about the company's philosophy and culture here and make sure to order the culture book - a great read.
  • If you can't get to an industry event where these guys are speaking, several of their talks are available on youtube here 
Most importantly, Zappos started in one of the toughest categories (shoes) and has generated these results:
  • Revenues/GMV rumored to be around $1b in 2008
  • 9.7m purchasing customers 
  • 75% recurring customer rate 
  • Repeat customers order > 2.5x in the last 12 months   
Here's the real kicker - About 2 years ago, Amazon realized the Zappos threat and launched a direct attack at them via a microsite called endless. That effort hasn't seemed to put a dent in Zappos' trajectory. Here's a company that is going toe to toe with juggernaut Amazon, and winning - how do they do that?

Let's look how Zappos does within the CEF framework to figure out the secret of their success.

Zappos and the CEF

1. Selection - excels
Zappos started out in the shoe category and is rapidly expanding to other categories (apparel and handbags seem to be next, but I've seen some electronics too).  For shoes, Zappos has 1200 brands, 200,000 types of shoes and when you look at the size/color/style matrix they have over 3m unique UPCs.  Amazon has 190,000 shoes by comparison, that I imagine probably matrixes out to 1m UPCs. eBay has 524k

Zappos clearly gets the long-tail for shoes.

For selection, it seems Zappos has decided they want to win the shoe selection game.  By focusing on one vertical, that allows them  to go deeper than a multi-vertical player like Amazon.

2. Value - not a focus
While Zappos provides free shipping (and frequently upgrades the shipping from standard to expedited at no additional cost), Zappos actually is not always the lowest price on the internet and even has stated that specifically is not their goal.  In fact they rarely even do mark downs/clearance and have acquired a business, 6pm.com, that has a different brand where they do that kind of activity as-needed.

3. Ease of use - excels

Within the shoe category, Zappos is extremely easy to use.  For some of their core customer sets they even have micro sites that cater the experience to that buyer-type's needs (example: couture, running, rideshop). The Zappos search engine is very tailored to shoes - you can search by any combination of brand, size, color, width, gender and price with a very easy to use filtering system.  A very graphical experience is given to the user so you can quickly see if your result set is getting close to what you are looking for.

Zappos pioneered the return process and I recommend everyone in the internet retail world look at how insanely easy they make it.  In fact every package comes with easy to follow instructions and a return label - Zappos almost encourages returns and in fact charges zero shipping for concerns (more on why in Trust).

4. Trust - innovates
Zappos' is a model citizen when it comes to trust.  Their customer service is second to none and clearly where they are investing to differentiate.  In fact I've hearch Tony and Andrew describe the company as: "a service company that happens to be in the business of ecommerce."  This is a clever way to signal internal+external folks just how important they view customer service to be.  The company takes pride that their customer service reps are not compensated on sales nor do they have any scripts or time limits.  The goal is for them to answer every customers questions regardless of time and not to pressure the customer into buying something.  Try their online chat sometime - it is amazing too.

I already mentioned the return process, but one important statistic I wanted to call out - when asked about abuse of the return policy at a recent shop.org event, Andrew answered that they don't worry about it because they've found that it is their top repeat buyers that return products so they actually view returns (and their policies) as an asset of Zappos and not a liability as many other retailers do.  In other words, each return they take in they believe extends the lifetime of the customer dramatically more than the cost of that return.

When it comes to shipping and handling, Zappos works 24x7 to ship out orders within 4hrs.  They do this via an advanced robotic warehouse system powered by Kiva Systems (watch the video!).  I did want to mention that the Kiva software was built by a good friend of mine and NCSU Professor - Pete Wurman.

Finally, read Zappos 'Safe Shopping Guarantee'.

5. Merchandising - excels

You're probably burning out on me gushing about Zappos at this point, but I did want to point out some areas they do merchandising very well:
  • Check out the reviews on this product - they ask customers to review the fit, comfort, etc.  Very helpful with shoes as some may run small/large and these reveiws tell you.
  • Each product has 4-7 'views' and zoom capability.  wonder what the heel looks like, click view 3 and zoom.
  • Each product has a wishlist capability  
  • Tell a friend 
  • Share the product lets you put the product out to your favorite social network (fb, etc.) for commentary/reviews 
  • Zappos provides a comprehensive glossary of all shoe terms for neophytes. 
  • Recommendations - Zappos seems to do a great job at learning about the kinds of shoes you browse/buy and then frequently serves up a value-added product recommendation.
Zappos - conclusion
Zappos excels at four of the five pillars - all but Value.  In fact, I think it's Zappos' acknowledgment that you can't have both the best customer service AND the lowest prices AND the best selection define the Zappos brand.  They have clearly chosen customer service and selection at the detriment of value and it works.  Many retailers I meet suggest that consumers won't pay for service and I always put Zappos out there as a case study that proves that wrong.

Case study 2 - Ideeli
(Full disclosure - Ideeli and ChannelAdvisor have a common investor - which I discovered AFTER being interested in their model.)

