Applying the Thoery of Constraints to an eCommerce Operation

Theory of Constraint is a “Lean Manufacturing” methodology that has been around since the early 80’s, however it is wrongfully considered to be relevant to manufacturing organizations only. David Sasson, CEO of overstockArt.com who discovered TOC about five years ago has adopted the methodologies that are discussed in TOC to an eCommerce operation.

The result has been tremendous, an increase in throughput and a profitable organization.

Theory of Constraints, for ecommerce companiesDavid, started writing about how he has adopted the Theory of Constraint to an eCommerce organization on Practical eCommerce, a widely popular online journal for eCommerce professionals.

The initial response has been tremendous, it seems that eCommerce managers and entrepreneurs are thirsty for methodologies to help them capitalize on the opportunities laid in front of them. David illustrates in a very simple and clear manner how organizations can revolutionize their internal processes and become profitable by doing more with what they already have, without any additional investments or cost cutting.

If you feel like your eCommerce operation can deliver more with what you have (you are probably right) then you should consider applying TOC methodologies, if you have questions, then don’t hesitate to ask. This subject has become a passion for us!

Figuring out your Customer Life Time Value

Customer Life Time ValueAs a marketer and executive there are various Key Performance Indicators (KPIs) that I tend to follow. One of these KPIs is our customer’s Life Time Value (LTV). The life time value in short is the amount of money an average customer from your chosen segment will spend in the coming years minus the dollars you spent getting that customer to your store. This KPI can help you gauge certain marketing channels, and enable you to distribute resources according to pre-determined customer segments.

But how do you figure out your customer LTV? I thought you’d never ask…

Customer LTV is a function of your Segment Size, Gross Margin, Average Order Value (AOV), Acquisition Cost and the number of orders per customer over a set amount of time.

Here is the function to consider:

LTV = [(AOV * Avg Number of Orders * Gross Margin) / (Segment Size)] – Acquisition Cost

In the example above, we have a segment size of 50,000 customers coming from a certain channel with an acquisition cost of $78.00. If we look at a 1 year span, the average customer orders 1.39 times a year with an average order size of $208.82. With a Gross Margin of 60% the LTV of this segment is $174.16. As you look at a larger time span, the number of orders per customer gets larger; therefore, the life time value grows as well. On a 5 Year span the Life Time Value of the Customer grows to $251.02.

The LTV is a very important KPI, and the time span you choose to determine LTV, depends on your business goals, your industry and the product or services you are selling. There are many ways to “skin this cat”, this is the method I find to be most quick and easy, and I use it consistently to help me determine marketing efforts and helps us segment our Top 20 VIP Customers. How do you use LTV? What time span is right for you and your industry?

Why is adding a new market or a new business model so hard?


In our business we run two or three business models which require many differences of approach and definitely bump into each other from time to time. When working on our plans for 2013 I was considering the different business models and it occurred to me that many companies have a very hard time introducing new models and perusing new opportunities. So in this short article I would like to set the foundation of how to establish a new business model and explore the inherent difficulties of operating multiple models.

First, I believe that when introducing a new model or going after a new market, which in many cases requires change in our model, there are two major pitfalls that cause failure. The first is expectations. This is ‘the grass is always greener on the other side’ syndrome. Initially looking at the new opportunity we are blind, to a large degree, by the amazing opportunity we perceive. The opportunity after all is what causes us to enter the new market or add the new product segment. Then reality sets and the difficulties we did not consider arrive. This is inevitable. But there are remedies.
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Five Tips to Prepare E-Retailers for the 2012 Holiday Season

Five Tips to Prepare E-Retailers for the 2012 Holiday SeasonWith e-retail becoming an increasingly competitive field this is not the time to do business as usual. As you put together your strategic holiday business plan be sure to take complete advantage of the latest consumer behaviors and trends. Having an online presence that’s ready to handle both changing consumer habits and expectations is necessary not just to keep ahead of the competition, but to stay in business.

At overstockArt.com we have successfully used consumer behavior and trend research to adapt our business to better meet our customer’s needs. This proactive approach has provided us with competitive advantages in the field and allowed us to continue to grow aggressively and profitably.
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The Money Machine

Earlier this week I visited a friend of mine who is a commercial printer. With all of the new advancements in technology you might imagine that the life of a commercial printer are not simple these days. However, standing there and watching the giant printer spitting out, what seemed like, thousands of catalogs per minute I kept thinking that a business is like a big commercial printer. We have our inputs (paper) then the inputs pass through the machine and the output comes out the other side.

The Money Machine

Usually in business, we refer to our output as what we ship out, our finished goods or services. But in this exercise, I like to think of output as cash or money. The purpose of a business, any business is not to generate work but to generate cash.
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