The following interview tells the impressive story of how strong marketing — in particular lifecycle marketing — helped to take Karmaloop.com from bankruptcy in 2015 to being acquired in 2016. We ask Drew Sanocki, CMO, how he approached the turnaround and the process he went through.
If you’re involved in eCommerce, this interview will contain some valuable insights for you.
Back in 2003, Drew started his own online retailer, Design Public, as a straight up, bootstrapped, drop ship retailer and grew it through 2011. During that time, Drew became passionate about customer analysis, email marketing in particular, as the ideal way to grow an online business. In 2011 he sold Design Public to a small private equity group.
“When I sold the business, I transitioned into becoming an operational partner at a PE firm — in that capacity, I help them conduct due diligence on potential digital deals and operate portfolio companies. In most of this work, I focus on lifecycle marketing as a key growth lever, which boils down to identifying the best customers, and then growing that customer segment.
As an operational partner, I’ve worked with probably 10 to 15 different retailers. The latest one was Karmaloop.com, which a firm, Comvest Partners, acquired out of bankruptcy in July of 2015. I went on board as the CMO and helped turn it around, and we just sold it about a month ago.”
Karmaloop had been a huge business (revenue peaking over 9-figures), but had fallen on hard times. The site had massive traffic, great brand recognition. Most people want to know why did they go bankrupt?
What got the company in trouble was they took VC money a couple of years prior, and the VCs wanted to step on the gas, so the company got involved in a lot of different growth initiatives. Then the money supply dried up before any of these initiatives had matured.
At that point, the company went promotional to juice up revenues, but when you go promotional, you attract a less desirable customer cohort that only buys on promotion, and it’s really a race to the bottom at that point. Within six months, Karmaloop was bankrupt.
The last year wasn’t pretty if you look back in their financials. They were losing significant money every month, and owed everybody money, owned customers money, owed vendors money, and eventually declared bankruptcy.
That said, there were significant “latent” assets at the company. They were still getting just a ton of direct and organic traffic to the site. Millions of kids each month typing in “Karmaloop.com” just to see what was for sale. The company had a massive opt-in list, in the millions. And the company wasn’t leveraging these assets as well as they could be.
When Drew came in as CMO, there wasn’t much working… Karmaloop had alienated most of its vendors, and had lost key merchandise. Loyal customers were flocking from the brand.
Why Marketing Isn’t Everything
Drew helped Comvest conduct the due diligence on the company initially. When the deal went through, Comvest’s first job was to assemble a management team. One of the key needs for the company was merchandise, somebody who knew the streetwear category, who could bring back some of the great brands and products.
As a marketer, I’d like to think that marketing can do anything, but at the end of the day, the right merchandise will create great customers. Karmaloop needed somebody who could get on the phone and contact all the great brands who used to sell through Karmaloop.com and get them to sell through Karmaloop again.
That person was the new CEO, Seth Haber, who had a strong background in streetwear. I went on board as CMO, and then there was also an external CFO who was brought on board. Other than that, Comvest retained most of the existing team.
What was your initial analysis or your initial impression of how Karmaloop was using email to grow the business?
Where do you begin when you take over as CMO? I spent the first month doing extensive customer analysis, playing with ten years of transactional data. I performed standard RFM analysis to identify who the best customers were and what was happening to those best customer segments over time.
One thing rang through loud and clear, and that was the best customers were defecting. When a retailer goes promotional, like Karmaloop did, usually the retailer is desperate to juice up revenue. Initially it works, but it has a dangerous side effect: it inadvertently attracts customers who only buy on promo, so the company was turning over its customer base and trading out it’s good full-margin customers for bad customers who only bought on promotion.
The challenge in my mind was, “How do you win back those ‘whale (VIP) customers’ who are no longer buying?” Part of that story was getting the right merchandise back on site. The marketing side of that story was going back to those old whale customers and trying to re engage them. Tactically, that translates to email and remarketing. Everything became about re-engaging those defecting customers.
At Rejoiner, we talk about how segmentation is critical when it comes to sending the right message to the right customer at the right time.
Drew found that their VIP’s or ‘whales’:
- Bought from certain categories. Footwear being a popular one. (Incidentally, Karmaloop ultimately sold to a footwear retailer to get access to even more inventory there.) That was the merchandise side.
- VIP’s all typically came through certain acquisition channels. And certain keywords were driving those whales. That was the marketing side.
- Were all involved with email. Email drove the highest LTV customer segments. They were all on the email list, so email played a big part.
Statistically, Drew defined their whales/VIP’s by the follow characteristics:
- They purchased over a certain number of times, a certain frequency threshold. Three or more purchases in a year defined a whale.
- A certain recency, too, having purchased within the past three months.
- They made at least two purchases at full margin.
“With that working definition, we started to craft our lifecycle campaigns to try to create more of those VIP’s.”