Ideeli
Ideeli (pictured above) is a relative newcomer in the internet retail world that is interesting because it is based off of a 'quick sale'/members concept that is becoming increasingly popular and disruptive.  The general idea is:
  • Only members (free and paid in Ideeli's model)  - this drives exclusivity which amps up the volume and brings people to the  'quick sale' 
  • A clear 'start time' to a sale (usually daily around 11/12 ET) and when an item is sold out, the sale is over.
  • Very limited selection - one driver of the model is that items need to sell out and be somewhat thinly traded to drive action.
  • Huge values - usually 30-60% off retail 
Many of you may be familiar with woot who was one of the first in the US with this model and now in addition to Ideeli we have Gilt and several others that all seem to be doing very well with the model.

Let's use the CEF to understand where these companies like Ideeli are investing their efforts and seeing success.

1. Selection - not a focus
Obviously, Ideeli has decided to favor everything BUT selection.   In fact they have turned very thin/focused selection into a positive vs. a negative. With typically only 50-150 items available per 'quick sale', consumers can't wait around, they need to be there within 30 minutes of the sale.  Ideeli has an interesting twist on this model that is typically called freemium.  Free/unpaid members get access to a sale one hour AFTER paid members.   This paid-member base gives the company a recurring subscription model of revenues and thus allows them to take some risks that other retailers without that revenue stream would be willing to take.

One challenge of this model is expanding selection can be tricky because you have to balance the call to action.  What Ideeli and others have done is scale the number of sales, frequently keeping them focused on different audiences/categories (kids, women's and men's running at the same time or dresses/formal, home goods, denim/casual running at the same time) so as to not cannibalize the 'quick sale' feeding frenzy.

2. Value - primary focus
For Ideeli, value is the primary focus.  Here you have luxury brands that historically are in the > $500 price selling for at least 30% off and as much as 75% off.  The Ideeli model is to drive customer acquisition via very aggressive discounts/mark-downs.

3. Ease of use - adequate, but no returns.
Ideeli is a very easy to use site for the model.  Because of the frenzy caused by the 'quick sale' concept, as a buyer, you want to be able to preview a sale and then when it starts, swoop in quickly, see what's available and add it to your card and get checked out very quickly before someone else snags the items.  Ideeli recognizes this and has streamlined the cart/checkout process and other functions of the site.  One interesting benefit of a thin selection is Ideeli doesn't have to put much effort into search. With 150 items, even the most basic on-site search engine is adequate.

Ideeli doesn't really allow returns, so there is no return process. See Trust for more.

4. Trust - adequate
Ideeli isn't really innovative around trust, but it also doesn't do anything to be a negative.  The site uses SSL for checkout and shipping times are not at Zappos' level, but adequate.  Another interesting aspect of the 'quick sale' model, is I would guess that pre-sales customers support is near zero, but post-sale support is probably higher than usual.  I've also been told that these types of sites can have a higher than normal return rate as the 'quick sale' drives people to buy things without as much consideration of the overall purchase, sizing, and other elements in the haste to get the product at such a great deal. To this end Ideeli doesn't accept returns, but IS very clear about that up front which helps with the 'no shenanigans' 

Ideeli also does some interesting giveaways to get people to experience the site and reduce the friction (and build trust).

Finally, another cool benefit of this model is that Ideeli has a bona-fide reason to email members every day to reveal the next day's sale.  Thus, I imagine they have an unusually high opt-in rate as well as open/click/buy rate for their email marketing vs. other retailers.  Their emails are not spam and if anything add substantial value to the overall experience.

5. Merchandising - strong
With luxury goods, frequently in the apparel category merchandising, you have to really draw the consumer into the product.  Ideeli does that with very strong product images (multiple views) as well as functionality such as zooming, panning and rotating.  Ideeli also does a good job of providing detailed product information that most shoppers will be looking for.

From a social/user generated content standpoint, Ideeli's products don't 'live' long enough to be rated, so they don't do that, however the site is designed to be very viral.  For example, as a member you can invite other members via email, or an html link like this  or with facebook and other social networks.  For each friend you invite that buys, you receive a $25 credit. Thus I imagine Ideeli doesn't have to spend more than $25 for new buyer acquisition which is very low by industry standards.

Ideeli - Conclusion

Ideeli is an interesting counter-case study to Zappos because while Zappos focused on all elements of the CEF except value, Ideeli has chosen value and ease of use at the expense of selection.  The 'quick sale' model gives Ideeli some interesting advantages and disadvantages that they have successfully navigated and turned into overall positives.

Conclusion - Applying the CEF to eBay and Amazon, coming in Episode III....

This brings us to the end of Episode II. In this post, we've reviewed the ChannelAdvisor Ecommerce Framework which allows us to look at any internet retailer across five dimensions to understand where they are focusing their efforts, where they are strong and where they are weak.

I purposefully chose very different companies to illustrate how the CEF can help you understand the similarities and differences to different models and also to prove that you don't have to focus on all 5 pillars of the CEF, in fact, it maybe better and certainly more practical/achievable if you really focus on 3-4 of the pillars and not the others so you are differentiated.

Finally, even if you are not interested how this CEF applies to eBay and amazon which we'll cover next, I hope you find the framework helpful to helping analyze, self critique and determine your own strategy or those of other internet retailers of interest.

I look forward to hearing your comments about the CEF in comments.

SeekingAlpha disclosure - I am long Amazon and Google

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