eCommerce as an industry makes the majority of its money on all the services that support it.
Great brands make about 30% profit margin at the end of the day. 70% of the revenue is lost to the services and people that support it.
Let that sink in a bit. If you go into eCommerce with the idea that you'll make millions in profit for yourself, it's not likely to happen. You have to approach eCommerce as not buying and selling but instead branding, and cultivating assets beyond revenue.
Pre-pandemic that amount of brands that make their money through direct sources would be lucky to be 25-30%. Pretty much all major brands that are non-subscription based have found their way into retail partnerships. Sales have increased online, but with that comes added competition.
Shopify, Facebook, Google, Klaviyo/Drip, FedEx/UPS/USPS – these are all the winners of eCommerce. The first 3 collect all the data and benefit from it at scale and can reuse that data to sell it to other stores through your actions. The game is rigged. (I've left Amazon out of this but that's a whole other level of rigged and data hoarding.)
Kickstarter and Indiegogo campaigns are now coming from brands with large backings. The amount of companies with series A funding opting for the Kickstarter or Indiegogo route has skyrocketed over the last 5 years. And most of those never deliver on time, breakthrough, or are around a few years later. It's just a marketing channel that gives them more exposure due to traffic than directing people to their website.
The majority of eCommerce stores fail and aren't profitable.
Let's break it down.
You need a store, Shopify is out of the box and relatively inexpensive, the vast majority of all stores fail but Shopify gets paid either way. But they don't do everything so you have to install apps, Shopify takes a 30% cut for just showing you available apps. They win again.
Facebook and Instagram are the major ways to advertise these days you really can't ignore them – you spend small amounts of money testing and driving traffic to have very few people convert with a goal of 2%. If you have a company page, forget about people seeing your posts, it would be better to just start a group instead, that way you wouldn't have to promote it to be seen. Influencers are fizzling quickly, even their post are throttled these days – doesn't make sense for them to be promoted. But there aren't that many alternatives.
Google yeah you're going to have competition so you have to rank and with their changing algorithm the best way to rank is to pay for your own keywords. Not knocking SEO, I think it should play a big role but for many smaller consumer companies it's more beneficial to be in an article that compares your product to others in the category – gives you cred and comes from a non-branded source.
Klaviyo, Drip, or any of the other email programs out there charge by number of people in your database, so ironically they are frenemies (we'll get to this next).
FedEx/UPS/USPS they all take their cut and for a lot of companies that are almost assumed to offer free shipping over a certain price, assuming a cart value of $50 the shipping for a light package would be about $5 or 10%. That's a tax not an expense. Goodbye margins.
There's a lot of people out there preaching how easy it is to make money via eCommerce.
It sounds nice – but they usually leave out all the bits that require a ton of effort.
The math works out – Get paid hundreds of dollars for a course that costs nothing but time to produce that you can resell without having to have inventory or sell products that earn you $0.30 per every $1.00 you earn. I'm not going to knock it, makes more sense to sell a course. Oh and no shipping tax or upfront cost.
No barriers to entry. eCommerce just requires an internet connection and a credit card.
Get a domain, setup a shop, advertise, repeat.
With rising competition and zero barriers to entry, this model doesn't work well for those that aren't really knowledgeable about all the different parts of the equation. Read: they all have experience or money behind them to hire people with the experience.
Success in business is constantly hedging your bets and looking into businesses that have multiple streams of potential income. It's viewing all your assets as things that can monetize and value to fuel growth. It's long term vision vs short term revenue chasing.
—————————————————————————————————————————————————– BIG DISCLAIMER HERE:
I do think there is lots of opportunities for smart well run automated stores to make around $1 million revenue on autopilot that should net out around $300k per year. I think it becomes a race to 50k subscribers with data to optimize their journey and maximize their LTV. Low and slow growth works best but this should be doable with limited startup costs of around $150k and a very strong strategic go to market strategy. So you don't need to invest this all at once but to get there it will take about $150k of pure marketing spend. The upside is you should be able to put things on auto-pilot through great systems and processes after that. It's about efficiency and outsourcing once you have great processes.
Napkin math tells me an average cart value of $61 and a 33% conversion rate from that list of 50k with a very strong customer journey stretched out over 12 months translates to just over $1 mil in revenue without planning for repeat purchasers.
So where does this leave us?
It's not all doom and gloom. There are ways to succeed today.
But it requires a change of mindset.
We need email addresses with data.
Some things will always be fundamental.
People like products, they like to buy things. But these same people buy things from lots of brands and lots of stores. Everyone wants more customers.
