On today’s episode, Kunle is joined by Michael Ross, Chief Scientist at EDITED, a software platform that combines different data to provide holistic views and insights to businesses.
When Michael Ross began his career as a consultant for McKinsey and Company in the 1990s, eCommerce was just coming into its own and the Internet was becoming increasingly popular. His ability to see the opportunity and ride the waves of the eCommerce space made him a pioneer in this space.
Michael shares his insights about the eCommerce space being customer-centric. It is the secret to most successful businesses and brands in the eCommerce space. Also, according to him, a company should be able to bridge data with creatives as it will provide the best assistance when it comes to the decision-making part of its operations.
It’s a brilliant episode as you’ll hear Kunle and Michael talk more about customer value, customer base growth and health, the combination of data and creatives, and views on the digital marketing space.
Here is a summary of some of the most important points made:
On today’s interview, Kunle and Michael discuss:
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Michael, welcome to the 2X eCommerce podcast.
Thank you, Kunle. Good to be here.
I’ve been looking forward to this conversation. I got a digital copy of customer base audits and I want to jump right into it. Before we do, I’d like you to give our audience some context of who Michael is. Feel free to go as far back or closer to today as you like. I want to give you that platform.
Thank you, Kunle. Let me go back over 29 years, I started my career at McKinsey & Company in the mid-90s. I was probably lucky to be in the right place at the right time, it was the beginning of the internet, Amazon had just launched, and I spent an interesting happy five years at McKinsey consulting in a whole range of internet-related projects. The BBC was my first project back in ‘94. In 1999, for those old enough to remember, that was when the first dot-com boom was taking off.
Consulting in eCommerce was like selling shovels during the gold rush, it was busy, and there was lots to do. If you believed in what was going on, you wanted to be out there in the arena getting the dirt on your face. I decided to jump ship and I ended up co-founding and becoming the CEO of Figleaves.com. Figleaves.com was one of the early UK commerce businesses we set up at the same time as ASOS and Net-a-Porter.
I remember Nick Robertson coming to visit Figleaves in 2000. At the time, Figleaves was about three times the size of ASOS. There was a brief window where Figleaves was riding high. A couple of years later, ASOS was five times the size of Figleaves. That was my first big learning. In the early days of the internet, people were coming online for the first time. Figleaves was growing exponentially. We grew one year 100% and the next year, 80%, and the next year, 70%.
I remember my board saying to me, “This is fantastic, Michael. We’ve got to keep growing. Let’s grow another 100% next year.” Fundamentally, we didn’t understand what was driving the growth of our business. We saw the growth of traffic, and the growth of conversion rates, but we didn’t understand growth from a customer perspective. What I wish I’d known then that I understand now is how to look at growth through the lens of customer acquisition and retention.
The challenge for Figleaves was we were bringing on a lot of new customers but we weren’t doing a great job of turning them into loyal existing customers. To bring that to life, a loyal Figleaves customer was maybe buying 2.5 times a year or 3 times a year versus a loyal ASOS customer who was buying 20 times a year. What that meant was that as our customer acquisition curve started to slow, which inevitably it does, our overall growth became extremely hard.
I’ll come back to that because that’s played into the past twenty years of my life, the criticality of understanding growth through the lens of customers. We did one smart thing, which was we sold 300 brands of women’s underwear. I remember one day that one of my merchandisers came to me and said, “Michael, we should stop selling La Perla.” La Perla is a premium Italian lingerie brand, which we’ve done an incredibly hard job to get to supply us.
I said, “Why on earth would we stop selling it?” she said, “We’ve done the analysis and it loses money.” When we look at the margin, the returns rate, and the cost of photographs at such high standards, we’re losing money on La Perla. What we did was we looked at the performance of the brand through the lens of the customer and what we saw is that all of the customers who bought La Perla in their first purchase went on to become high-value customers.
They started buying a bunch of other products and brands that were much more profitable. This was a super insight into saying that if you look at profitability through a traditional merchandising lens, you would make a decision to stop selling the brand. When you look through the lens of the customer, You make a completely different decision. The answer is we should be expanding the product range rather than reducing it. That was the one successful customer insight.
The third big takeaway from Figleaves was that, in 2006, I decided I wanted to move on. I reached the limit of my operational capabilities. I hired my successor who previously had been running Amazon in the UK, Robin Tyrrell, a great online retailer. He joined Figleaves and I remember vividly after about two weeks, he sat me down and said, “Michael, you’re measuring all the wrong things.” I said, “Give me an example.”
