Will Your E-Commerce Company Make It? How to Tell
How can you tell if your e-commerce company is growing? I use three metrics to measure top-line growth in my portfolio companies: traffic, conversions, and sales.
Not all traffic is created equal. Any old eyeballs will no longer do. You need visitor engagement that can translate into sales.
Getting the right visitor engagement is more complicated than just having a lot of money to spend. And as a young start-up, you can’t rely on snagging cross-over traffic from an established brand. Partnerships can help drive meaningful traffic and leads, but you need a number of them, structured appropriately, to produce significant growth.
While I find traffic generation channels such as paid search, online ads and affiliate programs helpful, I don’t believe they are the answer to ultimate, exponential growth. These programs were effective when they were first launched, but now the market is saturated. