4 key points of e-commerce product operation

In addition to the North Star Indicator, which is a key indicator for measuring product operating conditions, there are four key factors in e-commerce product operations that affect the final profit: sales volume, average order value, cost, and discounts. The author of this article analyzes and explains these four key points from a product perspective and shares them with everyone.

Among the products I’m responsible for, there’s an e-commerce module. Although I don’t usually get involved in it, the core concept of product operation is common. Therefore, I also tried to analyze the operating principles of the e-commerce industry from the perspective of content products.

01 North Star Indicator to Guide the General Direction

Most work requires setting goals and directions at the beginning, and the operation of e-commerce products is no exception. There is a well-known term in the growth field called the North Star Metric, which refers to a key metric that can measure the operating status of a product.

Generally speaking, the primary concern of e-commerce products is profit. Of course, due to different product stages and different ways of operating the product, the North Star Metric will also be very different.

1. Amazon’s Flywheel Theory

Bezos said in an interview that he divides the world's companies into two types: missionaries and mercenaries. Profit-driven companies prioritize sales, profits, and other indicators; missionary companies believe in their products from the bottom of their hearts.

How do you get things done if you simply believe in the product?

In our retail business, we firmly believe that customers value good prices, a wide selection of products, and fast and convenient delivery, and that these demands will become more stable over time.

Realizing user value is of course the top priority for a product’s success, and Amazon believes that the core value of retail is price, SKU and logistics. As a "missionary", Amazon does not take profit as its core indicator. Their North Star indicator is free cash flow. In Amazon's first annual shareholder letter after its listing, Bezos stated at the outset:

"If we have to choose between the beauty of a company's financial statements and free cash flow, we believe that the company's core focus should be free cash flow. "

In the following 20 annual shareholder letters, Bezos repeatedly emphasized dozens of times that the most important financial indicator of the company is the free cash flow per share.

With user value and free cash flow as the goals, Bezos proposed the flywheel business theory. What he meant was: In order to make the wheel turn, you must use a lot of force at first to slowly start the wheel. You may not even be able to see the initial rotation, but the initial efforts will not be in vain.

It is based on such long-term considerations that Amazon has launched AWS, Prime, self-built warehouses and other "flywheels" at all costs, which have slow effects but far-reaching impacts, and have promoted the development of the Amazon empire step by step. Now that the flywheel has spun on its own, Amazon’s market value has skyrocketed.

2. Alibaba’s “People, Goods, and Places” Theory

Of course, most companies operate with profit as the core indicator. E-commerce is essentially a large online shopping mall. It is responsible for attracting investment, obtaining sufficient quantity and quality of goods, and then attracting people to consume. Among them, due to distance restrictions, online shopping malls cannot exchange money and goods at the same time, and there are problems with logistics and transaction trust, so Alipay and express delivery were introduced. Alibaba also creates user value through people, goods and places, and ultimately maximizes profits.

3. Profit formula e-commerce theory

People, goods and place are simple and easy to understand, but the three concepts of "people", "goods" and "place" are mixed. They seem reasonable at the theoretical level, but are prone to gaps in actual operations. This article also takes profit as the core indicator, and analyzes e-commerce product operations from the perspective of a "profit-driven" company in a clearer and more structured way. I call it the profit formula theory.

We know from elementary school mathematics:

Profit = Sales * Profit Margin

That is to say, there are only two factors that determine profits: sales volume and profit margin. Most e-commerce companies use sales (GMV, Gross Merchandise Volume, the main difference from sales is that GMV includes the unpaid portion, which is somewhat vain) as their core operating indicator. For example, Alibaba and JD.com will actively report GMV during major holidays.

In fact, profit margin is also a very critical indicator. For the sake of simplicity, we only focus on gross profit margin here. It will be more complicated if other technical costs are included.

That is to say, e-commerce operators pay attention to both profit margins and sales, but there is a contradiction here. Students who have studied economics are all familiar with the price formula. When other conditions remain stable, a drop in the price of an item will cause an increase in demand. An increase in price reduces demand. In other words, sales volume and gross profit are inherently conflicting. All we can do is increase sales within a certain margin limit. Therefore, the essence of e-commerce is to find the optimal solution under multiple constraints.

At a macro level, profits mainly depend on sales and gross profit, so we also start from these two aspects.

(1) Sales

Sales volume represents user value, and users vote with their money. Under a normal supply and demand environment, greater sales means more user value is achieved. Therefore, sales volume is often the most critical indicator of e-commerce products. We know that:

Sales = Sales Volume * Average Order Value

In other words, if you want higher sales, you either have to sell more items, which is sales volume, or buy at a higher price, which is average order value. The two most important factors affecting sales are traffic and conversion rate. Traffic is of course the "people" in the people-goods market, and the conversion rate refers to whether people buy when they come. If they buy, sales will naturally be generated.

