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Mar 30, 2003
Case Study

Six E-Retail Survival Tips for Low-Margin Markets: How CDconnection.com Has Profited for 13 Years

SUMMARY: CDconnection only clears $3-$5 per buyer, so they have to be very careful about budgeting acquisitions campaigns, and use every trick in the book to increase conversions.

This Case Study includes tips on how to find out why shoppers do not turn into customers (and fix it), and how to recognize different shopping traffic patterns.
CHALLENGE

Ken Lovett, owner of CDConnection.com, started selling CDs online in 1990 (no, that is not a typo).

At first it was a "spare bedroom" story with three computers and modems, each dealing with one dial-up visitor at a time. The concept proved so popular, he installed more and more computers.

Lovett says, "There was a blissful period of perhaps a year when we asked ourselves, 'Gee, why isn't anyone else doing this?' We were so busy selling CDs that when the Web came along we really didn't pay enough attention to it."

By the time he finally launched a website in 1996, it was a different marketplace. Suddenly there were big-time music retailers with millions in venture capital. Giant competitors, low margins, and commodity products (not a promising climate for Lovett's business).

How come he is still around when many online competitors bit the dot com bust dust? What is his secret to 13 years of online survival?

CAMPAIGN

Lovett admits being a first-mover was key, "We started very early when there was no competition and built a sizeable customer base before the Web came along. If we were starting today, we wouldn't have a chance."

There is more to it than that. Here are the 6 survival tips he offers to other e-retailers:


-> Survival Tip #1: Track your acquisition costs and act on the results

Obvious, yeah? But MarketingSherpa research shows many marketers are still *not* tracking through to beyond the click.

Over the years, Lovett's used banner ads, PPC, radio, newspapers, magazines, comparison engines and more (just about everything except TV ads) to promote the website.

He tracks the costs of each campaign and matches that with resultant sales. With an average order size of 1.1 CDs, he makes just $3 profit on a transaction. When repeat purchases are thrown into the equation, he is looking at a maximum allowable cost of around $5 per new customer.

He has learned the hard way that most ad vehicles can not deliver that kind of direct response.

He recalls a banner purchase on targeted music pages at Yahoo, "Our banner went up on the Friday afternoon and we went home pulse pounding thinking that we were likely to be overwhelmed with the orders we would have on Monday morning."

They were not. The campaign, despite a healthy 3% CTR, produced an acquisition cost of around $300. Lovett says it did not take them long to figure out that decision, yet his competitors continue to advertise in venues where the bottom line results are untenable.

Says Lovett, "We've long since learned that cost-effective advertising opportunities are very rare."


-> Survival Tip #2: Use third parties to gain credibility and traffic

With little advertising, Lovett does not have a lot of name recognition with new customers. He says, "People come across the website saying 'I've never heard of this company.'"

His response is to use third-party associations with known names and brands to gain traffic and credibility; he places the relevant logos above the fold, screen center and left to ensure they are seen.

Lovett explains, "The graphics are intended to convey to the casual visitor that we are a reputable, reliable company and here's how you can count on that." They are:

a. BizRate Customer Certified logo
Clicking takes people to the BizRate comparison site where they can read more than 10,000 (overwhelmingly positive) reviews and ratings given by CDconnection.com customers.

b. Amazon merchant logo
CDconnection.com offers more than 30,000 items through Amazon's zShops and MarketPlace listings. As well as driving sales, it lets Lovett display the logo and five star rating (five is the best) awarded through customer feedback received by Amazon.

c. ScanAlert Hacker Safe logo
Clicking produces a third-party pop-up certifying that the site is tested daily and meets the highest security standards recommended by the President's Critical Infrastructure Protection Board.


-> Survival Tip #3: Keep customer service top so people come back

Following the adage that it is more effective to keep current customers buying, rather than acquire new ones, Lovett places strong emphasis on customer service.

He says that however responsive you may be to customer inquiries, the best kind of customer service is not to need it; get the order right the first time. For example, his
fulfillment team get gifts of CDs if the warehouse hits 21 error-free days in a row (the record is 151).


-> Survival Tip #4: Learn why people do not buy and remove the barrier

Lovett's listened to years of customer feedback so he has picked up a lot of anecdotal evidence about how to encourage purchases. Three of his suggestions:

a. Make shipping rate info even clearer

As with most catalog sites, all the different combinations of shipping alternatives, destinations and order sizes means it is impossible to list shipping costs up front. Lovett knows that many people will not enter the order process without some advance idea of likely shipping costs.

Like most retail sites, he has sample shipping information. Except he does not stick his down at the bottom of the page, but right in the middle (above the fold) in bold black lettering. "Example shipping rates and delivery times." It is one of the first things people see.

