Since it is so difficult for most online stores to generate organic website traffic, I was immediately drawn to products that could be consumed over and over. If customers could buy something on an ongoing basis, it stood to reason that they would be more likely to come back without being prompted by advertising or direct marketing. Tea is fortunately one of those products. When one of my customers ran out of tea, they were able to type in “omgtea” into Google and be directed to the website. Repeat customers were vital for my business. My best customer ordered every single month and spent over $4000 on tea in three years. She came across the brand through a Facebook ad, which at the time cost about $5 for each customer acquired. Before ordering, she messaged twice on Facebook seeking more information about the ingredients and whether the tea could be consumed for longer than one month. She first purchased a single bag of tea for $35 (plus $4 in shipping) using a 20% off discount code at 1.42pm on a Thursday afternoon. Her order was shipped out that afternoon and arrived by 9.30am the following morning, in time for the weekend. If it hadn’t gone out that day, she would have had to wait until Monday to receive her order. Deducting the $5 ad spend, along with taxes and other expenses, the profit from the sale was around $10. The following month, she came back to the website, without being prompted, and ordered four bags of tea for $85. A month after that, she spent over $160. It is difficult to make money when you have to spend $5-10 acquiring a new person for each order. You make money when you spend $5 on a person and that person goes onto spend in excess of $4000 in their lifetime as a consumer.
That is the value of repeat customers. Ultimately, it is impossible to know what someone is going to spend. Businesses can’t operate under the assumption that each customer is only going to purchase once. When a business doesn’t have incredible products and an unlimited marketing budget, the best thing they can do to boost sales is focus on customer service. It is extremely hard to build up goodwill online without having a physical touchpoint with customers, but it is possible: reply to emails quickly, direct customers to cheaper products if applicable, get orders out as fast as possible. Stand in a customer’s shoes.
It’s 7.38am on a Monday, your 3-year old daughter has just spilled water on your internet modem, so your internet is out. You have to drop her off at day-care and get into work before 8.30am. You also have to prepare for a presentation at 9.00am. By the time you get out of the presentation, you head straight into another meeting. You don’t finish up until after midday. By the time you sit down at your desk and check your emails, it’s 12.30pm. You do a search on Google and find a modem that is highly rated on an online store you have heard of. You finally place an order at 12.49pm. You paid for overnight shipping because you need it delivered the following day so you can watch your favourite show on Netflix. From the company’s point of view, the thinking may be simple: “Well, our cut off for shipping is midday, so we can get that order out tomorrow.” That may well be true, it completely ignores the customer’s experience and completely ignores the value of repeat business. If this sort of thinking leads to decisions that negatively affect the experience of multiple customers in a day, it will certainly cost the company a substantial amount of money in lost revenue over time. To ensure that I provided good customer service, I found it useful to imagine that I was communicating with or otherwise dealing with Justin Bieber or Kylie Jenner or Kanye West whenever I shipped out an order or replied to an email or Facebook comment. While average customers can’t change a business’ fortunes in the same way that a celebrity can, they can still change a business in a meaningful way by ordering on a regular basis. Like many consumers, if I receive good customer service from a retailer, I often overlook other shortcomings and become a fierce advocate of the company.
Since it is so hard to direct past customers back to a website, subscriptions have become a very popular way of locking customers in. Why battle to get a customer back onto a website and pay additional marketing costs, when you can get them to sign up for a subscription instead? In theory, the benefits should be substantial. If a product is being sold for $50 and a customer generally orders three times a year, that customer will generate $150 in revenue for a business. Now, assuming that that product can be consumed regularly, it may make sense to offer a subscription option to that customer: $40 each month for 12 months, which is 20% off the regular retail price. If the customer signs up, you make $480 each year instead of the $150 you were making before. On paper, it makes perfect sense. Who wouldn’t want to make an extra $330 from a single customer in a year? The underlying problem with subscriptions is that while a business may be able to get customers to sign up, it is much more difficult keeping them subscribed. Customers have to see the ongoing value in a product or service. Newspapers and video streaming platforms have to release an ungodly amount of content to keep customers happy, and even then, there is no guarantee. For subscriptions to work, businesses need to be providing something that customers can consumer over and over.