(2) Gross profit margin

Gross profit margin represents the value of a company. A high gross profit margin is beneficial to a company, as it can make more money with the same sales volume. But this also harms the interests of users. Therefore, merchants will provide discounts and concessions based on fixed costs to achieve a balance between sales and gross profit margins. This is also the main work of the midfield in the "people, goods and place" theory.

Now that we seem to have found some direction, let's continue to refine it.

02 Break down the layers to find problems and opportunities

It is far from enough to only look at it from the perspective of sales and gross profit. Let us brainstorm and connect the e-commerce functions we encounter in our daily lives and the activities of merchants in real life. From the first part, we know that there are four key factors that affect the final profit. Here are the four key factors:

1. Sales

The two key factors for sales are conversion rate and traffic.

(1) Conversion rate

The core of conversion rate is to create a shopping feeling. Compared with offline, it can be shopping in a large comprehensive shopping mall, such as Taobao and JD.com. It can be a snap up at a clearance store or factory store such as Pinduoduo. You can also go shopping in outlets, such as Vipshop.

1. The main idea of ​​the shopping experience is to have a large number of SKUs and merchants, so that users can walk a long path, look around, compare prices and finally form a conversion. For example, Taobao’s homepage has various scenario-based entrances, and there is cross-direction in different scenarios. Users are like entering a maze mall and wandering around endlessly;
2. Creating a sense of rush to buy is much more direct, with just one word: “price”. Price is the most critical variable in the supply and demand theory. A sufficiently low price can stimulate user demand. Pinduoduo’s homepage is much simpler, with the entire experience built around the transaction of a single item, and it doesn’t even have a shopping cart function. The implied message to users is "This product is so cheap, buy it now without hesitation!". Judging from the results, Pinduoduo's order volume will soon surpass Taobao, and people within the Fifth Ring Road cannot escape the law of true fragrance;

Of course, the creation of different shopping experiences needs to be combined with one’s own product secrets. Most e-commerce companies still follow the Taobao shopping model. With the rise of C2M (Customer-to-Manufacturer) represented by Pinduoduo and the entry of e-commerce in vertical fields, new shopping experiences will emerge again.

In fact, a transaction includes not only the monetary cost represented by the commodity price itself, but also the total time spent in the buying and selling process. Includes the costs of disseminating information, advertising, market-related transportation, as well as negotiation, consultation, contract signing, and supervision of contract execution. These can be collectively referred to as transaction costs.

In other words, in addition to price, consumers will also consider many factors, among which transaction intermediaries and transaction paths are two key points in e-commerce products. Transaction intermediaries include product introduction and shopping guide. We are already very familiar with the former, which mainly includes product details and reviews, while the latter is evolving rapidly.

The so-called shopping guide is a person who guides shopping. At first, it was an invisible person hiding behind the screen. We called it pre-sales customer service. Later, there were content shopping guides like Xiaohongshu, and now there are live shopping guides with real people. There are various forms, and many new products have been created. If there is a new form that can reduce users' decision-making costs, it will become the main driving force for the next e-commerce revolution. Our own e-commerce products can also enrich the form of shopping guides and optimize the corresponding experience.

In terms of transaction paths/shopping scenarios, we mainly divide them based on user intentions. For those with clear intentions, we use search and classification, while for those with unclear intentions, we rely on personalized recommendations and various scenario recommendations.

In general, conversion rate is the core of e-commerce products, and the relevant key points remain the same: "Help users find what they want to buy and give users reasons to place orders." As for how to improve the conversion rate, we need to share specific answers to specific questions. For example, the platform’s search usage frequency is very high, but the number of orders brought by the search is very small. It is very likely that there is a problem with the search link, the search has no results, the search results are of poor quality, the products after the search are not competitive, etc., and then specific optimization can be made based on the actual situation.

(2) Traffic

Traffic is a topic that has been talked about for a long time and is the cornerstone of all products. We will not elaborate on its introduction and awakening. Let’s talk about how to improve traffic utilization. In the entire specific scenario of e-commerce, traffic distribution is the most critical, including which business to direct traffic to and how to direct traffic more effectively. From simply replacing the location, UI copy or size of the entrance to personalizing the entrance, a small change in the entrance may mean a 10-fold difference in conversion rate.

Let’s take Taobao and Pinduoduo as examples. Taobao is a large shopping mall. The top tab is divided into categories such as department stores, toiletries, and underwear, just like the business divisions in a shopping mall. The banner ad below is similar to the huge ad in the mall. The more efficient part of the Taobao entrance is that it is personalized, presenting the items with the highest "estimated revenue" (eCPM advertising term) in the user's historical search and browsing records, achieving personalized advertising for each individual, which is something that physical stores cannot do.

Skipping the fixed entrances such as Tmall and International below, we come to the "tofu block" organized into different personalized shopping scenarios such as 10 billion subsidies and Taobao Live. It can be seen that Taobao has already mastered the application of personalization, but due to the wide range of businesses, the overall distribution of traffic entrances will take into account both sides and appear to be more "moderate".

