As the ecommerce landscape changes quickly, these three incoming tides may threaten your businesses if you don’t have a solid foundation.
I bet you’ve heard the Biblical tale of the foolish man that built his house on the sand (instead of picking a stronger foundation). As the commerce landscape continues to change, we believe several incoming tides threaten businesses. Especially those that haven't built a solid foundation.
Before getting into what those incoming tides are, let’s first identify what a solid business foundation looks like.
What does a solid business foundation look like?
In many of the best ecommerce businesses, we’ll likely find core competencies like their technology and tech stack (because they’re built on powerful platforms with extensive app ecosystems). As well as product development and marketing.
I’d bet that most of the customer-facing cogs in those businesses are probably running efficiently and effectively. On the other side of those, however, are the internal skills and competencies that are often neglected. And at the core of assessing the health of a business is its financial systems and information.
Having an automated system in place that provides real-time financial reporting is a superpower that helps businesses like yours chart the course proactively. But the key is to turn that data into insights as quickly as possible.
Luckily, much of this can be automated through systems and a bit of manual labour.
Here’s a brief explanation of a system I’ve used for multimillion-dollar a year businesses that only requires about 15 minutes a week to keep up-to-date:
- Connect your Shopify or WooCommerce site to Xero or Quickbooks to get real-time sales data into your accounting system.
- Add an inventory management system or lightweight enterprise retail planning software (such as Quickbooks Commerce, Veeqo, or Skubana) to Xero or Quickbooks to get cost of goods and inventory data.
- Integrate Dext (previously Receipt Bank) or Hubdoc to get your source docs into your accounting system for easy, fast bookkeeping.
- Track and forecast cash flow with Float or get visual, interactive management reports with Fathom.
- Lastly, use something like OrderMetrics or Metorik for commerce-specific reporting.
The outcome of this should be a better understanding of your unit economics, overall profitability, and what your cash flow looks like. And it provides a solid foundation for how you make decisions moving forward.
Why does it matter?
Having a better foundation in place unlocks many opportunities for further growth and optimization that come as you increase the financial literacy and sophistication of your operations.
For example, some of those opportunities are:
- Understanding your return on ad spend (ROAS) and unit economics per customer acquisition channel.
- Improve your cash conversion cycle to become cash-rich (this has been hugely beneficial for brands like Gymshark).
- Optimize your working capital invested in inventory. That way, your best sellers never run out of stock, and you don’t have loads of slow-movers or aged inventory just sitting in a warehouse. (This is something we’re hoping Cogsy will help with.)
- Increase your ROI on shipping costs by understanding the breakdown of shipping zones and considering adding a warehouse.
When tides change on a macro scale, businesses are more resilient if they have information at hand to chart a new path. By the time you need this information, you also don’t want to be scrambling to get it together.
In other words, building a better foundation is a proactive task.
The tides that are threatening commerce
In these early stages of 2021, we have already witnessed some tides start to threaten the shores of commerce without any signs of settling.
Privacy, attribution, and growing CAC
During the last few years, there has been increased scrutiny on data practices and what that means for individual privacy.
One of the bigger such initiatives has been GDPR, which has visibly changed the web with all those frustrating cookie notices we now have to click. But they have also handed out fines to those in breach, showing that this is not all bark and no bite.
It would take a courageous business owner to bet on this tide slowing down or privacy concerns going away completely.
Marketing attribution has always been tricky at best. But with all of the privacy changes lately, this exercise has become even trickier. (Pro tip: Use something like EnquireLabs to get attribution directly from your customers and augment your other data sources.)
And as a triple whammy, there has not been a new mature and scalable acquisition channel for about 4 or 5 years now (the last was Instagram).
Yes - TikTok is now maturing, and early adopters on the platform are now seeing great gains in reaching new audiences. But much remains to be seen whether those gains offset the rising customer acquisition cost (CAC) on other channels.
How to do it better: Build out your financial systems and reporting to avoid being overly reliant on these macro trends. That way, you can understand both the health of your business and what is actually contributing to its growth.
Every business is a media brand
The perfect segue from battling back rising CAC is to focus on what you can control. For instance, your brand and, more specifically, turning it into a media brand.
In a Twitter thread, Profitwell CEO Patrick Campbell recently explained how becoming a media brand lowers CAC. And he presented how Profitwell specifically lowered CAC by investing in 7 podcasts and video series.
Pursuing this strategy requires the development of new core competencies, including content production designed to both sell and engage. Meaning, building and nurturing a highly engaged email list (a long-standing best practice) will need to be supplemented by content creation.
For example, BABE leveraged a similar strategy to what one of their founders, dubbed The Fat Jewish, had done on Instagram. Or Parade, an underwear company that has nurtured a customer-driven movement on social media. Even Haus’ Spotify playlists - which go down well with their low-alcohol aperitifs - is an innovative attempt to earn greater attention from the market.
How to do it better: Optimize your operational efficiency and return on capital. These practices ensure there is sufficient budget available to develop these core competencies. Then, invest in these new initiatives and channels that represent the future of omnichannel retail.
Profitability and financial health
There is nothing wrong with building a highly profitable business in the long-term and getting the reward of the distributions that it creates.
One of the things I miss most from my time with WooCommerce is how cash-rich the business was. Monthly dividend distributions were steady, predictable, and created a lot of freedom.
In saying that though, I also acknowledge the impact that selling two businesses has had in my life. And also that the dream of selling a business is one that many others share.
As the M&A space for DTC brands changes, I’d advocate for a reorientation of expectations. This, admittedly, probably means that for most DTC brands there isn’t a unicorn-like exit on the horizon any time soon.
However, eommerce brands though are still regularly sold. And there is a different version of this dream still alive.
If exploring this option, I’d take the valuation guidance from a brokerage like FE International. Selling hundreds of businesses a year, they are the authority on such matters. According to them, most ecommerce brands will sell for a multiple of their EBITDA or Sellers’ Discretionary Earnings (SDE). Not a multiple of revenue. That should be the new dream for commerce brands.
4x400’s recent sale of FC Goods is a great case study for what this type of acquisition looks like. The two-part podcast series (part 1 and part 2), alongside their sale summary, is a valuable behind-the-scenes look at how these acquisitions actually happen.
Critically, the acquirers confirmed that one thing they valued greatly about their purchase was the profitability of the existing business.
How to do it better: Truly dial in those unit economics. Focus on the activities that drive most profit, and either tweak or eliminate those with negative profit margins. Profitability will create options in your business - both while you run and explore a sale.
Evolving the DNA of your business
The only constant is change. And it is generally the brands that see the change early and adapt to it that succeed in the long term.
It is also true that some of these incoming, changing tides may not be as significant once they hit our shores. Or that by the time they hit, there is a whole different tidal wave about to impact the market.
Therefore, building a better business, in this case, is less about radical change and more about an evolution of your brand’s DNA. It’s about strengthening your core so you can surf the waves as they come and go.
Start that evolution today and get the right disciplines, habits, and systems in place long before the next wave arrives.