Daniel Sperling-Horowitz in Google Shopping, customer lifetime value, effective commission, cpc, adspend

The Google Shopping Cash Machine

Posted: December 18, 2016

A few days ago, my business partner messaged me:

[Customer]'s Google Shopping growth over the last 6 months is stunning. They're now consistently maxing out their daily adspend, their effective commission is stable at 15% and if we double their daily adpsend they'll be just as profitable and generate twice as much monthly revenue. There's an artificial ceiling on their growth, they need to raise their adspend. Just let them know we've built them a cash machine.

Earlier this year, we posted an article - Demystifying Google Shopping, a Sleeping Giant for Online Sales - which detailed our approach to Google Shopping and the concepts of effective commission and customer lifetime value.

Before we continue this story, here's a quote by Paul Graham of Y Combinator, an investor in Zentail, that sums up our approach to enterprise software development and company building:

And in any case, competitors are not the biggest threat. Way more startups hose themselves than get crushed by competitors. There are a lot of ways to do it, but the three main ones are internal disputes, inertia, and ignoring users. Each is, by itself, enough to kill you. But if I had to pick the worst, it would be ignoring users.

We are extremely selective when it comes to bringing new retailers onto the Zentail platform. Each new retailer we work with is selected because they have demonstrated traction and a clear competitive advantage (i.e. some combination of brand ownership, distribution control and exclusivity, economies of scale, extensive knowledge in niche industry) and we believe our software platform and actionable insights will accelerate their growth.

By the time a new retailer signs on with us, we already have a clear understanding of what their goals are -- and they're usually audacious. To help each retailer achieve these goals, we offer intensive support by way of on-demand training, constantly growing Knowledge Base of best practices, and we work intensively with them to develop innovative features and expand successfully to new channels. Weekly and bi-weekly calls with customers is not unusual.

We're not focused on the "long tail" of marketplace channels. We're focused on developing the channels that have demonstrated a clear value proposition in terms of current GMV, GMV growth trajectory, monthly unique visitor growth, and willingness to invest large sums of capital. Accordingly, we firmly believe the highest value channels for our customers are Amazon, Walmart, Jet, eBay, and Google Shopping.

Google Shopping is perhaps the most widely misunderstood and important channel of them all.

Back to Google Shopping, the cash machine of online retail. Let's say you spent $100 per day purchasing 300 clicks of traffic (motivated shoppers) to your website, and of those visitors 12 made a purchase totaling $667 in revenue. Your stats are as follows:

  • Cost-Per-Click (CPC): $0.33
  • Conversion Rate: 4%
  • Effective Commission: 15%
  • Average order: $55.58

Now let's say we run the numbers and realize you can be spending $1,000 per day purchasing 3,000 clicks of traffic, and of those visitors 120 made a purchase totaling $6,667 in revenue. Would you do it?

For many retailers, there's a psychological barrier to ramping up adspend on Google Shopping and it's certainly understandable. Shelling out $1,000 per day ($365,000/year) without absolute certainly your return will be profitable requires a high degree of trust and intestinal fortitude.

The virtuous cycle of Google Shopping. As Google's ability to refer search traffic to Google Shopping listings continues to grow, and your website's growing number of Google Trusted Store reviews inspires more confidence among shoppers relative to your competition, we expect your ceiling of profitable daily adspend will continue to rise. Over the course of 2016 we've seen it first hand.

Now think about Google Shopping as if it is just another marketplace. Let's say you're generating $100,0000 per day on Amazon and your marketplace commission is 15%. You're effectively paying $15,000 per day to Amazon for the ability to generate revenue from their sales channel. What if Amazon changed their business model and said "since you're generating $100,000 per day on average, you need to pay us $15,000 at the start of each day, and in exchange, we will continue driving shoppers to you. Would you pay Amazon up-front?

Your answer should be yes.

Google Shopping, the growing cash machine. We fully expect Google Shopping to continue to grow. This sales channel is best thought of as a pay-to-play marketplace. This time next year the customer we highlighted will be generating over 25% of their online revenue from Google Shopping, up from 12% today. There is no doubt this customer will soon be spending $5,000 per day in Google Shopping adspend, and something tells us they'll be pleased with the results.

Did we mention you own the relationship with these customers and you can market to them at well below an effective commission of 15% to generate subsequent orders from them? That's a subject we'll cover in 2017.