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What I know for sure about e-commerce (a warning and some suggestions)

I'm writing this for e-commerce entrepreneurs who have a reseller business model and rely on paid acquisition. If it hasn't happened already, your marketing costs will go up, and your selling price will be pushed down.

Your profit margin will shrink.

There are specific reasons why, but before I get into that, let me tell you a bit about myself because I think it's important to know who you're taking advice from. Among other things, I used to be the head of marketing for a fairly big D2C company (mid-8-figures and growing). We bootstrapped ourselves to that level in around three years. No trust funds, no VCs. I could elaborate more, but I don't want this to be flagged as self-promotional.

YOUR COSTS WILL GO UP

The cost of acquiring new customers by advertising, in general, is increasing. CPMs, CPCs, CPAs – whichever way you're paying for advertising, it all goes up over time. It happened to Google a decade ago, and it's been happening to Facebook for the past few years. It's going to (eventually) happen to any new or smaller platform you may have in mind too.

That includes Tik Tok, Pinterest, Snapchat, and Reddit – you name it. When these companies mature as advertising platforms, they will, without a doubt, increase the cost of buying attention. As you may know, an increase in marketing cost without a corresponding increase in performance means a decrease in profitability.

What's more, e-commerce is booming globally. Global e-commerce sales are expected to top at 4.2 trillion USD in 2020 but shoot up to an incredible $6.5 trillion by 2023. This means that more and more people will rush to take part in the big online opportunity. Many others will soon enter our space.

Very few entrepreneurs have proprietary merchandising (i.e., offer goods not sold anywhere else). This means that many of these competitors will start selling similar (or the same) products to a similar (or the same) audience. And what happens when people can clone a business from their mobile?

The small fish start copying the big fish, and before we know it, the market commits marketing incest. Marketing incest works like real incest. Pretty soon everybody gets stupid.

Customers grow less and less sensitive to marketing messages, advertisers start bidding on the same audiences, which means costs shoot up, and performance spirals down.

YOUR SELLING PRICE WILL BE PUSHED DOWN

Unfortunately, there's another side effect of marketing incest—price wars. If everyone's selling the same stuff, with more or less the same marketing, sellers are incentivized to lower prices to get customers.

Here's why that's a problem. As resellers, we are NOT well-positioned for a price war because we have tight margins in the first place.

And we will never, ever be able to compete with big companies or people closer to the product source (e.g., Chinese-based companies) because they get preferential pricing and they will be able to go much lower in price. That's true even if we're a high-volume company.

But all that's just the tip of the iceberg.

Because here's perhaps the biggest factor. Consumer expectations. Sixty years ago, people were purchasing products and merely hoped they worked. In comparison, the expectations today are off the charts. Once variety of choice was the ceiling – think eBay and Amazon. Now there's a certain expectation of fast and affordable shipping. How long until people's expectations change to same-day, free shipping? Take a look at what Amazon offers in the US. How long until that trickles elsewhere?

And as long as it's the big boys like Amazon that set the pace, which they will, small entrepreneurs will be very hard-pressed to keep up.

We don't have the supply chain or infrastructure to match that kind of shopping experience, so we'll be forced to deal with an ever-shrinking profit margin to keep trailing the big players.

If not straight-up, go out of business.

"Oh, but I am making good money selling copycat products at double or triple the average selling price."

Take a look at the demographics of your buyers. They're skewing old, aren't they? Now ask yourself this. Why are younger people not buying? Could it be because they're digital-savvy enough to Google around and find the product for cheaper? Ask yourself this. Don't you Google around when looking to buy a product? How long until the non-digital-savvy segments get replaced by digital-savvy segments?

To have a business instead of an elongated promotion, you need to live in a world where you can have a reasonable price and still make a profit.

Anyway. The picture's bleak, but that doesn't mean we have to give up.

WHAT CAN WE DO?

We're all a bunch of capitalists, aren't we? So, we won't give up. We don't like giving up. So, here are some of the potential way-outs.

MONETIZATION, NOT ACQUISITION

Subscription-models. SMS. Email marketing. Whichever way we go about it, I'm talking about shifting our focus from acquiring new customers to retaining and remonetizing customers. Remonetizing a customer is less costly than acquiring a new one. I think it's absurd that people scale ads without having at least a minimum of seven to eight automated email sequences. I think it's even more absurd that people haven't heard about RFM analysis.

Optimize for profitability, not revenue folks! Before you go big and sell your business, you first need to have a reasonably sustainable business. Plus, more profit means more wiggle room to scale.

EXCLUSIVE PRICING

If we can offer exclusive access to better prices (keywords being the words "exclusive" and "better") then we DO have a great advantage. As I said, unfortunately, most resellers are in no position to do that. There's a retail company called Italic that does precisely that by capitalizing on manufacturer relationships. If you're Chinese, you may be able to do that too with a much less elaborate business model. 😉

BRANDING

Branding is probably the hardest thing to copy. So, if it works, it works, and it keeps working. The company stops being an e-commerce company, but a brand that happens to have an e-commerce distribution channel. The danger here is that it takes a ton of time to build a brand, and most "brands" don't have much brand value anyway, at least beyond the founder's imagination. Building a brand is also much higher risk than most people realize because, by definition, branding is partly about exclusion ("We are THIS and NOT THAT"), which means less wiggle room, less experimentation.

NICHE

Being niche means it's easier to be number one. That's what everybody says and why so many people do it. But it also means the market is much smaller. We eventually (quickly) hit a wall and have very little room to grow except if we expand our market through lateral product expansion or distribution.

LATERAL PRODUCT EXPANSION

People don't buy products in isolation. So why box our companies into a specific product type? If the focus shifts from "hot products" to understanding people, to the lifestyle and use cases these people have, product expansion becomes obvious. If someone buys hiking boots, they may like a backpack. What products would these people enjoy before, during, or after using your product? Don't sell sunglasses, sell means of expressing your personal style.

DISTRIBUTION

Distribution can mean many, many things. Entering new geographies. Selling to companies, in addition to selling to consumers. Having a retail presence. Getting affiliates. At its core, it's about delivering more value to more people.

Does this make sense?

Guys, I hope I gave you some food for thought if nothing else! If you found value in the post, the best way to say thank you is to shower me with sweet Karma.

Cheers.

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