How a dealership replicated Amazon’s growth model
I never liked Superman…. he’s just too polished…. seriously.
Where is there weakness and a need to overcome in a man who can juggle planets? And did you know Kryptonite is what actually saved Superman? That’s right, Superman’s greatest limiting factor was the one thing that allowed DC Comics to keep the superhero franchise alive.
Kryptonite actually gave the “Man of Steel” a human and vulnerable side with limitations and problems to evolve around. You see, people love limitations in others (but hate to admit them) because it reminds them of their own shortcomings as well as their ability to overcome and succeed – it’s an admission of fallibility through another. People are inspired to move past these things when others can show them a simple way to solve complex problems so they can become who they were made to be. To go from underdog to champion.
Through the years, I have studied many brands growth and affluence from startup to unicorn. Amazon is one of my favorites. Jeff Bezos and Amazon’s rise to disrupt the entire retail sector is a legendary underdog story. Bezos is a genius at taking complex things and making them simple. And that’s exactly what this article is about, overcoming huge obstacles with simple formulas.
With my past experience and training as a digital agency owner, entrepreneur and consultant I had ample experience with experimenting with the metrics and behaviors that drive business growth. I learned quickly that growing businesses ensured customer loyalty for my business. Some of these basic elements of growth are:
- qualified leads
- marketing conversion rate
- sales engagement rate
- sales conversion rate
I would say that dealership’s number one enemy of growth is complexity. Let’s face it, there are hundreds of metrics to watch and account for with behaviors to observe and improve that move those metrics. There are also multiple verticals with multiple product categories within each to keep track of. But what if we could simplify the equation and mimic the strategies of some of the largest and most disruptive companies in the world, such as Amazon and Google?
You know, like Amazon, the e-commerce Website that is responsible for the current and future collapse of traditional retail. Or Google, the multi-product media platform that owns 72% of what you interact with on computer screens, disrupting and fracturing the strongholds of traditional media companies from a handful of paid options to multiple media channels. Oh, did I mention Google’s products are free? With this in mind, I set out to define the initial growth equation for my employer, Washington Tractor. In this article, you’ll read about my journey.
What is a Growth Model?
Let’s first define what a growth model is. According to Hila Qu, product manager for Growth at GrowthHackers, “A growth model is an equation that tells you what are the different variables in your business and how they work together and translate into growth.”
When I first started studying growth as an entrepreneur I found that the concept of a growth model is both old and new. It has a close connection and similarity to what’s typically called a “business model.” The difference between old and new is a focus on growth, simplicity and data driven decision-making.
“Any business can be explained using a mathematical equation,” according to Andy Johns, vice president of Growth at Wealthfront, and former product marketing of growth at Facebook and Quora.
In order to build our own model, I started out with the basic equation in Image 1, which is highly dependent on organic growth.
- Top of Funnel (TOFU): These are all the brand awareness and traffic building activities that attract users to your products, services, and digital properties. Strategic Marketing channels and campaigns dump new and qualified leads into the top of our funnel which is our website. Conversions at this point are typically request for quotes on our highest converting and highest margin product categories.
- Magic Moment: The user’s emotional response when interacting with the product. The John Deere brand, our diversification, our geography, our brand story, and our product support all converge to create the magic moment. Relevancy is also key. We utilize digital marketing and social media strategies that target the exact customers that are most interested in our products and services. The John Deere brand takes care of most of the trust and marketing friction in the moment.
- Core Product Value: This component involves the size of your market, the legitimacy of the problem you solve and how correct you were with your product/market fit hypothesis. For our initial growth model, we used specific verticals and specific product categories. We let John Deere do most of the top of funnel heavy lifting educating the customer about the products. We differentiate our core offering’s through our unique story and support network. It is important that your products solve real problems for your customers that your sales people can translate into real value.
Modelling Amazon’s Growth
Now that we understand the basic growth factors as outlined in Image 1, let’s take a look at how we can model Amazon’s growth as shown in Image 2. Obviously, there are many other variables to Amazon but this illuminates the thought process behind it.
Johns’ growth model for Amazon, illustrated in Image 2, provides an example of how to apply the basic growth equation to a real company. Here’s how he explains it mixed with some of my own insights:
- Vertical Expansion: When Amazon launched, it sold books. Its growth was limited by books as a vertical. As it moved into more verticals, such as music or jewelry, it unlocked additional, latent growth potential and could expand at a faster pace. Every new vertical brings new growth acceleration. What’s key here is plotting, which verticals to move into, in what order and with which plan to automate and scale. Sound familiar?
