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Applying the Flywheel Effect To Your eCommerce Business

This is a guest post from Teikametrics, a leader in leveraging data science and machine learning to automate advertising on Amazon. They’re offering Deliverr followers exclusive, early access to their new Retail Optimization Platform, Flywheel

There’s a huge opportunity for eCommerce businesses to leverage advertising to create a Flywheel effect. It’s an exciting time across marketplaces, Walmart, eBay, and Amazon have enabled sellers and brands to use advertising to scale growth in an unprecedented way. As Amazon’s ad business is posed to become a 10 billion dollar business, the challenge all eCommerce businesses must address is developing sustainable long-term sales momentum.

Most businesses leverage paid advertising to drive more sales. Sellers absolutely should be advertising their products; however, often overlooked is the reason why they are leveraging advertising in the first place: long-term sales momentum. How do you ensure you’re capitalizing on the opportunity to use advertising to meet your ultimate business goals?

To help you answer that question, we’ve put together a guide on how to apply the Flywheel effect to your business. Keep reading.

What is the Flywheel Effect? Why should I care?

A flywheel is a large rotating device that requires an initial input of energy to get moving and then spins faster and faster with less and less effort. Applying the flywheel’s operation to eCommerce, there is an initial cost to advertising necessary to spur product sales, and eventually that investment will start to generate more and more sales. This effect compounds over time, yielding greater returns for less advertising spend. When set into motion by entrepreneurs, the “flywheel effect,” a term coined by Jim Collins, can create sustained growth and momentum.

As an example, consider a young company founded on an abiding love of “Wheel of Fortune” and selling Pat Sajak pinwheels. People have only ever known Alex Trebek pinwheels, so the business owner says, “I’d like to buy an ad.” The company aggressively and optimally advertises its product to introduce it to consumers.

Once people see the new product in all its spinning glory, higher sales follow, which leads to better sales rank. Better sales rank leads to more organic traffic, at which point the know-it-all Trebek becomes considerably less smug; and subsequently, increased organic traffic for the Sajak pinwheels allows the company to refine and further optimize its advertising. Flywheels, pinwheels and heads are spinning at rapid growth.

Amazon’s meteoric rise was founded upon this principle. Specifically, valuing the customer experience above all else, Amazon obsessed over courting consumers with low prices, thus increasing traffic.

Lower prices led to more customer visits. More customers increase the volume of sales and attracted more commission-paying third-party sellers to the site. That allows Amazon to get more out of fixed costs like the fulfillment centers and the servers needed to run the website.

Amazon scaled revenue while decreasing costs, then lowered prices and further raised customer satisfaction: a continuous and “virtuous cycle.” The good news is that Amazon doesn’t have a monopoly on the flywheel effect.

How do I apply the Flywheel effect to my eCommerce business?

1) Consider Your Marketplace: evaluate your available options for advertising and analyze opportunities before investing.

  • eBay, for instance is a smaller (but still substantial) market; it offers lower seller fees and, unlike Amazon, it doesn’t compete with its sellers. Though nostalgic shoppers can go wild with eBay’s selection of vintage items, 80% of the items offered are new.
  • Walmart.com has been leveraging its brick-and-mortar retail advantage to compete with Amazon online, including an aggressive push to develop its third-party marketplace. Walmart has also acquired Jet.com, a 2015 startup that rewards shoppers who buy more items that can be shipped together or who are willing to waive their rights to free returns. Walmart Performance Ads are a good PPC advertising option for many sellers.
  • Amazon offers multiple forms of advertising with a large audience. In fact, it was predicted that 84 percent of American consumers would buy products through Amazon during the 2017 holiday season.

2) Optimize Product Listing Pages: pay-per-click advertising that doesn’t convert is costly! To maximize conversion, your Flywheel will require product pages with stellar photos and copy that accurately describe and differentiate your product.

3) Execute Effective Campaign Structure: set up advertising campaigns strategically based on platform best practices. In the context of Amazon, this means that every campaign is set up with an automatic and a manual campaign. Automatic campaigns explore what search terms customers are using to find your products, and manual campaigns exploit those keyword opportunities. For more tips on Amazon campaign creation best practices, check out this detailed guide.

4) Optimize Advertising: through no fault of your own, keeping up with competition won’t be sustainable without tools to help automate your advertising workflow. A reported two-thirds of Amazon advertisers are using or plan to use some form of automation, so if you don’t, your flywheel simply won’t be able to keep pace.

5) Practice Patience with Growth: as you start up your flywheel, the initial focus should be on increasing sales. During this growth phase, you should be willing to accept lower (or sometimes even negative) margins and higher ad costs to get your product into the hands of consumers.

6) Measure Success: tracking key metrics will enable you to effectively measure the success of your advertising. By comparing TACoS against ACoS, you can begin to attribute the lift advertising is contributing to your organic growth! In doing so, you will gain clarity on your ROAS. Here is how to calculate each of these ratios (simply multiply by one hundred to realize them as a percentage):

  • TACoS, or Total Advertising Cost of Sale, is a ratio of ad spend and total revenue.
  • ACoS, Advertising Cost of Sale, is a ratio of ad spend and ad sales.
  • ROAS, or Return on Ad Spend, is a ratio of ad revenue and ad spend.

7) Decrease Advertising Spend: now that the flywheel is in motion, the data pouring in from your mounting sales can be used to refine your campaigns as your company sets new goals. You want to see organic sales increase without increasing ad spend, or to put it differently, a TACoS that is going down and an ACoS that is staying the same.

8) Expand to Wider Audiences: after you create a sustainable advertising flywheel, deploy advertising on other marketplaces to reach even more customers. This is where the Flywheel effect really starts rolling.

Teikametrics Flywheel is a Retail Optimization Platform (ROP) designed specifically to help you follow these steps to increase profitability and market share. It puts cutting-edge data science at your disposal so you can get the most out of your precious advertising dollars and efficiently control your bids and keywords across thousands of products.

Moreover, its interface gives you an unparalleled view of your company, from the broad to the granular, total revenue to product-level campaign performance. You get both a revolutionary algorithm and complete visibility, a combination is what makes Flywheel unlike anything else on the market.

And did we mention it works? Businesses spending over $20,000 a month on ads saw 23% growth within the first 30 days of using the product. So set your flywheel in motion—your business will look better and better as it comes full circle.

The Teikametrics team is offering a free account audit from an Amazon expert with exclusive access to their Flywheel Retail Optimization Platform.

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