With the holiday shopping season at our doorstep, e-commerce sites and digital businesses are finalizing their plans to maximize their revenue for Q4 2020. But there are obstacles that face each of these businesses year-round that can make a particularly negative impact on one’s bottom line. PerimeterX expert Reesha Dedhia previously spoke on episode 5 of the PerimeterX Podcast about coupon extensions, ad injections, fraudulent affiliate fees, and other challenges facing e-commerce and digital businesses. Now, Reesha returns with fresh metrics and insights from a collaborative report between PerimeterX and Aberdeen Group. These takeaways help to better understand the effects of these challenges on modern businesses. Listen to the full podcast audio here.
Reesha, you previously joined us to talk about the challenges of coupon extensions and ad injections to e-commerce businesses. Today, we're here to talk about the impact of these extensions. How do we begin to understand how to quantify the business impact of coupon extensions and ad injections on e-commerce merchants?
Reesha: We took the approach to partner with third-party research group Aberdeen, and together we conducted a study to quantify the business impact of coupon extensions and ad injections on e-commerce merchants. Today, I'd like to talk through some of that analysis. For e-commerce merchants, sustainable financial success depends in large part on their visibility and their mastery over a traditional funnel model for generating revenue. What does that funnel look like? Let's look at the four stages.
This funnel starts with the awareness stage, and this is about attracting new customers and potential buyers to visit the merchant's website. Next, we go to the interest phase. You've started with awareness bringing customers to the site. Now, you need to provide compelling ways for site visitors to both identify and actively engage with items of interest to them. You can think about the interest stage as you've brought the customers to your site. Now, you want them to actually stay on your site, browse the different product pages, and start to develop interest, which brings us to the third stage, the start checkout stage. This is about enticing shoppers to add items to their online shopping carts, they're going to the product pages, they're developing interests. Now you want them to take action and start adding those items to the cart, which brings us to the fourth stage: the complete purchase phase. This is about encouraging shoppers to complete their online purchases and finish the intended customer experience. They started the action to add those items to their carts. Now, it's about getting them to complete that purchase and get to order confirmation.
How has the pandemic added complexity to these four stages? It seems like it's not as simple anymore.
Reesha: For some merchants, the total business picture can be a bit more complex, especially where we're at with COVID-19. This has only heightened the importance of online purchasing, but in combination with this, it's brought new innovative approaches to contactless product delivery, or for example, the omnichannel approach. This can add complexity. Buyers may research items online, but they might prefer to visit the physical stores to complete their purchase. In these scenarios, the top-performing merchants have adopted the omnichannel approach to track different buyer activities across websites, mobile apps, physical stores, catalogs, direct mail, and so on. With all of these channels, working from a common database of products, pricing, and promotions, there are complexities. The traditional funnel model for generating revenue has commonly led to four common key performance indicators, or KPIs, that most e-commerce merchants utilize.
Can you tell us a little bit about these four KPIs for e-commerce merchants?
Reesha: Let's take a couple minutes to define these. First, bounce rate. This is really the number of e-commerce website visitors who leave the site without actively engaging with one or more items. Second is the add-to-cart rate, the percentage of visitors who add one or more items to their online shopping cart. Third is the cart-abandonment rate. This is the percentage of online shopping carts abandoned before getting to that complete purchase stage. Then fourth is conversion rate. Conversion rate means the percentage of visitors who actually complete the purchase. We went through the funnel before. You can see how these KPIs map as you move down the funnel.
How did these KPIs then tie into that traditional model that you were talking about?
Reesha: The traditional funnel model becomes even more clear when these KPIs are shown in context and scale. What does that look like? About two-thirds, or 67.5%, of shoppers that come to an e-commerce website, actively engage with product views of one or more items. The remaining 32.5% of shoppers bounce from the site immediately without taking any further actions. They're not getting to that interest phase we just talked about in the funnel—they're leaving right at the awareness stage.
Next, of those who actively engage with one or more items on this site, 87.4% ultimately don't add anything to their online shopping cart. This results in about 8.5% of all site visitors adding one or more items to their cart.
If you move down the funnel, 8.5% of the shoppers that came in actually take that action in the funnel to add the item to the cart. Let's move down the funnel. Next, of those who do create these online shopping carts, about 70% end up abandoning them without even making a purchase. This results in about 2.6% of all site visitors ultimately generating revenue. You can think of this 2.6% as the average benchmark conversion rate across e-commerce merchants. If we take a look at these numbers at scale, it's easy to understand that anything which increases the bounce rate decreases the add-to-cart rate, or increases the cart-abandonment rate. This will have a negative impact on one of the e-commerce merchant's key business objectives. These objectives are largely to increase the number of conversions and to grow the volume of online orders.
Great. How do browser extensions tie into this funnel?
Reesha: Browser extensions have a negative business impact on e-commerce merchants. They can hurt bounce rates, conversion rates, average order value and profitability—those KPIs that we talked about. What does this look like? These extensions can increase your bounce rate via unwanted popups, ads and coupons that they inject, ultimately driving shoppers away from your site and not getting past that awareness stage.
Extensions can reduce conversion rates and buyers can be redirected to competitors. They can also leave voluntarily, based on price comparison extensions, to complete their purchase at a competitor's site, being enticed by a lower price offered for the same product.
These extensions can also reduce average order value. This happens by providing unnecessary discounts for purchases that would have happened anyway. A coupon pop-up from an extension such as Honey could appear when the shopper is already about to complete their purchase. After adding an item to their cart, the coupon offers them 2% cash back or a 10% discount. This is taking away from the e-commerce site's margins and average order value when the shopper was already planning to make that purchase.
