23 March 2021
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 ecommerce landscape continues to change, we believe there’s a couple of incoming tides that may threaten those businesses that don’t have a solid foundation.
Before getting into what those incoming tides are, let’s identify a few of the things that would create a better foundation.
In many of the best ecommerce businesses, we’ll likely find core competencies on things 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 cogs in those businesses that have any direct form of customer interaction are probably running efficiently and effectively.
On the other side of those, there are a bunch of internal skills and competencies that often gets neglected.
At the core of assessing the health of a business is its financial systems and information. Having an automated system in place to give you real-time financial reporting is a superpower to help you chart the course of your business proactively.
The key is to move from data to 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 that I’ve used for multimillion-dollar a year businesses that required about 15 minutes a week to keep up-to-date:
The outcome of this should be a better understanding of your unit economics (Common Thread Collective has the best guide on unit economics for ecommerce brands), overall profitability and what your cashflow looks like.
Having a better foundation in place will unlock many opportunities for further growth and optimisation that comes as you increase your financial literacy and sophistication of your operations. Some of those are:
When tides change on a macro scale, businesses are more resilient when they information at hand to chart a new path. By the time you need this information, you also don’t want to be scrambling to try get it together or have an already-developed core competency.
Building a better foundation is a proactive task.
In these early stages of 2021, we have already witnessed some tides that have been building in the recent path and are not showing any signs of slowing down.
During the last couple of years, there has been increased scrutiny on data practices and what that means for individual privacy. One of the bigger such initiatives in the last couple of years has been GDPR, which has visibly changed the web with all of those frustrating cookie notices that 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.
Apple’s recent privacy changes and especially the impact that this has on Facebook Ads is a natural progression based on recent years. (Here’s a great overview of what it means for ecommerce brands.)
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 and with all of these privacy changes, 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 to make all of this a triple whammy, brands have not had a mature, scalable new acquisition channel for about 4 or 5 years (the last new channel was Instagram). Yes, TikTok is now maturing and early adopters on the platform are now seeing great gains in reaching new audiences. Much remains to be seen whether those gains offset the rising customer acquisition cost (CAC) on other channels.
How to do better: Build out your financial systems and reporting to not be overly reliant on these macro trends to understand both the health of your business and what is contributing to its growth.
The perfect segue from battling back rising CAC then is to focus on the things that you can control: your brand and most specifically turning it into a media brand.
This Twitter thread by Patrick Campbell (CEO of Profitwell) explains perfectly how becoming a media brand helps lower CAC. And in explaining that, Patrick also presents a really great example of Profitwell has become more of a media brand.
Pursuing this strategy will require the development of new core competencies which includes content production designed not just to sell, but to engage and build a brand. Building and nurturing a highly engaged email list (still a high leverage best practice) will now need to evolve to be more media and content-driven.
Examples that come to mind is BABE, which was spawned on a similar strategy to what one of their founders, The Fat Jewish, had done on Instagram. Or Parade that has nurtured a customer-driven movement on social media with their underwear. Even Haus’ Spotify playlists - which goes down well with their low-alcohol aperitifs, is an innovative attempt at how to earn greater attention from those to whom they sell.
How to do it better: Optimise your operational efficiency and return on capital to ensure there is sufficient breathing room in your budget to develop these core competencies and invest in these new initiatives and channels.
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 that I miss most from my time with WooCommerce is how cash-rich the business was, which meant monthly dividend distributions. It’s steady, predictable and creates a lot of options and freedom.
In saying that though, I also acknowledge the impact that selling two businesses has had in my life and that the dream of selling a business is one that many others share.
As the M&A space for DTC brands change, I’d advocate for a reorientation of expectations which probably means that for most DTC brands there isn’t a unicorn-like exit on the horizon any time soon.
Ecommerce brands though are still regularly sold though, so there is a different version of that dream that is still alive. As a start, I’d take the valuation guidance from a brokerage like FE International who sells hundreds of businesses a year. What that means is that most ecommerce brands will sell for a multiple of their EBITDA or Sellers’ Discretionary Earnings (SDE) instead of a multiple of revenue.
4x400’s recent sale of FC Goods is a great case study and example of what such an acquisition likely looks like. The two-part podcast series (here & here) alongside their summary of the sale is a valuable behind-the-scenes look at how these acquisitions happen. Critically the acquirers confirmed that one of the things they valued greatly in 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 activities that have negative profit margins. Profitability will create options in your business; both whilst you run or in the case of exploring a sale.
The only constant is change and it is generally those businesses and brands that see the change early and adapts to it that succeeds 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 by the time they hit, there is a whole different tidal wave that impacts markets and societies.
The path to better here is less about radical change and more about an evolution of your business and brand’s DNA.
It’s about strengthening your core so that you are able to surf the waves as they come and go.
Start that evolution today and get the right disciplines, habits and systems in place well before the next wave arrives.