He said, “I can give you lots of examples but let me give you one example. You’re telling me that you are 92% in stock at the SKU level.” For lingerie, for underwear that has lots of different colors and sizes, the SKU is an individual color size combination. We had about 50,000 SKUs on the website. He said, “You’re telling me we’re 92% in stock.” I said, “That’s correct.” He said, “It doesn’t matter. What matters is, are we in stock of the products customers are looking at or what Amazon called viewed availability?”
Viewed availability is a customer-centric metric. Unweighted availability, the 92%, is a company-centric metric, it measures the company’s view of availability. The viewed availability is much more around, what are customers looking for on the website? This was a real epiphany because we thought we were a pretty smart leadership team, we’ve been running the business for seven years, and no one had ever thought of that.
Why was our viewed availability so bad? It was bad because we had lots of marketing. Traffic that was driving customers to products that were sold out never existed or were fragmented. We had lots of personalization on the website and sought orders that were good at promoting best sellers but weren’t good at pushing them down as they started to sell out. This idea of how you measure things that are important to customers has been a critical theme for me around how you connect customer insight and customer profitability to business action.
Thank you for the intro, it was the longest. This has been the best intro on the podcast. Thank you for sharing the anecdotes on Figleaves. With customer data, when you look at things from a customer’s perspective, there are two ways to do that in terms of data on the one hand and what the customer feels when they are interacting with your offering. What feeds into what? How do you stack it up from a strategic perspective to making the right decisions?
It’s a great question. The way you framed it is, what feeds into what? Where do you start? I feel strongly that a customer-base audit is foundational. This is something that every business should be doing as absolutely part of how they run and operate their business. For me, the customer base audit has three elements to it and the first one is what is the health of our customer base? Every business that is engaging with customers has a customer base.
How many customers do we have? How many active customers? How many are lapsing? How many have lapsed? Is our customer base growing year over year? I think of this as every business has a balance sheet, you think of your active customer base as a balance sheet of customers. That’s pillar number one. Pillar number two is, how do we make revenue and profit from customers? The question I want to answer is, how much of our revenue or profit next year is going to come from our existing customer base? How many new customers do we need to acquire to hit our plan?
A fundamental way to look at that is through the lens of the customer cohort. Many businesses have customer segments. In my mind, a cohort is the most fundamental way. When I talk about a cohort, I mean a group of customers that were acquired in the same period, whether that’s a year, a quarter, or a month. The reason cohorts are so powerful is every customer is a member of one cohort, no customer is a member of more than 1 cohort, and the membership of a cohort never changes.
When you look at how revenue and profit are built up from cohorts, you get a clear picture of what a retailer described to me as the heartbeat of their business and you understand exactly how revenue from cohorts evolves over time. That’s the second pillar. The third pillar is to look at the distribution of value of the customer base. What I like to say is that there is no average customer. When you rank customers from most profitable to least profitable and you group them into ten bins, what you will typically find is a top decile customer can be worth 100 times the bottom decile customer.
Generally, all profitable customers are customers you want but you want to ensure that you’re aligning decisions across your business to customer value. That, for me, is a nice example of how you can make a decision about merchandising aligned with customer value. For me, these three pillars of the customer base audit are foundational. The next level is then to say, “Let’s go and talk to customers.” Who are our most valuable customers? What makes them tick? What’s important to them?
Let me give you an example from a luxury retailer. They went out and did a customer-base audit and they found that they had a top 2% of customers that represented 50% of their revenue and 70% of their profit, incredibly concentrated. You look shocked, Kunle, and you shouldn’t be. It’s amazing when you look at how concentrated these high-value customers can be. They went and talked to customers and said, “What’s important to you?”
They weren’t interested in promotions. They weren’t interested in discounts. These were wealthy people. What they wanted was better service. It turned out that this business, one of the things they introduced was a top-of-the-queue email experience and a top-of-the-queue delivery experience. If you’re a high-value customer and you placed an order, your order went straight to the front of the delivery queue.
If you sent an email, you went straight to the front of the email queue. If there was any issue with your order, you would proactively get an email from customer service telling you what was going on and asking you what they wanted you to do. They did give you a sale preview but that was the fourth most important thing. What was interesting about those four examples was they all had high perceived value and low cost to the retailer.