Then these extensions can also reduce profitability. Website traffic can be fraudulently tagged by these extensions to collect both unwarranted and unearned affiliate and referral fees. Based on the total number of online shoppers in the United States, the browser market share, and browsers most likely to be used in e-commerce, the Aberdeen research that we looked at estimates that between 13% and 20% of all online shoppers have currently installed a browser extension for e-commerce. Given the primary focus of these extensions—to save users money on their online purchases—it's reasonable to anticipate considerable growth in user adoption. You can only imagine—in a couple of years, many more online shoppers will have extensions like these downloaded on their browsers.
To expand further on the business impact of these extensions, Aberdeen's research found that the conversion rate for e-commerce merchants across all sectors over the last five quarters ranges from 1.88% to 3.38%. Aberdeen has developed straightforward Monte Carlo analysis models to measure the positive impact of implementing a solution to protect one’s business.
Monte Carlo models are a proven approach for quantitative analysis in business scenarios with inherent variability or uncertainty. Can you help expand upon this, Reesha?
Reesha: In a Monte Carlo model, computations involving e-commerce merchant KPIs can be carried out for many scenarios—tens of thousands. Each of these uses a random value from the estimated ranges and shapes for the inputs. This is as opposed to a single calculation based on a single static value, such as a cart abandonment rate of 70%. The results of these computations are thus not a single static value, but they're in the form of a range of possible values along with the associated likelihoods. From this, we can describe both how likely and how much impact these obstacles pose for businesses.
What did the analysis from these models show?
Reesha: For e-commerce merchants in all sectors, Aberdeen's analysis shows that implementing a solution to protect against the negative impacts of browser extensions results in an increase in both the number of orders and the profitability of online orders. Conversion rates can increase from anywhere in the low range of 1.88% to 3.38% with a median of 2.65%, to at the high range, 4.35% to 7.2% with a median of 5.87%.
Then average order value, when using a protective solution, can increase between 2.85% and 3.95% with a median of 3.41%. The increase in average order value is particularly noteworthy in the context of the overall profitability of e-commerce merchants. When looking at how these individual order values combine to affect overall earnings, the advantages are even greater. A widely-used measure of overall profitability is earnings before interest, taxes, depreciation, and amortization, commonly expressed as a percentage of top-line website revenue. Over the last five quarters, the annualized number for e-commerce merchants range from 10.44% and 12.45%. This represents the estimated increase of 2.85% to 3.95% in average order value from using a solution that manages extensions. This represents a pretty significant bump to the current profitability for e-commerce merchants.
E-commerce is a pretty big space. There are many different segments within e-commerce, like fashion and beauty or home goods and so forth. Is the impact from coupon extensions and ad injections different for different segments in the e-commerce market?
Reesha: Yes; to gain additional insights into the business impact of extensions on e-commerce KPIs, we conducted one-on-one interviews with multiple merchants from each of the following e-commerce market segments: electronics, fashion and beauty, home goods, home improvement, kitchenware and general merchandise. What we saw was a significant opportunity to increase both the number of orders and their profitability when using a solution to manage these extensions. Here are a couple of examples of what this opportunity could look like.
Let's take fashion and beauty, for example. The current industry average conversion rate is around 3.03% to 14.92%. Now, using the Monte Carlo analysis and looking at some of these numbers, using a solution to manage extensions can increase conversion rates from 7.6% to 21.94%—a pretty big opportunity.
In the kitchenware industry, the average conversion rate across the e-commerce segment is 3.6% to 5.7%. Using a protective solution to manage extensions, these conversion rates jumped to a range of 6.8% to 10.5%. Again, lots of opportunity to grow.
Let's touch on one more. Let's look at electronics. The current average conversion rate in the electronics e-commerce space at the low end is 2.93%, and the high end is 10.91%. Using a solution to manage extensions, again, there's an opportunity to increase these conversion rates. At the low end, you increase from 2.93 to 6.35%, and at the high end, you could raise that 10.91% to around 17.18%. We're seeing significant growth across these different segments in both the number and profitability of online orders.
Can you leave us with the biggest takeaways from this impact analysis and some closing thoughts?
Reesha: From the perspective of the e-commerce merchant, Aberdeen's research and analysis shows significant value in solutions designed to protect digital businesses’ KPIs. These can help maintain high conversion rates and secure your e-commerce site’s browsing experience.
Using a solution to manage browser extensions, coupon extensions and ad injections, you can increase your conversion rate from between 1.88% and 3.38% at the low end to 4.35% and 7.2% at the high end. You can increase your average order value by 2.85% and 3.95%. This is a significant opportunity to directly increase revenue to your business. A third noteworthy takeaway is that an estimated 13% to 20% of all online shoppers have a web browser extension for e-commerce currently installed.
Again, there’s a high likelihood of considerable growth in user adoption with web extensions going forward, so this e-commerce risk isn’t going anywhere. From Aberdeen's perspective working with us, digital merchants should give high priority to risk management and understanding the impact of these web browser extensions on their KPIs. Doing so can lead to an increase in the number of visitors following the intended user experience and taking the desired actions to reach conversion goals. Implementing protective solutions to mitigate these risks is now proven to encourage revenue growth, customer retention and higher conversion rates. Business owners should take note.
For more information about conversion rate optimization and revenue protection, read the full report from PerimeterX and Aberdeen Research here.