People click on ads for products that catch their eyes, people are visual.
This will never change, but…
IT'S NOT ABOUT A SOCIAL FOLLOWING, IT'S ABOUT AN OWNED AUDIENCE.
Social is valuable but largely vanity and at the bequest of nothing you can directly control.
So what is an owned audience?
Email, SMS – I like email more than I like SMS, less chance of long term regulation. But both can be used with success.
The basics –
The average cost to acquire a new customer is between $26-$52 for B2C eCommerce and rising.
More competitors with little differentiation with the zero barriers to entry listed above has this assuredly becoming the new norm with no sign of slowing down. Depending on how competitive the space is you're driving up the prices on ads going after the same audience with the same products.
This will only continue to increase as a trend.
You need to relentlessly look to build your email list – it's a faucet for revenue when used correctly. But you also need to maximize it's worth – this is where most brands FAIL HARD without realizing it.
If you have an email list of 100,000k with no data it's worth maybe a few thousand dollars for retargeting efforts. Pennies per person.
If you have an email list of 100,000k with data and strong open rates, you can assume that a company is targeting that same demographic and you know because of that data that it's likely that 30% of your list would purchase something from another company with complementary goods…
Math time – Your list is worth at minimum $780,000 – $1,560,000 (30k x $26 – 30k x $52) in acquisition cost not factoring in Lifetime Value or any revenue or sales data.
If the average cart is $100 you just found a value of between $7,800,000 and $15,600,000 just based on your list potential. So your worth as a factor of the acquisition cost plus first time purchase revenue becomes pretty substantial. Most companies will look to make this back over a span of years this varies with the intangibles but a safe bet would be 3 to 5 years with upward growth. At this size you should be bringing home at least $3 million in revenue so you'd be looking at a multiple in the 2.5x to 5x range but ONLY if you have a strong brand and great data that's complimentary and usable by your buyer. Without it you'd be looking at 1x to 1.5x revenue.
To contrast this, Supreme was just purchased for $2.1 billion with $500 million in annual revenue and 60% of sales coming through their website. They got just over 4x and they are internationally known and HUGE on email collection.
Bonobos went to Walmart (roughly 2x revenue) one of the first to be in DTC acquired to help them with their push into ecommerce technology. But acquisitions are few and far between that rely just on brand.
If the space is hot – sell. Casper should have sold, offered $900 million – market cap currently of $288 mil.
The commodity space is build a brand, build an email list with data and sell to a larger company – the difference is in the ability to have a large footprint. It's all about data.
So what else does data do for you?
The cheapest way to acquire customers is via branded partnership with a similar brand or offer of complementary products – big stuff on this, if you are in retail, this avoids MAP pricing so you can sweetheart deals to acquire new customers from existing brands emails when done correctly. But it's much much easier to do this if you have amazing data behind your list, it becomes WORTH A LOT MORE as illustrated above. It also allows you to form deeper partnerships and look to test different segments to better understand where the overlap exists.
I've worked with Google, Apple, Microsoft, Amazon, and others with partnerships they were all interested in the data we had on our customers – if these giants were interested in what we had as a small company you better believe every bit counts.
During an acquisition for a consumer brand, it's all about the audience and the brand (and sometimes the technology or expertise).
IT'S ALMOST NEVER ABOUT THE ACTUAL PRODUCT.
On the rare occasion it could be about the Intellectual Property but most small companies can't actually afford to defend it if a big player decides to copy it. It's actually common for the larger company to just bleed them out via legal fees if the smaller company sues before opting to purchase them at a reduced amount.
Patents have to be enforced – a lot of things aren't patentable.
This is the power of 1st party data and an owned audience.
Why do I bank on this? Because I've lived it first hand. No one noticed that data was taking over and Amazon, Facebook, and Google would own all of it and that a few companies have a monopoly and can leverage it 10x better than a small company. For every new social network the organic reach is shorter and shorter before it becomes pay to play. Media is dying and the amount of articles that are sponsored has sky rocketed and the amount of traffic coming from them plummeting. I know I've had companies featured in TechCrunch, cNet, Forbes, you name it. I watched first hand as the traffic just dwindled. Reddit is full of stories of doing well on Product Hunt launches only to end up with just a lot of lookers. Now major brands are launching brands on Product Hunt – notice the trend. What is fresh and new becomes stale really quickly. Platforms meant to even the playing field are being dominated by those with the most resources.
You NEED to take a page from Levi Strauss.