Most VIP’s were disillusioned that the brands they liked were gone… How did you get the old VIP’s back into the mix and what was the success rate in doing that?
Unfortunately it wasn’t that high initially. We tried almost 20 different marketing tests to win them back. The nice thing about Karmaloop is there’s a huge number of email subscribers. We were able to send out A/B tests with segments of 10,000 or so and achieve learnings pretty quickly.
We tried “Percentages off,” and then various percentages off, from 10 to 30 percent. We tried “dollars off” your next purchase, and we tried straight-up gift certificates, like free money. We tried personal letters from the CEO. We tried phone calls.
There was just a lot of hatred out there towards the brand. I think we all underestimated this when we came on board. People from pre-bankruptcy hadn’t received product and were not going to get their money back, and they were understandably pissed off. We didn’t have as much success in re-engaging those defected customers as I thought we might have.
What we did have more success in was just acquiring an all-new whale cohort. Fishing in another pond, and trying to nurture those people from scratch.
How did you find your new VIP customers?
Social was very good for us. Instagram marketing. I remember hearing somewhere that all of Shopify’s top stores had been using Instagram for customer acquisition, so I was very curious about Instagram for us.
I think I just filed that away and said, “You know what? We’ve got to go hard on this.” We had a guy who was a great brand steward and customer advocate, and he was the perfect guy to run with social and focus on influencers.
The second to Instagram was influencer marketing on YouTube. There’s this whole cult of people called “Haulers,” who unbox Streetwear, and talk about Streetwear on YouTube. If we could go back and reengage those guys, we were doing a good job at ultimately getting a lot of high frequency buyers from those channels.
What were the triggered lifecycle emails Karmaloop implemented to grow revenue per subscriber?
When it came to email, I implemented emails across the entire customer lifecycle curve. I know you guys talk about that lifecycle curve, and I have five or six campaigns that go from initial acquisition all the way through to a win back on the end. I implemented all of them.
When you’ve got a new customer, or a new email subscriber, that means a welcome series. Five to seven emails that go out to that customer or subscriber that serve to build up trust in the brand, and introduce new people at the helm at Karmaloop, and feature some of the new merchandise that we have.
The next step in the lifecycle are abandoned cart campaigns, a must have for all eCommerce retailers. That did very well for us.
We created an MVP or VIP campaign, so using our definition of what a whale or a VIP customer is, if somebody checked out and had an AOV or an average order size above a certain level, we hit them with a custom campaign, and a thank you letter.
We also used that campaign to survey our best customers and learn from them. That way we knew what other merchandise to procure, or changes that had to be made to the site.
Bounce back campaigns worked well. What a bounce back is, as soon as you checkout, you’re in buy mode. You’ve got your credit card out, and you’re purchasing. If you’ve got a great shopping cart, you’re hit with another offer at checkout to upsell you. Unfortunately, our shopping cart was pretty old. It dated back to 2001, so I had to do a lot of that post-purchase upselling and cross-selling activity with email, instead.
As soon as you checked out, you got an upsell email offer, a deal for another product. That one worked really well.
Then just following all the way to the end of the lifecycle, the win back or anti defection campaigns kicked in if somebody hadn’t purchased in 30, 60, 90 days, with just an ascending offer to keep them engaged. I call this a discount ladder, and it’s one of my favorite marketing tactics
On your survey secrets – how did you gain valuable insights from customers?
We ran a basic NPS survey on SurveyMonkey. “How likely are you to recommend Karmaloop to your friends, 1 to 10?” If they ranked us highly, then it was, “OK, let’s first ask for a testimonial, and then ask some of these other questions to help us learn about our “best” customers.”
Key questions were:
- Where else do you shop?
- What brands should we carry, that we don’t carry?
- What blogs do you read?
There was a real learning curve, here. Remember we just took over this retailer. We know nothing about our best customers, so the more we can find out about their behavior, the better.
If they answered low on the NPS survey, it was, “Why didn’t you rank us higher? What could we do to improve?” That response got vectored to the right internal department. If it was a beef against the site, it went to the IT team. If the customer had a problem with customer service, it went to the customer service head.”
People were filling out our surveys without any incentive. I think, because we were selecting only our best customers to survey. I think they’re just more likely to engage.
How did Karmaloop measure lifecycle email campaign performance, before and after?
They [Karmaloop] weren’t doing any lifecycle emails before. So measuring performance was really about going from nothing to something. That was the biggest win.
They were just pounding the list every day, sometimes twice a day with discounts. Just pounding the list into submission. Open rates were terrible and getting worse. You know the story:, open rates stink, but we need the revenue so send another discount!
You look back at most of the emails, and they all looked exactly the same too. The only difference was that discount changed.
We went from this to lifecycle nirvana. To show what I was doing at board meetings, I would show email performance, and Google Analytics, month over month, year over year, just to show things like revenue per subscriber was going up, and engagement was going up. How we were increasing deliverability, or improving deliverability to the email list.
