Ecommerce Profitability: The Critical Second Sale

Acquiring new customers is so expensive for retailers that it wipes out profits from a first-time sale. New analysis from my firm, SeeWhy, of data from Forrester and the U.S. Census Bureau shows that, on average, 73 percent of online conversions come from first-time customers, but that these first-time conversions are not profitable due to the acquisition costs.

In contrast, the 27 percent of conversions from returning customers generate 41 percent of the revenues and 100 percent of the profits. This mirrors work done years ago by Bain and Company and made famous by Fred Reichheld’s book, The Loyalty Effect.

There are several factors at play here.

• Returning customers spend more than first-time customers.
• The cost of acquisition is born solely by the first purchase.
• Factoring in customer service, fulfillment, and returns eats into margins.

New shoppers generate an average 9 percent loss due to the acquisition costs, compared with repeat shoppers who spend more and generate a 14 percent gross margin.

However, it’s worth noting that even though new customer conversions are not profitable, they still contribute to overhead. A proportion of new customers will go on to become profitable returning customers.

Your own data will likely show some variation from industry averages. I’ve assumed a gross margin of 40 percent — some retail sectors are significantly more profitable than this, and others less — and I’ve also not amortized the customer acquisition cost across the expected lifetime purchases of a new customer. However, if this prompts you to do your own analysis, and consider tactics for securing the second sale, then it will have been a fruitful exercise.

So what tactics are important when it comes to getting the first and subsequent second sales?

Getting the First Sale

Getting ecommerce prospects to purchase for the first time is a topic that warrants a novel, but here are three essential tactics to focus on.

• Nurture new prospects: Remarketing, brand messaging, promise of service. Only 0.25 percent of new visitors buy, but your chances of securing a conversion go up nine times if you can get them back to the site. The reality of the conversion process is that each visitor is on a journey toward a potential purchase, spanning a sequence of visits to your site and others.

There is a huge temptation to view all visitors on a particular page as equal and focus solely on conversion optimization. Prospects behave differently from customers and have different needs. It’s also tempting to chase the holy grail of securing a conversion from the first-time visitor. But it’s probably going to take a sequence of visits before your prospect is ready to purchase.

Nudging nervous prospects with reassuring brand messages via email helps drive new customers back to your site. This is best done using retargeted advertising and email remarketing, and the key to success here is to be 100 percent consistent with your brand and promise excellent service.

• Build trust: Content, authority, social proof. You can build trust in your brand and purchasing experience with excellent site content. When writing content, step into your prospects’ shoes by giving objective advice on products, earning trusted adviser status. Remember that new customers aren’t looking to be sold; they want confirmation that your proposition is a good fit.

Social proof — reviews, testimonials, number of products sold, and authoritative reviews by independent third parties — are critical for building trust in both your products and the brand and service that go along with it. Don’t forget to feature reviews and testimonials about your service. Shoppers may have decided to buy the product but have not yet decided whether to buy it from you.

• Make it easy: Phone numbers, free shipping, and returns, payment methods. Studies consistently show that consumers seek free shipping and free returns above all other promotions. Easy returns are of particular concern to first-time customers who have no experience with your brand or customer service. If you can’t offer free returns, then make the process transparent and as easy as possible. Don’t bury this information on your site or hide your phone number, which only deters nervous prospects from purchasing from you. A prominent phone number goes a long way in reassuring a prospective customer that you will be easy to contact when something goes wrong. Ensure you have thought through your payment strategy, as it has a big impact on mobile conversions.

The purchase process should be easy and intuitive. Read Steve Krug’s book Don’t Make Me Think and consider your own site experience while wearing the shoes of a prospective customer.

Getting the Second Sale

Again, I’ve picked three tactics out of many to focus on in securing the second sale.

• Deliver exceptional service. We know that customers choose to spend with you again based on price and previous experience. So it’s critical that first-time purchases go off smoothly, and you should use any hiccups as opportunities to deliver exceptional and memorable service. These “moments of truth” cement a relationship with your brand and lead to brand advocacy and future purchases.

Since the first purchase is unlikely to be profitable, you may encounter resistance internally to spending money on outstanding service. This is why understanding where the profit comes from is essential. Leading ecommerce companies know this. It’s not a coincidence that Amazon is the largest ecommerce retailer and also has the highest customer satisfaction score.

• Get customers browsing your products on their tablets. Tablets are increasingly used for recreational shopping, so take a page from the catalog companies’ playbooks and link the pleasure of browsing catalogs with easy online purchases. There are massive online conversion benefits from having customers research your product catalog at leisure on their tablets. If you plan to build a tablet app soon, you might want to reconsider and look at digital catalogs instead, as they are more in line with what customers want when shopping recreationally. Or, focus your efforts on a stunning tablet shopping experience that recognizes the recreational nature of how many consumers are starting to shop — in the evenings from the couch.

If you’ve not yet investigated digital catalogs, they can be produced cheaply and will drive high-quality traffic to your site that spends more. Put this on your to-do list, or read my previous article, “Do Digital Catalogs Drive Conversions?“.

• Keep email communications relevant. Simply adding new customers to your email program will keep your brand message before them but does little to build a relationship. Instead, think about triggered email programs that are more relevant, including leveraging recommendations on the purchase confirmation, soliciting for post-purchase reviews, and real-time triggered emails based on products and categories browsed. All of these techniques increase the probability of securing future purchases.

Conclusion

Examine your own numbers to have a clear picture of profitability for new and returning customers. The tactics above offer some opportunities to improve first and second-time conversions. Making changes that enhance the new customer conversion experience can be challenging. But hard data tends to win the day and offer objectivity for better-informed decisions.

Editor’s Note: See Charles Nicholls’ 2022 update, “Ecommerce Profitability Revisited.”