#11 Improving Gross Margins: Borrowing a lesson from an eCommerce case
This week, Emily Lonetto, Head of Growth at Voiceflow shares her insights on building organic growth for early stage SaaS startups. Voiceflow helps you to design, prototype and build voice apps
Ankur: What one organic growth strategy would you recommend to early stage SaaS startups?
Emily: Focus on community. If you're early stage and don't have a ton of resources, getting your early power users into a group and starting to build a community around them will give you:
A strong marketing and evangelist channel
Instant product feedback, and
Increased retention, and even more.
It's always worth the test.
Lessons from the discovery of a critical problem of an eCommerce business and the growth experiments to win over it.
I vividly remember the day when we first launched our eCommerce store. It was a weird mix of excitement and apprehensions. We have been testing the concept offline for a while by then, but seeing the product range going live on the internet was altogether a different experience.
It took us a few months to design the products, find a manufacturer, and be ready with a small inventory of the complete product range. The fact that we had to invest almost a fourth of the little profit we had made during offline testing only added to our apprehensions.
To set up the store, we spent days on product photoshoot, carefully crafted product details and titles based on keyword research, finalized pricing, and launch discount.
Finally, the big day arrived. I clicked the publish button from the dashboard, and one by one, all products went live. We stayed glued to the website for a while, not sure what to expect. An hour passed with no action, and we went back to our routine work.
We were discussing an ongoing project after lunch when my mobile beeped. It was a new order. First sale from our newly setup online store! I felt a rush of hope and triumph.
Orders started flowing in. We were in high spirits, discussing new designs, branding, and growth. We had set up shops on a few online marketplaces, and those were driving sales too. While testing the concept, we had built a small email & phone number list and a little Facebook following. These helped us to drive traffic to the store during the first few weeks after the launch.
Over the next nine weeks, we improved the package branding, sold off the inventory, and placed a new order with the manufacturer. However, there was an issue that at first, I considered a routine affair. I was wrong.
Discovery and Struggle
After we set up the store, we started marketing activities to drive traffic. Our photography and product details were good enough for conversion. However, a lot of buyers were returning the products.
For the first few weeks, returns were within acceptable limits, but then they shoot up over the roof. At the end of the second month, the return rate was 67%!!
I did not have return rate benchmark data of private label brands. But this was alarming. Orders from marketplaces too had a high return rate. I looked at the reasons that buyers were leaving while initiating the returns.
However only a few buyers were mentioning any reason, most of them were in too much hurry to provide a reason. They just wanted to be done with the return process and get their money back.
It seemed that information on product pages was not clear enough; it was attractive but lacked value. So we changed a few images, added features related words in the titles and changed details of some products.
Since there were only a handful of buyers who provided return reasons, I wanted to interact with more buyers. I had limited access to marketplace customers, so I tried talking to direct buyers before shipping the products.
Contacting buyers over the phone before shipping is tricky; people want a smooth buying experience and sometimes do not like communicating. At the same time, I did not want to rely on surveys for this. I used calls and Whatsapp messages to converse with the buyers.
I realized that there were too many variables in play. Every few days, I changed only one variable and then observed its effectiveness.
I started my career designing robots and writing software to bring them to life. One key lesson my seniors taught me there was, “never attempt to solve a problem as a whole, rather break it into many smaller parts, and then solve each of those parts individually”. Over the years I have learned that almost every problem can be broken into multiple smaller parts. This is what I was trying to do here.
I talked intensively with support teams of different marketplaces where we had our stores, even paid for their account manager service, thinking that their experience in managing multiple accounts will be of help. However, none of this worked and returned rates remained at around 60%.
Such a high return rate was killing our momentum. A returned product is not just a loss-making transaction; it eats away the profit of another successful sale. We could have made more money by closing down the business and buying some blue-chip stocks. I sensed a feeling of helplessness in my team; their silence told me that they had sensed it in me.
Each new order notification was now scaring us.
We were in the fifth month by now. With no clear solution in sight, we finally decided to stop all marketing activities and focus on solving the problem of a high return rate with everything that we have got. I turned on ‘out of stock’ for all our products.
Epiphany, Experiments & Turn Around
It was a difficult decision to stop all sales, I didn’t want to do it, but I could not ignore the numbers either.
Data forced me to stop all marketing and sales.
With daily activities halted, I spent full days analyzing data and figuring out a way forward. However, nothing much came out after three days.
At the end of the third day, while walking back home from work, in the solitude of the dark evening, I realized that the problem lies with the positioning. Buyers found the products attractive and liked the features but were not sure about the value.
An effective positioning is not something that can be achieved by listing the features. So I decided to try a long copy.
Before going to bed, I wrote the first draft of a direct response copy, which addressed a lot of value issues. My idea was to insert this copy at the top of the funnel so that visitors can make informed buying decisions. The next day I refined the copy and created three different versions of it for experimentation.
Every day we were losing on the potential business, so to speed up the experiment, I decided to run Facebook ads.
I used all three versions of the copy and set up 15 long-form carousal ads using different audience-copy-creative combinations. At this point, I was looking for validation and not for scale. Hence I set up a total daily budget of only $30. I published all the products again and turned on the ads.
For the next ten weeks, I kept improving the copy and the ads. Sales shoot up, and by 6th-week, the return rate showed a clear decreasing trend. For the 8th month, the return rate was just 7%, down from an all-time high of 67%!!
In terms of the invoiced amount, returns were reduced by 83%.
Once I verified the problem-solution with the help of Facebook ads, I stopped the ads, turned the best performing copy into a blog post, and started distributing it. That blog post became the top of our funnel.
For those who are curious, here is the link to that blog.
It took us seven months to win over the problem of the high returns. However, this experience enabled us to build a growth framework that we have used a couple of times since then.
What can a SaaS team learn from this?
Written words when selected for affinity and strung together to address a problem resonate with the audience and help a SaaS to improve gross margins.
Clear message and positioning built on “how can they do better” can improve acquisition.
Product education presented in a non-invasive way can reduce churn. A huge number of users leave because they could never understood the product thus never experience its benefits.
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