About three months after I received my first shipment of tea, I started to think about offering subscriptions on the website. I crunched the numbers and came to the conclusion that subscriptions would transform my business. Based on my repeat customer rate, I estimated that OMGTEA could generate an extra $100,000 in revenue each year by offering subscriptions. Realising this, I quickly made it available on the website and marketed it heavily to customers who had purchased more than once. For a few months, it was hugely successful. After three months, things took a turn for the worse: customers started cancelling their subscriptions. After 12 months, about 80% of the customers who had signed up at the beginning of the year had cancelled. Despite this, it was nice having a guaranteed source of income for a change. The thing that is so hard about any form of retail is the unpredictability of sales and revenue. It can be hard to know if a business is going to make $500 in a day or $5,000. This uncertainty has implications for forecasting and planning. How are you meant to know how much stock to order if you have no idea of the number of sales to expect? Over time, as you build up data on sales and customer spending habits, it becomes easier to manage, but in the moment, it is incredibly stressful. I came to realise that while subscriptions gave me peace of mind and provided more month-on-month sales stability, it didn’t actually boost my revenue; instead, it cannibalised bulk sales.
Before I made subscriptions available on the website, many of my repeat customers were ordering in bulk. Rather than ordering a few bags a month, they were ordering six bags every three months at a discount. Every three months, like clockwork, they would come back and reorder without being prompted. Without realising it, they were ordering in a predictable pattern — I just hadn’t looked at the data properly. When I reached out to some of the customers for feedback, almost all of them said that they didn’t like being locked in. Some months they drank a lot of tea and other months they drank much less. They didn’t like the idea that they would still receive the tea in months where their consumption was lower. I could completely understand. No-one likes the idea of paying for a gym membership on the months that they don’t use it. The difference between me and a gym is that I made it as easy as possible for customers to cancel. If subscriptions weren’t quite working, I felt that the onus was on me to improve the business model, rather than trying to trap customers.
In my experience, you can tell that a subscription is a good offer if cancellation is easy. If a company has confidence in its ability to sign up more customers, it shouldn’t matter if a few existing customers want to cancel their subscription. When there is an underlying weakness in a product or service, companies will try to tie you to a contract and penalise you for leaving.
Retail is a very simple concept. All you are trying to do is extract as much money as you can, from as many people as you can, as often as you can. That’s the game. There’s no point being romantic about it. While many businesses like to pretend that they care about some underlying issue, like TOMS shoes offering footwear to children in developing countries, they only care to the extent that it influences customers and generates sales. Social causes intrinsically motivate consumers to purchase. However, idealism in business doesn’t play out well on the balance sheet. A problem I have with the subscription model is that no-one has ever stopped to think about how much disposable income the average customer actually has. Most businesses would rather compete in a feudalistic fashion, rather than thinking about the issue. As a consumer, I am expected to be subscribed Netflix, Amazon, HBO, Hulu, Disney, cable, satellite radio, a mobile phone and about 20 other offerings. At a certain point, I am not going to have any more money left over to sign up to any other product or service that pops up. Just think for a second about what a typical middle-class customer might look like. We can paint a picture of Alice, a 32-year-old consultant who earns $100,000 per year in salaried income. After taxes, superannuation, and student loan payments (Alice has just completed her MBA) she has about $60,000 in take home pay which is about $1,153.85 per week. Her husband, Mark, is in a similar position, but brings home $1,568.50 per week in income. Between them, they have a grand total of $2,722.35 to spend each week. Immediately, $1,100 of that goes to mortgage repayments and another $500 goes towards child care. That leaves just over $1,000 to spend on groceries, car repayments, two gym memberships, and all of their other daily living expenses. Mark and Alice are left with approximately $300 each week in disposable income that they are able to spend on things like movie tickets, alcohol, and other forms of entertainment. All consumer product and service companies are competing for a share of that $300. The goal is to do whatever it takes to get as much of that figure as possible. The more products and services there are on offer, the less money there will be to go around.
Retail is a very simple concept — all you are trying to do is extract as much money as you can, from as many people as you can, as often as you can
There are two ways that a typical business can boost sales: either attract more customers or try to extract more money from existing customers. At the time, my problems couldn’t be solved by trying to extract more money from existing customers. I needed more customers. The only way I saw that happening was through the use of social media influencers.