You only get those sorts of insights by talking to customers and, for your brand or your retailer, understanding who are your most valuable customers and what’s important to them. That’s not a general, “We’ve got to appeal to Gen Z,” or, “We’ve got to appeal to Baby Boomers.” It’s drilling into the specific people who are opening their wallets and spending and working out what is important to those people. For me, it’s combining the best of good quality analytics with deep insight that you can only get from talking to customers.
Makes a lot of sense. You start with quantitative data and then you go more qualitative through interviews, surveys, and what have you with customers, with your high values. Do you concentrate on the high value and then work your way down to a certain point to the mid or do you just focus on that, master it, and get it right? With your example, 2% of customers generating 50% of sales and 70% of profits is staggering. That is where the focus should be. Squeeze more.
That’s it. If you’re going to start somewhere, you start there. They are the customers who you don’t want to lose. Any small incremental profit you can squeeze from those customers is the easiest group to get. It’s understanding what is different. You want to focus on your high-value customers but you’re also interested in what differentiates them from low-value customers. You want to work your way down.
Your low-value customers in aggregate are worth a lot but you need much more of a mass proposition and a mass communication to them. I would say that the leadership challenge and the management challenge is how to, as you said, start at the top, work your way down, and think hard about how surgical you need to be. Business is not about perfection, it’s about making the right judgment calls. It’s incredibly easy to overcomplicate and it’s also easy to oversimplify. Maybe one of the big challenges I see with businesses at the moment is to operate at the right level of complexity.
It goes back to one of the points you made in the second pillar, which is more looking at revenue from cohorts versus what the merchants do at a segment level or a demographic level. The cohorts are fixed in stone and they came at a certain period. Would you go any deeper than that timestamp? That timestamp might have resulted in a collaboration that brought in a specific quality of customers or a channel or a marketing campaign. Would you go into channels or would you fix it at time?
Kunle, lovely question. You never fix anything. You start with cohorts and then you dig deeper. If you see all cohorts are behaving similarly, great, happy days. If we can see that we have a particular cohort that is performing incredibly well, poorly, or was performing well and then stopped performing well, that’s when you double click and you ask the question, why? Amazon didn’t invent this but they have this concept of the five whys where you keep asking why until you find a root cause. Exactly that.
If you say, “We’ve got the Q3 2022 cohort, they look good,” then you ask the question, “What did we do? That was interesting. That’s when we ran a collaboration.” I was looking at a business where I said, “What did you do this month because something happened.” The business said, “We remember we stopped sending our catalog. We used to do a catalog and that was the month we stopped it.” I said, “That looks like a mistake because you can see that the cohorts that were performing happily suddenly fell off a cliff.”
The other dimensions you’re overlaying, whether it’s channel, device, or geography, all of those things are powerful overlays to bridge what I would say from customer profit to business decision.All of this customer insight is interesting but it’s not useful unless it translates into insight and action. The drill downs you’re describing are critical to deciding, “Do we keep doing what we’re doing? The system is performing well, we don’t need to change anything,” or do we want to make an intervention.
If we want to make an intervention, do we want to do it for specific customers? Do we want to do a specific channel for a specific brand or for a specific element of the operation? For me, that is the central management challenge of a customer-centric business. I’ve seen lots of businesses fiddling around with websites and changing the colors of buttons, which is probably the least important thing. Let me tell you this great story from a friend of mine who was at Amazon. I asked him, “What did you talk about on a Monday morning?”
He said, “Michael, we talk about four things. We talk about viewed availability. Are we in stock of the products that customers are looking at? We talk about viewed price competitiveness. Are we price competitive on the products that customers are looking at? We talk about delivery on promise. Are we delivering to customers when we told them we would? We talk about range competitiveness. Do we have everything that our competitors have? Do we have an exclusive product?”
I said, “Do you talk about conversion rate?” He said, “No. The Amazon culture is you can cry about conversion rate but you can’t do anything about it. We talk about metrics we can action.” There’s this real power of how you bridge between understanding customer behavior and understanding customer value. Ultimately, you want to take actions that are going to drive increased customer value.
With all of those four questions, it ended with what customers were looking at. It’s from their lens. The data tells you what they’re seeing and how they’re behaving and you’re translating that data to make smarter decisions you would hope.
Precisely, it’s web analytics, which is seen as something, for the digital team, as Adobe or Google, and it’s complicated. In my mind, that’s the glue. That is the digital exhaust that tells you what are your customers doing and looking at and interacting with. That is the gold dust that should be relevant for merchandising teams, buyers, and planners.