During the gold rush in San Francisco, everyone came looking to strike it rich and find gold, Strauss came for the same reason but then noticed that everyone needed a pair of pants that could withstand the tough conditions and thus decided that rather than take his chances on something that wasn't guaranteed, he could do better by selling something that everyone needed.
Same goes for people that sold shovels etc.
Customer emails with data attached are today's jeans and shovels. They are required to more easily convert profiles into money BY EVERYONE SELLING ONLINE.
If you're starting in eCommerce today, a data play from day one should be required.
Not random data that doesn't matter or clicks or hotjar sessions, or email addresses with out more to them. You need to create customer journeys that can collect 1st party data and combine it with profiles.
You need to fundamentally be able to break down based on data points:
- Who is most likely to purchase and what traits they have
- Why people purchase cross referenced with the traits
- Why other people didn't purchase referenced against those that did purchase with traits
- How long it should take from first visit to sign up to conversion to repeat purchase according to customer traits
- How to guide someone down a path that leads to conversion based on the above
Traits are things customers actively tell you, NOT things that you glean from watching an activity feed in a piece of software. Unless someone tells you something, it's really hard to fully understand what they are thinking and often not reliable. Dirty data = BAD
If you don't have an idea for any of the above with data, it's going to be a struggle. The amount of inefficiency in eCommerce is gigantic because most people can't answer the above questions. The majority of stores even if they can answer them don't have data to back the answers – they are guessing.
Be lean, be efficient, overcome the guessing with data.
Today, spend money to understand the traffic that is coming to YOUR website and how it RELATES to your customer journey not just demographics and some location data.
Anyone can create revenue with enough spend – that's not cool. What's cool is understanding who is signing up, what makes them tick, who's buying your stuff and finding cheap organic ways to be involved where they hangout so you can spend your time on being part of a community and converting via word of mouth without ads.
Your goal is to max out Lifetime Values with a data backed approach to achieve sustainable profit.
So how do you collect data to leverage?
Build a customer experience that is helpful and leads the customer to tell you what they are looking for. De-risk a first time purchase at all costs (think breakeven overall to build an audience) then scale up through automation for the transactional and give all your time to the community building and social scaling on platforms where your users hang out.
Buttoning this post up, we're not a society of selling commodities anymore. We're a society of collecting and leveraging data.
100% of stores will tell you they track data and are leveraging it.
99.9% of stores won't be able to conclusively tell you the answers to the questions above with data.
You can be successful without going full data, but you won't be as efficient as you should be or productive as you should be and it will cost a whole heck of a lot more. When you're time is your biggest resource constraint, do yourself a favor and build a data collection process that you can leverage for the life of your store and beyond.
I'm still amazed at the amount of emails I get with products featured that aren't in my size.
So how do you cash out of eCommerce?
If there is a company that finds it easier to take over your existing brand and your email list you many get an offer for no more than 2x your revenue more likely around 1.5x depending on your EBITA. And that's rolling based on your last 12 months.
There aren't that many that get to exit that aren't subscription and even more that were subscription that went under. You're looking to take a little bit of market share away from a large conglomerate enough where it becomes cheaper to purchase you than to compete with you. This is rare, because usually they can outspend you and will. The companies that have managed this have all raised a lot of outside funding to keep up absurd marketing budgets to compete.
But you said 2x – 5x above based on the email list?
I did, but only because it has potential to make more revenue and bolster your underlying revenue via partnerships. Do enough great partnership work and one of them just might be willing to pay a premium. Either way you'll reduce your cost of acquiring new users and be able to get your marketing spend under control increasing your profit margins.
Instead, I usually recommend your goal should be to automate the store and outsource all the processes and expand to other stores with complimentary audiences and other goods so you can reuse the data that you have in other adjacent verticals or expand your own line to maximize profit margin through scale.
eCommerce is a lifestyle business where you do it because you love it, you believe in your products, and you know how to automate things that create flexibility with your work life balance.
I'm not saying there aren't exceptions but by and large money is less available for DTC today and has been cooling as the marketing expenses often outpace the revenue in search of growth.
So if you have the necessary skills or a clear path to making $150k over time to reinvest – you should be good to go, if you don't, study up. Pay attention, go work for another brand, and keep an eye out for a genuine product market fit opportunity for when the clear path presents itself.
So day one, commit to learning, commit to data, and commit to understanding all the skills and parts necessary to run a successful business, because you're only playing with max 30% profit margin.
Also if you can focus on consumable goods and things with high likelihood of a repeat purchase – one off products require a lot of money to maintain growth.
Go forth and do great things.