Retailers and the lower funnel trap

by David Randolph, 06 Feb 2018

  The Amazon app graces 35% of smartphone home screens. That’s more than YouTube, Google Search and Instagram. Three times as many shoppers search for products on Amazon than Google every day; Amazon is expected to control up to 50% of U.S. e-commerce in 2018.     So it’s a post-Amazon world for retail marketing. Amazon Prime ships in two days. Amazon offers copious consumer reviews for most of its millions of products. Their search and suggestion features are unparalleled, and their price is tough to beat. Amazon has credit card and shipping addresses for 60% of U.S. households. How does a retailer battle this juggernaut? First, instead of focusing on the low funnel of your marketing program, retailers should look to the middle and upper funnel—it’s the best weapon against Amazon and your direct (non-Amazon) competitors. Here’s why  depending too much on the low funnel of your marketing program is a bad idea.  

Lower funnel addiction

A fully-funded and optimized demand capture campaign is mandatory. Unfortunately, the low funnel is demand capture, and the returns are finite. There is a loophole, however! And when retail marketers are assigned aggressive growth objectives, it’s far too often employed. Marketers often use the euphemism “pushing harder” in the low funnel. Here are the cold facts about what actually happens. There are two main levers to ramping the low funnel: 1) Allow higher advertising cost per customer, and 2) deepen promotions. To execute both approaches simultaneously has an exponential negative effect on ROI. The math can get ugly quickly for desperate retailers.

More for less

Ramping the low funnel is most often done through paid search, where temporarily re-modulating scale is simple and incurs no increased production costs. Without getting too far into the Google/Bing weeds, most retail search programs can only drive more clicks by increasing cost per click. That pushes scale upward (good), but each new point of scale is more expensive (bad), while also making the scale you already had more expensive (REALLY bad). Here’s the peculiarity of paid search using a catalog analogy:
  • Suppose you currently mail 2 million catalogs at $1 postage each.
  • You want to add another million catalogs. But they cost $1.50 postage each.
  • And the act of increasing quantity forces postage on the original quantity to $1.50.
You bought more, yet price/unit increased! It’s the exact opposite of a volume discount. And a demonstration of the brilliance of Google’s paid search model.  

Promotional spiral

You will no doubt be very familiar with the impact of promotions. While 20% site-wide sales will improve conversion rates and customer acquisition, they will worsen margin on each SKU sold. Average order size often improves, but each cart will contain less profit. Many customers will be new, though each has an unpredictable lifetime value. After all, they were attained with a bribe.  It’s likely to be a fickle bunch. Many other incremental orders will come from current customers, some incentivized by the promotion when they would’ve paid full price otherwise. We call this the “Bed, Bath & Beyond coupon effect.” It’s helpful for even the most veteran marketers to consider that promotions should have the objective of securing an order that wouldn’t have happened otherwise.    

By the numbers

Retail marketers eat, sleep and breathe performance numbers. Deltas are of particular interest if causality can be proven between activity and results. The below table illustrates the negative compounding effect with a typical month versus a month of aggressive low funnel ramping.  You can probably guess what drove the desperation… there was an urgent call from Finance to boost gross revenues for the quarter…    

Month over month eCommerce data showing simultaneous deep promotion and increased paid search investment.


There’s more to the funnel

Avant-garde marketing holds that the idea of a shopper funnel is outdated. They have an undeniable point – consumers have never had more information at their fingertips, and a greater level of distraction. But we wholly disagree that there has been a change in the consumer journey from awareness to consideration to purchase, truncated as some stages might be. It is the most accurate depiction of the journey followed by your addressable target audience, as it dwindles down to those who become customers. So, that’s our point of view on the limitations of pushing demand capture marketing only so far. But you’re probably curious as to what we suggest as an alternative. So keep an eye out for our blog post on best practices for your middle and upper funnel; it’s coming soon. Subscribe to the DRUM blog to make sure you don’t miss it.

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