Pinduoduo is even more "extreme". Apart from the same category tab at the top, there are very few secondary entrances left, and almost all of them are direct recommendations for single products. If the degree of personalization is high enough and the recommendation algorithm is accurate enough, the conversion rate will probably be much higher than Taobao. Because the user's usage path is shortened, the decision-making cost is greatly reduced. Of course, from the perspective of traffic, the entrance to this small circle is used very roughly, and the conversion rate is probably not high.

2. Average order value

The average order value is actually a very difficult balance point to grasp, as it is related to both turnover and gross profit margin. As a merchant, you hope that users will buy expensive goods, or buy several items at a time, so the unit price of an order will increase. Therefore, there are two main ways to increase the unit price: one is to start with product selection and make the high-priced products in the SKU competitive.

Pinduoduo's 10 billion yuan subsidy is a masterpiece in this regard. By subsidizing high-priced products, it has actually increased the average order value, broken its own brand disadvantages, and attracted a large number of new users within the Fifth Ring Road who are "really attracted to it". It can be said to kill three birds with one stone; the second is to approach from the perspective of one order with multiple products. The master in this regard is Taobao. A series of measures such as the long shopping experience that makes you dizzy, discounts for group orders, free shipping for orders over a certain amount are all guiding users to buy more items.

In principle, there is a certain conflict between these two methods. Making users go around in circles may continue to reduce the overall conversion rate, but being too direct may make it difficult to drive sales of other high-profit products, which is disadvantageous to merchants and platforms. It is difficult to say which method has more advantages. From my personal perspective, if I only buy one item and Pinduoduo happens to be cheaper, I will use Pinduoduo. If I buy a series of items, I will choose Taobao.

From a long-term perspective, the high SKU advantage that Taobao relies on for production may be slowly eroded, but Taobao lacks the courage to confront Pinduoduo head-on. Referring to "The Innovator's Dilemma", it is difficult for a company that has made a lot of money in its comfort zone to give up its own high-profit market to do the dirty work. Therefore, Pinduoduo has a certain initiative in this close combat.

3. Cost

I haven't come into contact with the cost aspect much. From my personal analysis point of view, the main costs include: goods, people, logistics and after-sales (R&D and management are not included). There is a lot of room for optimization in these four areas:

1. The ODM and C2M models that are emerging in the current supply chain are pursuing the ultimate cost-effectiveness of goods. In fact, Xiaomi has established a firm foothold on the word "value for money". In many fields of the Internet of Things and home appliances, brainless Xiaomi has become the choice of many people. This is actually a reflection of Xiaomi's strong control over the supply chain;
2. Pinduoduo's "cut one knife" is a classic example of using social networks to obtain low-cost traffic. Although it is restricted now, it still cannot stop Pinduoduo's strong motivation to obtain traffic;
3. JD.com has built its own high-quality logistics, and Taobao’s investment in STO Express is also to control logistics efficiency and costs. From this perspective, Pinduoduo's next move may well be to make up for its shortcomings in logistics. It can do so by cooperating with China Post or doing it on its own. It is fully capable of doing so given its current size. This is also an important example of Bezos’ flywheel theory;
4. After-sales service currently has its own advantages.

4. Offers

It is a cliché that price is the most critical factor affecting transaction demand. Discounts are a key tool for controlling prices (i.e. the user's monetary cost). However, discounts are a double-edged sword. Too many discounts will affect gross profit and thus the company's profits. Sometimes selling a lot at a low profit margin does not necessarily mean making more money with high gross profit and low efficiency.

Generally speaking, there are three types of discounts:

1. Discount: Directly multiply a certain discount factor on the original price. Since this method is the simplest and easiest to understand, it is also the easiest to promote orders. The earliest Double Eleven was claimed to have 50% off on all items. There are many variations of discounts, such as 50% off the second item, 50% off three items, 50% off for group purchases, etc. Of course, adding restrictions will reduce the conversion rate, while increasing the gross profit margin to a certain extent;
2. Discount when the purchase amount reaches a certain limit. Since there is a limit on the amount, it is easier to promote large orders and guarantee the average order value. Of course, the calculation of the discount and the pressure on users will be much greater, so the conversion rate will be lower than that of direct discounts (with the same discount amount). Other variations of discounts include coupons, pre-sale deposit inflation, combination discounts, etc. In this regard, Taobao’s Double Eleven is the most fierce, and has exceeded the scope of human computing cognition.

summary

This article breaks down the working framework of e-commerce products in a structured form, allowing everyone to observe the various aspects of it in an easy-to-understand way. I hope it can provide some inspiration for e-commerce practitioners. Of course, I am not a professional e-commerce person. If there are any mistakes, you are welcome to correct me.

Author: Content Hacker

Source: Content Hacker (hamuxiaodi)