One of the challenges in most digital retail businesses is they’re organized like traditional retailers where they never had this data. What I’m seeing a lot of is it requires a new operating model and operating mindset. You’ve got all these amazing, fantastic, and successful traditional retailers who are still often operating with a model that was designed for store retailing and hasn’t evolved and adapted to this customer-centric world.
Your analogy at the start of this conversation was the customer base audit is similar to a balance sheet in the financial world. You know what a healthy balance sheet looks like, more assets than liabilities. When you get this customer audit out based on the three pillars as well as your last point on talking to customers, how do you gauge the health? Are there any metrics to gauge the health of your customer base? How do you know my customer base is firing on all cylinders?
It’s a great question. In simple terms, if your customer base is growing, that’s generally a good thing. If it’s shrinking, that’s generally going to be a bad thing. I would say that there are a bunch of businesses that are increasingly realizing they have a bunch of loss-making customers. Sometimes, you do need to shrink your base before you grow it again. There’s an overall, “How is the customer base performing over time?”
Within that, it’s understanding the dynamics. One of the things I like to look at is these deciles. Let’s look at customers’ decile this year versus last year. How stable is that? Let me give you one story on this. I remember talking to one luxury department store in London and they were interested in the stability of their highest-value customers. These were customers spending more than £5,000 a year. They looked at the number of those customers and they said it was great.
They saw, three years ago, they had a few 100 of those customers. Last year, they had a few thousand. A year later, they had more than that. When they looked year on year, they saw that all the high-value customers from two years ago had completely churned. Overall, the customer base was growing and the VIP customer base was growing but there was an enormous amount of churn, and that then led to the question of why.
You drill into what’s driving it. The punch line was there were a lot of international customers, particularly Chinese customers, who were sensitive to the Chinese sterling exchange rate. When the UK was a cheap place to do their luxury shopping, they’d come to London. When the Pound strengthened, they would go somewhere else, they’d go to Singapore or the US. They thought they had a great lot of VIP customers. In fact, what they were observing was just to do with exchange rates.
When you say benchmarks, it comes down to understanding the dynamics, what’s driving the growth of the customer base? You’re not seeking perfection, you just want to make it better, and you want to ensure you’re making the right investments. Another example of what goes wrong is I was working with one UK retailer who was saying, “We’re doing fantastically. We’ve got an average customer value of £200.
Our average customer acquisition cost is £20.” This is a £200 value, £20 acquisition cost, and what is called the sort of CAC/LTV ratio where you divide the value by the customer acquisition cost and that was a 10 to 1 ratio. They were saying, “We’re best in class. Google is telling us we’re good. We want to be spending more money on acquisition.” What was interesting is we did two things, we looked at the distribution of customer value, and the distribution of customer acquisition cost.
The punchline there was that most of the spend was acquiring customers where the customer acquisition cost was greater than the lifetime value. Both of these distributions were skewed. Most of the customer acquisition cost was cheap but most of the customer value was low-value customers. The insight there is this was a business that was growing customers but, at the margin, the customers they were acquiring were spending more money to acquire them than it was generating in lifetime value.
Ultimately, as a business, you care about long-term profitability and you generally would think that growing a customer base is an input into that but not at any cost. You certainly need to understand the trade-offs and make sure that you’re not just growing a customer base without any concern for what it’s costing you to acquire customers.
What did they do with that insight?
They took the spend. Once they looked at that distribution, they said, “We’ve grown our customer base 10% last year but spent a whole bunch more money acquiring those customers than they’re going to be worth it to us. Let’s redeploy those marketing dollars. Let’s not keep feeding the machine.” In their case, they were an omni-channel retailer. One of the insights we found is that stores were a much better route to acquire customers than digital channels.
If you look at a store as a vehicle for acquiring customers, it is powerful and there are lots of online retailers now doing pop-up stores. When they looked at stores in terms of what we call the four walls profitability, how much money is going through the till? It didn’t look great. When you look at the store profitability based on what we acquired from this customer and then they went home and spent a lot more money online, you realize that a store was a brilliant way. The punchline was, “Let’s take a bunch of cash that we’re spending on digital marketing, and let’s open more stores.”
Especially with um a store-to-online loyalty program, it’s powerful. I was activated at Rituals Cosmetics as a customer and the loyalty program was extended online. It’s a fantastic experience from an omni-channel standpoint. The second time I went to shop there, I got this gift, one was acknowledging my birthday, and another was based on a spent threshold. There were two others, which entered with a first online purchase. It was phenomenal. It’s a holistic customer-centered loyalty experience, which I haven’t seen anyone execute.
