You have to be able to do the math when you run a private domain

To run a private domain, you need to know how to calculate. How to calculate? The author summarizes two business models. Let's learn about them together.

Today, I would like to talk to you about two business models by using the method of accounting.

As usual, let’s start with the formula.

Sales = Traffic × Conversion Rate × Average Order Value × Repeat Purchase/Referral

The first half of the formula corresponds to the traffic faction, and the second half of the formula corresponds to the private domain faction.

1. Traffic faction

This is a typical traffic mindset. As long as the ROI is positive, people will frantically increase traffic. There are also those who just focus on increasing traffic, but end up with poor conversions and a negative ROI.

The way traffic factions generate traffic is either by investing in traffic, or by using technical means, such as software, or intercepting traffic.

The conversion rate of traffic-driven products is usually not high, which is normal because customers have no basic trust. It is just like selling on the street. Although there is a large flow of people, the conversion rate is very low.

As for the subsequent average order value, repurchase, and referrals, they are usually low. On the one hand, it is due to lack of trust, and on the other hand, in pursuit of transaction efficiency, they push for orders without paying attention to delivery and experience. Like the previous K12.

Of course, if your traffic reaches a certain level, it is another matter. For example, Luckin Coffee and KFC, although the conversion rate may be very low, even 0.1%, their private domain volume is there, and the sales volume is also a considerable number.

But this is obviously not the credit of the private domain, but the brand.

Unfortunately, such brands are just other people's brands. Most of those who are keen on traffic have a very low conversion rate, and their repurchase and referral rates are not high. The reason is very simple. The genes of a team determine their preferences, and it is impossible to be all-encompassing.

2. Private Domain Group

The focus of this genre is on the backend, and traffic is not excessively pursued, but the average order value is usually higher, or repeat purchases and referrals are higher, like me.

I am quite restrained about traffic. On average, about 10 people add me every day, and about 1/3 of them don’t have any remarks. I will not approve any of them without remarks. The reason is very simple. There are special reminders and remarks where I put the QR code. If there are no remarks, I will regard them as technical people who are attracting traffic.

Next, let’s do some calculations.

Sales = Traffic × Conversion Rate × Average Order Value × Repeat Purchase/Referral

Traffic distribution: 10 = 10000 × 1% × 100 × 0.1%

Private domain group: 500=10×1%×10000×50%

Profit = Revenue - Cost - Expenses

The traffic faction needs to constantly generate traffic, needs to continuously invest in traffic costs, and the labor cost will not be low (a lot of people).

The private domain faction focuses on back-end delivery, and repeat purchases and referrals have almost no cost, and the labor cost will not be too high (few people).

Therefore, from the perspective of the model, the model of the traffic faction will become increasingly difficult, the cost will become higher and higher, the conversion rate will become lower and lower, the profit will become lower and lower, and even negative; the model of the private domain faction will become easier and easier, and the cost will become lower and lower.

Of course, everything depends on the situation. If you are doing C-end business and the traffic is very large, then of course you have to increase the traffic. When the base is there, even if the conversion rate is only 1%, it is still a big number.

On the contrary, if the base is too small and the average order value is low, even if the conversion rate is increased by 5% or 10%, it will be just that. If the traffic is small, the conversion rate is low, and the average order value is low, there is only one situation where the repeat purchase and referral rate are high. For example, community group buying.

Finally, no matter what business you are in, whether you are in the private domain or not, you must learn to do the math. If the average order value increases by 50% or repeat purchases or referrals increase by 30%, how much can your revenue and profits increase?