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"Yes, things are sweet," thinks the owner of IMissAsia.com (not the real name of the site), ending a phone conversation with a supplier.

Who would have thought! In just one short year, with the remains of the dot-com bust scattered all about, IMissAsia.com was running at sales of $25,000 a month. With an operating margin of 40%, "The Miss," as the owner liked to call the site, was going to generate about $120,000 this year pre-tax - certainly enough to keep the spouse warm, fed, and reasonably happy.

Who knows what next year would bring? Could the business double in size? The owner figured The Miss could do about $2 million in annual sales with the current infrastructure set up - a web site / shopping cart that cost about $40 a month and assorted software / hardware purchased for a total of about $1,000. The owner put up the very simple web site and ships every box - the order management system is highly integrated with both the shopping cart and UPS WorldShip, so order processing and customer service are a breeze. All other costs of the operation were basically variable to sales. Sweet, indeed. Of course, the owner / only employee has done a lot of things right in the first place to get to this place.

IMissAsia.com is a site for people who used to live in Asia and now don't, and are scattered all over the world. The core business idea takes natural advantage of what the web is very good at - aggregating niche vertical demand.

A person who used to live in Asia but now doesn't is cut off from a lot of things they liked and now "miss" - food, clothing, beauty items, culture. IMissAsia.com aggregates all those things into one web site, and then offers it as a "one stop shop" to a very geographically dispersed group of people all over the world. IMissAsia.com is "patient zero" in all this, the intersection of diverse needs with a fragmented customer base - a perfect application for the web.

The site is set up smartly, using mostly free resources to attract and hold on to traffic - news feeds, free newsletters, and discussion boards. The store is tightly integrated into all the content, so there are many opportunities to get visitors to take a peek at the merchandise. The Miss gets pretty high natural search rankings for important search terms because it's a plain HTML site without a lot of script and database-driven components, and has been written carefully with search engine optimization in mind.

In other words, the site is a little cash machine that requires almost no maintenance. Shipping packages, customer service related to those shipments, and the newsletter are about all the day-to-day work done on the business. However, storm clouds are on the horizon.

Response to the weekly newsletter is falling, and the owner is thinking of going bi-weekly or even monthly. In addition, to try and keep response up, the owner has been discounting more aggressively in the newsletter, and this practice is starting to depress margin. This situation is of deep concern to the owner, because the newsletter generates a big chunk of sales volume.

Niche markets are a double-edged sword. While they fit perfectly into the natural search-driven model of the web, by definition, niches are small. This kind of business has a tendency to ramp up very quickly, but then plateau as the entire niche is discovered and filled out. You can quickly capture 80% of the market, but then there is nowhere to go.

And as soon as you are successful, you will attract copycats, who chip away at your share, often undercutting your prices in start-up mode. The copycats have now started to appear. How will the owner grow the business when it already dominates the niche, and defend against the copycats? Not to mention address the worrisome situation with the newsletter.

IMissAsia.com offers an e-mail newsletter on every page of the site. The owner tries to create a broadly appealing piece, mixing some new content with links back to areas of the site experiencing high activity - specific discussion boards, products, news clips, etc.

The owner has always felt the visitor / customer should drive the direction of the site; if certain topic areas were getting the most traffic, then those must be the most interesting or attractive topics, and likely the ones with appeal to the most people. This "swim with the tide, not against it" approach had always worked well in the past as a driver for newsletter content.

Within this content, the owner carefully mixed contextual sales opportunities directly related to the content, along with one or two more aggressive product pitches. This formula had worked well and the newsletter drove a good chunk of sales. But the owner of IMissAsia.com was getting worried about response to the newsletter, which has been falling. Perhaps swimming with the tide was not a good idea, and the content should explore "not popular" issues and products? Perhaps the product pitches were too frequent and aggressive? Perhaps this market was just slowing down because of the economy? Or worse, perhaps the owner had already "creamed" this market and the best days were over?

One thing the owner knew for sure - the percentage of total sales from new customers was falling. Now, this could be a good thing, the owner thought, because it means more sales are coming from repeat buyers. But it could be a bad thing, if what it means is the market is saturated and the best days are over. How to resolve this question? And how is the newsletter affecting this issue?

The owner thought a lot about new customers, repeat customers, and the newsletter. What is a "new" customer, anyway? Are they new only the day they make a first purchase? Are they still new if they haven't made a purchase 30 days later? 60 days later? 6 months later? Do they have to make a second purchase to not be "new"? When do they stop being new?

For that matter, when is a customer not a customer any more? If they purchased twice or more and have not purchased again for 6 months, are they still a customer? What about no purchase in 2 years? 5 years? When do customers cease to be customers? What does the customer base of IMissAsia.com really look like?

Next Article: Recency: Online Retail Example: Purchase Recency

This article is taken from the book Drilling Down: Turning Customer Data into Profits with a Spreadsheet. The first article in this series can be found here.

Jim Novo has nearly 20 years of experience using customer data to increase profits. He is co-author of The Guide to Web Analytics and author of Drilling Down:Turning Customer Data into Profits with a Spreadsheet. If you want more visitors to take action on your web site, try using the free conversion metrics calculator, downloadable here. If you need to sell more to customers while reducing marketing expenses, get the first nine chapters of the Drilling Down book free at http://www.drillingdownbook.com.
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