We did a lot to improve deliverability. We began just sending emails to the engaged people who open emails and reserved the entire list for, maybe once a week or once a month sends. We really improved our creative, we brought on a creative email team to do something other than just send out the blast promos. That’s how we showed performance.
What was the makeup of your email team that launched these campaigns?
I did the strategy. I got into the database and figured out things like intra purchase latency, and how often the best customers were buying, and thought through all the campaigns.
I handed that to ‘The Architect’, who built out the lifecycle campaigns in our email software. He worked with the creative team, which serviced all of Karmaloop. They would do everything from home page graphics to paid ads on Facebook, to email.
Part of what we did is bring some order to the email process. Every week, Monday we’re going to focus on new product, new brand, and maybe Thursday we’re going to profile one of our best designers, or one of our best brands. Maybe Friday’s deals or something.
We made that a set process every week. Merchandising played a role, and they were always trying to push, I think, things that they wanted to move out of inventory. You have to balance that with what will make an email interesting, so it’s a little bit of tension between marketing and merchandising there.
Those are the main roles. The email architect who pulled everything together, and then the creative team that produced the graphics, and the merchandising team that helped come up with the promotions, and what was going to go in each email.
This was definitely a company that had been run by merchandising, and everything else took a back seat. I think that was new to me. I’m not sure the company could appreciate what good online marketing could do for them. All they had thought historically was, “Marketing equals traffic. Get more traffic, and we’re going to have more revenue.”
But that mindset is so far from how to grow a company profitably. Never did retention come into the conversation. There was never a dialogue about who our best customers are, and building the business around the best customers. It was just about traffic. I think we had to, this was a step in the other direction when they brought me in as a CMO. I don’t know if they even had a CMO before me. It definitely was a new approach.
You turned things around and then went to sell the business. What metrics did you share with potential acquirers around results from email?
Different buyers cared about different things. Some were more sophisticated in their knowledge of retention and lifecycle marketing, others were not.
Some of the more savvy ones had catalog marketing backgrounds. For them, I really dug into the cohort analysis, and showed how the cohorts that we were acquiring each week and each month were getting better. The repeat orders were going up, the LTVs were going up, and we were just acquiring better customers.
For them, the story is that we bottomed out in summer of 2015, and this is a retailer that’s coming back. They got that, and they appreciated that data driven approach.
For others, it was more the story about how sneakers and footwear were a power category before, and they could be that again. We still, despite our best efforts, didn’t have access to all the footwear we wanted. So a sneaker retailer with that access would conclude that they could make a lot of money by just taking their product, and pushing it out to our list.
It was like, “Here’s the list, here’s your product. Here’s the past performance of that product to this list. There’s money on the ground here, for you to pick up, if you buy this company.”
Lessons From Drew’s Story at Karmaloop.com
- When you go promotional, blasting your email list with discounts, attracts customer cohorts that only buy on promotion and it’s really a race to the bottom. (Within six months, Karmaloop went bankrupt in part because of this).
- Marketing is very valuable to a business, but it isn’t everything. Merchandise is a great driver of great customers. Creating amazing products that your customers love is a key piece of the puzzle.
- VIP customers drive the growth of your business. Drew always asks: “How do we win back those ‘whale (VIP) customers’ who are no longer buying?” Everything should be about acquiring and creating more VIPs.
- Drew spoke to some colleagues at Shopify and they were saying, of all their seven figure stores, something like 90 percent of them were built off of Instagram marketing. The visual nature of Instagram can be a great way to attract new customers. Think how your company can use Instagram to find new customers.
- “I implemented emails across the whole customer lifecycle curve” – Drew analyzed past customer purchase data so he could understand the Karmaloop customer lifecycle curve. He then went and implemented 5-6 campaigns that go from initial acquisition all the way through to a win back at the end of the curve.
- Abandoned cart campaigns are a must have for all the eCommerce retailers. (See how Liftopia recovered $714K with a cart abandonment campaign)
- Consistently surveying your most engaged customers helps you understand and serve them better. Drew found it easier to survey customers who were engaged with the brand as they were more likely to respond to questions.
- They [Karmaloop] weren’t doing any lifecycle emails before. That was the biggest win.” Drew’s biggest win was being able to setup a lifecycle email program from scratch. He grew his previous business using lifecycle email and knew it would work for Karmaloop as well. Think about 2-3 lifecycle campaigns you can implement right away.
- Having an email team comprised of a strategist, an architect and a creative team can help you launch your lifecycle email program fast.
Thanks To Drew Sanocki of NerdMarketing.com
Drew also has an extremely valuable free newsletter with actionable strategies to grow any eCommerce business.
What to Do Now
You can learn more about email marketing for eCommerce here.
If your company would like to understand how much revenue you could generate by setting up these campaigns, then I suggest you schedule a free strategy session.