When you experience these things, when it works well, it’s a joy. It drives loyalty and advocacy, you’re advertising that to a big group of people who hopefully have read this far. What you find is these things are easy to talk about. Executing them well is hard.
You need to pilot it a lot. You can talk about mystery shoppers. You need to pilot this with people with courts of real people, which circles me back to one of the points you made. I want to go back to that example of the 2% customers generating 50% of sales and 70% for the retailer. With that insight, how would you get those customers to get more customers like them? They hang out with each other so to speak. This is sideways but how would you approach that and get them to build that base for you as a retailer?
I’ll tell you one example. Particularly high-value customers, they’re not going to be interested in a friend-get-friend voucher, for example. What are a couple of examples of what this business did? They did fashion shows because they were a super premium luxury retailer. They did fashion shows for the press and celebrities. They invited twenty of their highest-value customers to these fashion shows and that was extremely successful.
They then looked at the behavior of those customers. I would say that is probably a clever idea because then these customers are going to take photos and tell all their friends. You give them the opportunity to spread the word without it being too cynical. More generally, these are the creative marketing challenges. It’s like, “We’ve got these super valuable customers.”
Let me give you another example, one beauty retailer realized that a lot of their customers were coming into their store. They were dropping their kids off at a certain set of private schools in London and then they were all coming to get their nails done at 10:00 in the morning. That’s an insight. If we get this insight that there are going to be mothers, not to be not to make a generalization but it’s going to be mothers at the school gate, how do we then create morning events in our store?
It’s a little bit like what Lululemon did with their yoga classes. These are clever ideas. You don’t see that in the data, the data gets you so far, and then you join it with these real deep customer insights, and then you execute well, that’s the virtuous circle. That’s what it’s all about good customer-centric retailing feels like.
From an execution and team standpoint, it means that the data people need to be speaking with the creative people with the mediator that ensures that there are campaigns that serve the translation of the data.
I couldn’t agree more. One of the biggest challenges I find is there’s sometimes this disconnect between data teams for whom, a dashboard or a piece of insight is the end of the journey, and creative teams, who have the challenge of, “How do we translate this into product or marketing?” I remember William Kim, who used to run the eCommerce of Burberry, and he described that the people he looked for were geek geeks who could speak. If you can find a geek who could sing, that was Nirvana.
That idea of saying, “How do you create that partnership between data people and creatives?” That’s extremely hard to pull off in practice. It requires creatives willing to ask questions, be curious about customers, and be curious about data. As you said, the intermediary, the same way in technology, we have product managers who sit between the business and technology. There’s a critical role for translators to sit between the analysts and the business people.
I thoroughly enjoyed this conversation. Two things I’d love you to do now that we’ve gotten here is, what are you doing now? Are you still with EDITED?
Yes, I’m the Chief Scientist of EDITED. My business dynamic action was acquired over two years ago. I’ve stayed so I’m working with the EDITED clients on all of these issues all around. How do you join together transactional data, behavioral data, and market intelligence data to help them make better decisions? That’s my life’s work.
What’s the overall proposition at EDITED? What’s the full delivery?
We’re a software platform. The old EDITED business is all about market intelligence. We have both fashion, beauty, and home. We have the best market intelligence system on the planet. That’s essentially seeing the price proposition range for every retailer you could think of in every market on the planet. My old business dynamic action is all around inside the enterprise data. We’re bringing together digital marketing data, web analytics data, customer data, returns data, supply chain data, and gross margin to give this holistic view of what is going on in the business. EDITED now is all around bringing together inside the enterprise data with market intelligence data to simply make better and faster decisions. That’s the challenge.
It’s Edited.com. Your book is The Customer-Base Audit and you co-authored it with Bruce Hardie and Peter Fader. It’s out on all platforms. You’ve been out for a while. It’s on Amazon Audible. Not many business books are on Audible so that’s a plus, Kindle and the like. It’s called The Customer-Base Audit: The First Step on the Journey to Customer Centricity. I like the name and the book cover is nice. For people who want to follow your work, are you active on any social media channels?
I would not describe myself as super active. I’m on LinkedIn and I post occasionally. I am mildly active.
Michael, it’s been an absolute pleasure and deeply insightful. I’ve enjoyed this conversation. Thank you for coming on the 2X eCommerce podcast.
Thank you, Kunle. Great pleasure.