- Product Inventory Per Vertical: Product inventory within a vertical asks: How can Amazon go from selling 10 books to 10 million books to every book on the planet? Amazon’s growth is proportional to the depth of its product inventory per product vertical – just like yours is.
- Traffic Per Product Page: Product inventory is directly linked to product pages that are capable of yielding additional traffic all over the web. The lever here is converting traffic at a higher rate to buyers. In our industry product inventory that is in stock satiates the sense of urgency to the customer and conveys confidence to the salesperson as well as a more seamless customer experience.
- Conversion to Purchase and Average Purchase Value: These components — the number of purchases and amount of each transaction by a customer — are strongly linked. Amazon optimizes this variable by injecting recommendation engines into the product. The company suggests a related product, which helps it convert another purchase and generate additional revenue.
- Repeat Purchase Behavior: Eventually the business gets so sophisticated that they can build mechanisms to drive repeat purchase behavior, such as introducing products like Amazon Prime. They just buy and buy. This is the purpose and function of aftermarket in our industry, as an example.
Selling the Idea as a Minimum Viable Product (MVP)
Make no mistake. This is not an easy hypothesis to sell in the war room. Image 3 shows the initial idea and equation I worked on to prove a “MVP” around my growth hypothesis. I knew that if I could sell and prove this simple formula we could scale to more products and verticals.
- Known High Conversion + High Margin Product: Optimizing the operational side of a high growth segment requires resources. You want to choose a strongly converting product that also has great organic growth potential. It never hurts to use a product as well that solves problems for a large market. For our case I split tested several products in the consumer space and found that compact utility tractors (CUT) converted the highest, with some of our highest margins. This allows us to scale this segment while generating the cash flow needed to sufficiently optimize the operational side, preparing it to scale.
- Increase Inventory: Once I could prove that I could consistently deliver the traffic and leads that ultimately translated into sales and increased revenue I had gained the trust to talk about increasing inventory to scale the CUT product segment.
- Conversion Rate Optimization + Sales Enablement: Once trust was built in the equation and data we continued optimizing our strategies and tactics for converting more traffic to buyers. We split test ads, keywords, pages, and channels on Google. I was simultaneously correlating and explaining to ownership these improvements to our campaigns to increased product sales.
The sales enablement portion was the optimization of the salesforce in how it responded to leads and how it managed the sales funnel. Essentially, sales enablement is the behaviors that sales and marketing need to adapt to work better as a cohesive team. This started with lead engagement (the percent of leads followed up on), then to improving engagement time (the average amount of time it was taking to engage a lead), to engaging leads by customer preference (email, phone, text, live chat).
- Buy-In to Growth Equation: Once these three steps were implemented and being leveraged we had the buy-in to trust the data, plan accordingly from an inventory, personnel, and logistical standpoint, and execute on that plan. We were ready to scale and we were ready to expand the formula for even more scale in more verticals.
Leveraging Amazon’s Growth Engine at Washington Tractor
Each product segment has its own growth model. For this example, we applied the formula in Image 4 to our CUT and riding lawn equipment (RLE) segments. This equation, however, is a good framework for most wholegoods and front-end sales.
- Vertical & Product Category Focus: To start you need to focus on a specific vertical and product category. For this growth equation we used CUTs and RLE.
- Product Category Inventory In-Stock: For the first two years of applying this formula there was not full consensus and trust around the data and hypothesis. The first year of trusting the data we fell short but still outsold our projections. The second year we were a little bolder but not quite there and still fell slightly short but exceeded goal again. But now in the third year we are in full consensus with sufficient inventory and operational resources to keep pace with the marketing as well as the market itself.
- Targeted Traffic Per Product Category: This is the amount of digital traffic you drive to your sales funnels per product. Ideally you have already estimated yearly product inventory based upon a) past year conversion rate per product, b) past year sales, c) projected economic outlook, and d) estimated increase in demand generation through targeted marketing campaigns. Of course, there are more factors but these are some of the most important to consider.
- Conversion to Lead + Lead Engagement Rate: These two metrics are key to your planning and forecasting. Lead conversion rate is the percentage of traffic converted to leads. Sales engagement is the average percentage of leads that sales engages with. Sales conversion rate is the percentage of sales generated from engaged leads.
