Increase Profit by Raising Revenue with Upgrades

By Larry Kavanagh

At a movie theater concession stand you'll hear, "Want to make that a jumbo for just a quarter more?" In an airport bar, you can get a bigger beer for just a dollar extra. Car rental companies will upgrade you to a nicer ride for just $7 more per day. You can add 32 gig of extra storage to your iPod for just $80. All these merchants know that getting you to spend just a little bit more will supersize their profits. The same is true on your website.

The Bottom Line
The first column in the chart (at right) shows how much money a typical retailer makes on a $100 order. The example assumes the product cost is 50 percent of the price, and shipping and fulfillment costs take up another 10 percent. The example retailer spends $20 on sales and marketing to generate an order, pays another $16 to cover overhead, and makes a $4 profit on it.

The second column shows what happens when that retailer is able to add $10 (10 percent) to its average order. Cost of goods and fulfillment go up proportionally, but it doesn't cost any more to generate the order; you've already spent whatever it took to get the shopper to check out. Overhead costs also stay fixed; your rent didn't go up just because the average shopper spent more. That 10 percent average order size increase resulted in a 100 percent increase in profits — from $4 to $8 per customer.

For e-commerce sites, there's a second benefit to driving up average order size: The single best predictor of a customer's lifetime value is the dollar amount spent on the first purchase. Increased lifetime value allows you to spend more on new customer acquisition and thus acquire more new customers. Convincing a customer to add to an order is the gift that keeps on giving, at least for the merchant. Supersize me!

Secrets of Supersize
How do you increase average order size on your site? Here are a few techniques:

1. Basic Cross-Selling: Make sure you at least show shoppers "people who bought this also bought that." This cross-sell alone can increase average order size by nearly the magic 10 percent. Make sure you use it in your shopping cart. A number of sites have this feature but use it only on product pages. That's a big missed opportunity — the cart is the No. 1 place shoppers click on cross-sells!

2. More Advanced Cross-Selling: If you're already doing the basics, step up to the next level by showing multiple types of cross-sells on the same page. These can include product groupings like "category top sellers" and "people who viewed this product eventually bought these." You also can have your merchandiser select complementary products (filters for a water purifier, for example). Recommendation engines like RichRelevance, Certona and MyBuys are great at increasing average order size.

3. Offers: Part of the purpose of an offer, such as "buy $50 or more and get some bonus," is to drive up the average order size. If you use this kind of offer, test increasing the threshold to receive the bonus. If you can get the dollar threshold up just by 10 percent without losing response rate, you likely have an easy winner on your hands.

4. Buy Several Products With One Click: Amazon offers a 32-gig iPod touch. But with just a click on that iPod's page, the shopper also can get screen protectors and a case. The math gets a little trickier here. If you offer a 20 percent discount on that extra $10 item from above, the shopper pays $8 instead of $10. But your profit increases from $4 to $6, $8 less the $2 in revenue given back as a discount. Merchants are willing to give up that extra $2 if it entices shoppers to increase overall spend.

5. Bonus Offers Based on Dollars in Cart: If you've ordered from Omaha Steaks, you've almost certainly been offered "special deals" to add to the order. You can't get the specials directly; you have to buy something first in order to be eligible for them. This technique translates well to the  online world.

6. Product Ratings and Reviews: Many studies have shown that shoppers are significantly more likely to buy a product that other shoppers have given positive ratings — about a 40 percent boost over unrated products. You can make cross-selling more effective by displaying product ratings with them. PowerReviews recently came out with an "Express" product that allows small to midsize merchants to get this feature on their sites for as low as $80/month.

7. Products Previously Viewed: Your best customers can view 10 to 20 different products during one visit. Build a dynamic list of the products they've visited, and give shoppers a one-click way to return to those items. Do the same with categories they've visited. ROI

Larry Kavanagh is founder and CEO of e-commerce software-as-a-service developer D.M.insite (lkavanagh@dminsite.com).