Online Retailers are Innovating: Customer Service is #1

There's been some talk recently about the online retail ecosystem is finally changing after a decade of staid innovation. Notably, Josh Koppelman has two great blog posts on this subject. Josh makes the point that when you look at the top-15 most trafficked sites on the internet vs. the top-15 most trafficked online retail sites, there has been very little change in the top-15 online retailers whereas the top-15 most trafficked list is dominated by a collection of relatively new names.

I agree with Josh's analysis: up until recently the level of innovation online retail has seen has been no match for what's happened in the broader internet ecosystem. But I think it would be unfair to say that online retailers haven't innovated; it's just that their innovation has taken an old-fashioned form: customer service.

I was reminded of this discussion while thumbing through STELLAService's recent ratings of online retailers in online customer service. STELLAService is an independent agency that ranks the top 150 online retailers across several different dimensions of customer service. I wasn't surprised to see current BVP portfolio company Diapers.com ranked #2 (behind #1 customer service king, Zappos):

STELLAService Ranking:

#1. Zappos

#2. Diapers.com (current BVP portfolio company)

#3. BlueNile (former BVP portfolio company)

#4. Staples (former BVP portfolio company)

#5. Amazon

#6. LL Bean

#7. Crutchfield Group

#8. Sears

#9. Best Buy

#10. Apple

Why is it no surprise that the customer service charge is led by two relatively new online retailers?

Established brands have a huge advantage in the online customer acquisition game. For every customer they pay to acquire directly using PPC and other methods, they get a customer essentially for free or at very cheap price compared to less established competitors because customers either search for their brand or recognize their brand in sponsored link results or the natural search results (for more on this, check out my previous post, The Staples 2.0 Effect). When you average in all those free customers, it's a lot easier to make the equation "customer acquisition cost is less than customer life time value" work.

New eTailers don't have this luxury. The only way people are going to find the site initially is if the eTailer pays to acquire them. When each customer needs to be acquired directly, the"customer acquisition cost is less than customer life time value" equation becomes a finely tuned machine. As my colleague Jeremy Levine wrote in his post Penny-at-a-time brands, if it costs the eTailer $100 to acquire a customer, the customer must in turn generate more than $100 of marginal contribution (i.e., gross profit) for the model to "work." No ifs, ands or buts.

Essentially, when you are building a brand, there is no free lunch: every penny spent must result in a positive ROI. To say the least, this is a tall order. And here is the curve ball: it's been my experience that many eTailers don't even make back their acquisition cost with a customer's first purchase. They need the customer to become a repeat buyer for the equation to work.

Neither Zappos nor Diapers.com

has ever had the luxury of brand marketing to build their brand (though now that Zappos has a brand, it is investing in brand marketing). Instead, they've realized that if you give your customers fantastic customer service at every opportunity, they'll not only come back again and again, they'll also tell their friends. And thus, they've built their brands penny by penny, and customer service call by customer service call.

This is why in my opinion, Zappos and Diapers.com are two of the most innovative online retailers around, and it's no surprise they are at the top of STELLAService's list.

That they both figured out how to make above-the-call-of-duty customer service work for their business is great innovation in my book, even if it is a little old-fashioned.

New York's Own Jason Finger Joins BVP as EIR

I'm a little late to writing this post given the press release went out earlier this week, but I'm thrilled to announce that Jason Finger, Co-Founder and former CEO of NYC-based SeamlessWeb has joined Bessemer as an Entrepreneur in Residence.

For those that never spent a late night at an investment bank or a consulting firm (lucky devils!), SeamlessWeb is the service that lets you easily order food delivery in 14 cities from thousands of restaurants. The company has won numerous awards including Time Magazine's 50 Coolest Web Sites for 2006, while Jason himself was recognized as the Ernst & Young Entrepreneur of the Year for eServices in 2007.

SeamlessWeb is a great success story. Jason and his team had to master the tough art of local sales to restaurants and enterprise sales to clients at the same time. Moreover, I think Seamless Web might be the only company I know of that managed to start as an enterprise product and trickle down to consumers.

Jason joins our team of All Star Entrepreneurs in Residence: Jason Putorti, Designer in Residence from Mint (by the way, if you haven't read his post on how Mint acquired 1.5m users, you should do so now!), and Gary Messiana, our sales guru and former CEO of Netli (acq. by Akamai). gradebook.

Now if I can just get Jason to have SeamlessWeb focus on Larchmont!

The Importance of Removing Features

Recently, I had coffee with a product manager of a venture-backed software as a service company. The company’s product has been out on the market for a couple of years, and while they are starting to see their hard work pay off with the beginning seeds of a user community, he still felt like they could be growing faster, and believed that community feedback would be the key.

From a product design perspective, user communities are incredibly valuable sources of product feedback. It's no wonder startup gurus like Sean Ellis and Steve Blank stress the importance of constantly talking with your users to achieve product market fit. But as my product manager coffee-mate started to walk me through his methodology for prioritizing which features he was going to add to the product from a long list of feature requests he was getting from the community, I couldn’t help but ask him “Yes, but how do you prioritize which features you should remove?”

Everyone knows that simplicity is king for product design, but all too often, the focus of product discussions fall in the “What’s next?” camp. i.e., What are the new features? When will they be rolled out? The converse – which features to remove— doesn't have as loud a voice. User feedback almost always skews towards which features to add instead of which to subtract. Consequently, as product development becomes increasingly driven by users, it’s never been easier to forget about the need to remove features.

This can be dangerous. I'm sure everyone's had the experience of looking at a new web app and not knowing where to start. Too many features slows early consumer adoption. That said, the user community actually does provide passive feedback on which features you should consider losing: by not using the features. It's not as in your face as a user begging you on a forum or twitter for a new feature, but it's just as important. That’s why tracking feature engagement is critical and I've always found it to be an important part of the product design workflow for all the great product managers I've met.

My product manager friend didn't have a process for removing features because he was focused on satisfying the user requests. Eight times out of ten, you should focus on building out the featureset. But sometimes, it’s better to ignore what your users say, and focus on what they do.

(Hat tip to SpringPadIt for the inspiration for this post, and blogging about not just which features they added in their new product release, but also which they removed.)