Even then, he says, some people write in to complain they can not find info on shipping costs. Which makes you wonder just how many sites are losing customers by hiding this info away in FAQ and other pages.

b. Do not put off international orders

About a third of Lovett's customers are outside the USA. He says simple changes to a website can make them so much more foreign-friendly.

For example, one of the biggest gripes non-residents have with US retail sites is order forms which do not work with non-US address formats. (A surprising number of retailers accept international orders but their order form insists a US state or US-formatted zipcode be entered.)

Lovett's order form has sufficient lines and line lengths to copy with any address format. Additionally, the form has text reassuring people they need not enter state and zip data if outside the US/Canada.

c. Provide credible customer ratings and reviews

Again, like many sites, CDconnection.com lets customers rate and review items so that others can feel comfortable following a recommendation. Lovett says, "The people who know whether something is good are the people who are buying it and listening to it."

Lovett enhances the value of the customer input in two ways:

- It is the community speaking
Rather than just call it customer feedback, ratings and reviews are collated under the "Golden Ears Society" moniker, and you have to click on an icon of a golden ear to reach the ratings and comment forms for an item.

As the site says, "Who are the members of the Golden Ears Society? Why, our customers, the best judges of music in the world."

- Credible feedback
A customer can only rate and comment on CDs they have received from CDconnection.com. This assures visitors that the results come from people who have actually bought and listened to the CD in question.

Lovett says, "We wanted to preserve the integrity so don't open up to anyone rating anything."

Lovett's team also approve each written review before it is posted to the site. They remove obscenities or useless information, but do not censor bad reviews or ratings, because of integrity and legal issues.


-> Survival Tip #5: Recognize different visitor browsing
patterns

Product categories are not (yet) split by music genre, due to incompatibilities between suppliers' catalogs. Lovett also says that visitors only benefit from genre classifications at a very deep level, since even very narrow categories still throw back too much data in the music world.

Instead, the site has a search function letting visitors search using any of 11 criteria, adding the likes of "song title" and "orchestra" to conventional album title or artist classifications.

For those who prefer to browse, there are several different categories, aimed at the different needs of customers.

a. For "eager beavers," there is a "future releases" tab, itself split into broad genres (jazz, classical etc.)

b. Those looking for the latest releases have a "new releases" tab, further sub-divided into "this week," "last 30 days" and "last 60 days" (and then into broad genres) to cater for different site revist patterns.

c. Those looking for recommended CDs get a "highest rated" tab, sub-divided by genre and listing those CDs with the best customer ratings. There is also a "best CDs" link which is a list of those CDs combining high ratings with a low price.

d. Those looking for popular CDs get a "fastest selling" tab, also broken down by broad genre, which features those CDs which have the highest daily sales.

A third navigation route is through a custom-built "Best CD recommender" which uses CD ratings, purchase patterns (e.g. titles or artists commonly bought together) and sales numbers to make product suggestions for one or more artist names.


-> Survival Tip #6: Focus and keep things simple

Lovett says, "We want people to feel comfortable and focus on the content when they get there, and not on the surroundings."

The site itself is simple and uncluttered, with no graphics for fast loading (bar the site logo and CD cover designs) and a blue/white color combination to support the simple feel.

Product descriptions are all "outsourced," combining customer reviews with supplemental information (titles, release dates, critical reviews, etc.) drawn from a database licensed from Muze, Inc., an independent data supplier.

Lovett carries virtually no stock himself, rebuilding his catalog every 24 hours based on daily stock reports from his 10 suppliers.



RESULTS

CDconnection.com has been consistently profitable since soon after the launch back in 1990, though Lovett adds that they are "not millionaires."

Some other results:

- Lovett notes that his type-in traffic (people who go directly to his URL without clicking on a link elsewhere) typically converts at 4-5%.

- Almost 50% of his revenues comes from repeat customers, though the percentage of customers who purchase more than once is much lower than that figure might suggest. The old 80/20 rule at work again.

- The site's collected about 335,000 CD ratings and around 25,000 written reviews (growing at the rate of 75 and 5 a day respectively).

- Although people can rate their previous purchases anytime, Lovett says the best way to collect feedback is to use the confirmation page of a new order to solicit ratings on products shipped in the previous order.

- The "fastest selling" and "highest ratings" browse categories are most popular, followed by "new releases," then "future
releases."

- 90% of searches are by artist name, 5% by title and the remaining 5% spread among the other nine search options.

- Visitors exposed to the Hacker Safe logo are 13% more likely to buy than those that do not see it, according to tests carried out by Lovett. He adds, "We could easily justify the cost of the service with a 1% increase in orders."

As for the next future, Lovett's comfortable about staying moderately profitable, but not too upbeat about the prospects for the industry as a whole.

"The ecommerce world has changed a lot since we began. In fact, there was no ecommerce world when we began. The careful observer will note that there are not many large companies jumping into online CD sales these days, and in fact, quite a few are jumping out."

http://www.cdconnection.com

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