Example:1,000 visitors x 10% conversion (100 leads) rate x 80% engagement rate (engage with 80) x 25% close rate = 20 unit sales. Average cost per click (CPC) is $5 x 1,000 clicks = $5,000 total advertising spent to sell 20 units as an example. If the average net margin per unit is $1,000 x 20 – $5,000 (CPC), the total net profit would be $15,000. Of course, you would want to figure in your remaining cost of sales for the particular product.
When we first started out our sales conversion rates were horrible. Our lead engagement rate was about 10% with a 10% close rate because there was no buy-in, understanding or consensus on the value of a lead follow-up process or managing a modern sales funnel. Through awareness, education, ownership support, increased sales, and training we have greatly improved those numbers over the last three years and continue to improve today.
- Sales Conversion Rate: The percentage of leads converted into actual unit sales. It’s important to understand your average overall sales conversion rates per product category or actual product. You take the amount of leads generated x the percent that converted to sales to factor this number. Example: 100 leads divided by 10 sales = 10% sales conversion rate. Plan accordingly.
- Avg. Net Profit Margin Per Product: Just like it sounds. Take the average net margin of a product segment x projected unit sales to estimate your total net revenue growth per segment. Of course, this can be refined down to individual products and utilized on a more micro level as you become more sophisticated and refined. Example: You estimate an increase in CUT sales by 100 units over the next year x your average net profit margin = estimated increased revenue and units for year. Once these numbers are known then there is better trust in deploying the resources to attain the goal.
The output from the inputs and functions of this equation equal our wholegoods growth formula as it sits now from a mathematical standpoint.
Some Results Thus Far
As of this writing, we are on track to move roughly 300% more compact utility tractors than we did a little over three years ago. With more input (demand) comes the need for enhanced functions (operations) to output (logistics), which is where more limitations are exposed. That’s right, more obstacles to overcome.
Nothing but Good Problems to Have
Implementing a successful growth formula to your dealership will create additional challenges and problems to solve for sustained scalability. One of the greatest benefits of growth is that you can only succeed as a team. Nothing rallies a team quicker than pressure and accountability. Growth exposes your limitations and the only thing that matters at that point is your response to pain. At Washington Tractor, these were some of the major choke points and problems that needed to be fixed, built or enhanced:
- enhancement of our trucking network
- improvements to our logistical operations
- optimization of our setup, PDI tracking, and processing
- overhaul of our inventory ordering, forecasting, and tracking processes
- finding top talent to keep up with aftermarket support of increased units
- finding, making and attaining additional space for a considerable increase in inventory
Requirements for Operational Success
The following are basic requirements to achieve operational success.
- Excellent cohesive teamwork between departments, especially, for this example, between sales and marketing and their leadership elements.
- Stakeholder buy-in.
- Consistent communication between departments and leadership. You MUST have your finger on the pulse of the organization.
- The right marketer in the cockpit. For the love of all that is holy, this does not mean your friendliest receptionist or your best salesperson (not knocking sales or reception, just observing a trend I’ve seen. This person should be a strategic thinker, have vision, have proven experience in digital marketing, be a data-driven decision maker, and, of course, the ability to lead and inspire a team. This person should clearly be able to sell and assist in executing and implementing ideas (with an emphasis on execution).
- A sales manager that values marketing and vice versa.
We are slowly moving on to apply these growth hacking strategies and experiments to other product segments and departments. We are also consistently developing and measuring new frameworks and hypotheses to things we’ve done a certain way forever.
Your Limitations are the Precursor to Greatness
I believe that this world is constantly trying to get you to believe that your wounds and shortcomings are a handicap to achieving what you dream about. But the truth is, your wounds and limitations are your very gifts that allow you to overcome the obstacles in your story. It’s why they call it “character building.”
Stop believing that the “Big Idea” is too big, too expensive and too complex to solve. Define the problem you want to solve, break it down into all of its steps, eliminate the waste and fluff, create the formula, create the process, build a case study, scale it, optimize it, and rock on.
If someone says it’s impossible, crazy or undoable, you’re on the right path. Albert Einstein would agree having said, “Three Rules of Work: Out of clutter find simplicity; From discord find harmony; In the middle of difficulty lies opportunity.”
Be an overcomer.
TYLER MUSSON is director of marketing for Washington Tractor, a 12-location John Deere dealership in Washington State. He also serves as a marketing coach and trainer for WEDA’s Dealer Institute. Comments or questions may be sent to Tyler at firstname.lastname@example.org.