5 Rules for Staying Ahead in the Ecommerce Race
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While the news has been filled with stories of brick-and-mortar struggles lately, ecommerce has been thriving. Just last year ecommerce sales rose 15.1 percent, according to a report released by the U.S. Commerce Department, encompassing 8.1 percent of total retail transactions. Indeed, optimistic hopes for online buying from the late 90s are 2017’s reality.
And in turn, after a number of relatively dormant years, there has been a flurry of ecommerce M&A activity. This has included some of the largest ecommerce exits in history such as “unicorns” Dollar Shave Club and Chewy.com. Yet, conversely, the last couple of months have also seen unfortunate results, with Nasty Gal, One Kings Lane, Modcloth, Gilt and others shuttering or selling for less than the capital raised through their VCs.
Ecommerce is by nature transactional and thus built to succeed. The question is, why do some well-funded companies manage to thrive and others fall apart? Of course, all strokes can’t be painted with the same brush, and there are many operational and marketing oriented reasons that lead to a company’s success or failure. However, starting with a winning formula from inception goes a long way in guaranteeing long-term sustainability.
So, what are best practices for building a successful ecommerce company in 2017 and beyond? Here are some simple rules:
Vertically integrated models work.
Vertically integrated ecommerce companies own the entire customer lifecycle, from coordinating manufacturing to final delivery. Since the inception of Warby Parker in 2011, vertically integrated ecommerce companies have thrived, and with due cause. By virtue of being both the manufacturer and retailer, they can provide greater value and service to customers while maintaining reasonable margins. They also don’t have to engage in price wars on Amazon, which inevitably bring down profits and don’t allow for differentiation.
Pursue large, inefficient markets.
Everyone needs a mattress. Similarly, lots of people need glasses. Pursuing large markets has been to the benefit of online disruptors out of the gate. But, Warby worked not only because it went after a large market, but that it also went after one that was inefficient and over-priced. Its better service and branding helped, but the market itself was ripe for disruption.
Subscriptions make sense.
Dollar Shave Club sold to Unilever for $1 billion. Why do subscription companies do well? The reason is simple: They can handle a higher user acquisition cost vs competitors. Take subscription vs. non-subscription players for lower cost items. If you’re selling a $9 razor one time only, you probably aren’t justifying the price you paid for Facebook ads to acquire that customer. If you’re Dollar Shave Club and that person pays you $9 and sticks around for three years, the customer is actually paying you $324 over time. Guess who wins out in the long run?
The largest ecommerce exit ever, Chewy.com, in some ways operates as a subscription model in disguise. Pets need to be fed daily and Chewy, by making it simple and easy to buy again, got lots of its consumers to return to Chewy.com the next time they needed a fill-up.
Complexity is difficult.
Complex businesses with lots of specialized SKUs can be difficult to turn into effective businesses. For example, there have been a few fashion and apparel wins during the last few years, but lately apparel exits haven’t been the toast of the town. Even the vertically integrated apparel trailblazer, Bonobos, sold for much less than its investors were hoping. Why? Because apparel is inherently complicated. There is seasonality, inventory and converting one-time shoppers into loyal consumers can be difficult in a world of styles and trends. It can happen, but it requires an experienced team, a great product portfolio and strong technology. Retention and data driven etailer Stitch Fix has thrived by getting customers to purchase more than once; others not as much. If generating loyal shoppers doesn’t work out, well, you have the makings of some of the less successful ecommerce transactions we’ve seen lately.
Differentiated products sustain.
Inherently smart businesses should have more efficient marketing over time. The bad news is that even if greater efficiency happens in isolation, as a space gets more competitive, pricing for user acquisition usually goes up and conversion rates go down. The good news is that there is a way to get past this issue: Provide a differentiated product from your competitors.
In the online mattress category, we’ve seen over 60 companies enter the category during the last three years. It’s become expensive to enter the space and market effectively online. For example, the price of Google in-market spending has risen by four times in the last four years. At Saatva, we’ve been able to continually be one of the top players because we provide a unique luxury product and differentiated service. We custom install a non-compressible product in-home; our competitors arrive via UPS rolled into a box. It’s this type of core distinction that allows us to convert a greater percentage of buyers, even as marketing costs get more expensive.
Here's the bottom line.
It’s an amazing time to be an ecommerce company, and the good news is that there seems to be a system behind success. Less successful companies don’t pursue the right markets, aren’t able to provide a distinct value proposition or have customers that become less loyal over time. Good companies can come from anywhere, yet certain ones have the odds stacked in their favor. With a strong business model, the skill to operate relatively simple businesses and provide differentiated value in a space with increased competition and marketing costs, an ecommerce company can be built to thrive and stay ahead in this competitive race.