A Venture Capitalist’s E-Commerce Shopping List
Editor’s note: Sergio Monsalve is a Partner at Norwest Venture Partners where he is focused on early and growth investments in the digital media, mobile, and social areas. Follow him on Twitter . E-commerce is one of the fastest-growing sectors in technology and is poised to get even hotter, with sales expected to double between 2010 and 2015, according to eMarketer. So how can discerning investors find the most promising opportunities? They have to first take off the rose-colored glasses.
Niren Shah - Norwest Venture Partners

Editor’s note: Sergio Monsalve is a Partner at Norwest Venture Partners where he is focused on early and growth investments in the digital media, mobile, and social areas. Follow him on Twitter

E-commerce is one of the fastest-growing sectors in technology and is poised to get even hotter, with sales expected to double between 2010 and 2015, according to eMarketer. So how can discerning investors find the most promising opportunities? They have to first take off the rose-colored glasses.

While innovative, fast-growing e-commerce companies abound, many of them will not succeed in the long run. For all the opportunity, it remains extremely difficult to build a great e-commerce company that truly and repeatedly delights the consumer.

At Norwest Venture Partners (NVP), we’ve been shopping in the e-ommerce market for years. The companies that rise to the top of our list have one thing in common: an obsessive focus on the consumer lifecycle, which can be measured and managed in many ways. For me, it boils down to four key elements that I refer to as the 4 A’s: Awareness, Activation, Addiction, and Amplification.

Amazon.com exemplifies the 4 A’s cycle. In 1994 Amazon began offering readers a much larger selection of books than would ever fit on the shelves of local bookstores. The startup gradually improved and extended customer experiences and engagement as it expanded far beyond the book realm. Massive brand loyalty turned Amazon into the world’s largest online retailer, a household brand, which benefits from loyal customers praising it in online and offline social conversations.

The Cycle Begins: Awareness

The cycle starts by using a variety of channels to expose prospective customers to your brand, attract them to your e-commerce site, and get them to revisit and start to engage. These channels may include direct marketing (e-mail, direct mail, catalogs, etc); search-based advertising and marketing; social networks; and mobile technologies. The precise mix is dictated by the habits of the target audience and can generate powerful cross-channel synergies.

Tracking visitors, Monthly Active Users (MAU) and monitoring social chatter can measure awareness. If you can, give pre-purchase users enough reason — such as a delightful digital experience — to Facebook Connect, comment, register or log in on subsequent visits. You can collect more detailed statistics implicitly and/or explicitly and propel users to the activation stage.

Activation and Engagement

The Activation stage starts with a transaction. Consumers will purchase something, and perhaps register for future interactions. First-time impressions are critical, so obtaining feedback on the product and the entire experience at this stage is critical. Tools such as the Net Promoter Score can measure satisfaction levels and start separating out your evangelists from your detractors.

Tactics that can distinguish your site at this stage include unique merchandising, a superior user interface, more granular personalization, seamless accommodation of mobile devices, and streamlined logistics.

Revel Touch is a company that fosters activation by extending a retailer’s footprint to the fast-growing iPad channel. It also helps lead into the addiction phase by turning a retailer’s website into an app that can be as sticky and engaging as a game.

Addiction and Loyalty

You reach the Addiction stage when you have captured some significant mind share. You get a high level of repeat purchases from your customers, and your site becomes the first thing they think of when they want to buy something in the category or occasion your brand represents.

Apple can boast a very addicted customer base, the foundations of which pre-date the web. When Apple releases a new iPhone, legions of passionate evangelists are ready to tout it. An addicted customer base is ready and willing to be engaged, with e-mail campaigns, contests, games, and links from social sites. At this stage it is important to measure everything in the sales funnel, quantify delight factors, and keep a close eye on customer service metrics.

As customers get more addicted, you will see increases in purchases-per-buyer ratios and average order values. There are also mind-share metrics that help you measure brand loyalty.

Creating a personalized connection with each customer is critical to the Addiction phase. Companies like Certona, SailThru, and MyBuys that create personal recommendations and promotions can help boost loyalty and build devotion.

Amplification and Social Spread

Once you have established a cadre of addicted evangelists, they will start promoting and amplifying your brand to others. If you track and further engage with your best customers and empower them via Facebook, Twitter, Pinterest, Extole, Kenshoo and other social tools, they can amplify your message endlessly.

You can increase evangelist impact in the Amplification stage by making effective use of social media measurement and marketing tools. Other Amplification tactics include personalized offerings, incentives that encourage social sharing, and tell-a-friend campaigns. Good customer testimonials are worth their weight in gold at this stage.

Key metrics for the Amplification stage include buyer/sharer ratios; a traffic mix that is increasingly organic; lower customer acquisition costs; higher repeat purchases; Net Promoter customer loyalty scores; and viral coefficients. Ultimately, a delightful service with a high measure of evangelists and low level of detractors should translate into higher Awareness, beginning the cycle again at the first A for a new wave of customers.

Fab.com has nailed Amplification with a product feed that ties directly to a consumer’s social graph. Built to be extremely social, the amplitude is that company’s most valuable asset.

The Wow Factor

The 4 A’s cycle hinges on delighting customers, and just what constitutes customer delight varies from one e-commerce brand experience to another. What makes your product — or how you sell it — stand out?

Zappos sells products that are quite ordinary and uses massive availability and no-hassle returns to delight customers. Zappos offers the same brands at roughly the same prices, but carries most sizes and widths. You will find what you want. Zappos also removes some of the risk of online shopping, by offering a very friendly returns policy and great service.

Another great example is Gemvara in the jewelry category. Gemvara delights you with customized products that don’t exist until you create them, and engages you with enjoyable virtual renderings of inspiring jewelry that exists nowhere else.

ModCloth sifts through the fashion universe and carefully curates vintage and retro-inspired clothing. You don’t know what you will find, but you know it will be on-trend and beautiful.

E-commerce has undergone massive changes since Amazon first opened its virtual doors in 1994, and there is no sign that the transformation is abating. This continuing disruption favors agile startups that deeply understand and obsessively measure their unique 4 A’s of the consumer lifecycle: Awareness, Activation, Addiction, and Amplification.

With each turn of the cycle, the customer base increases rapidly while customer acquisition costs drop and the lifetime value of each customer goes up. The result is a high-worth and durable e-commerce brand that scales and delivers high profits.



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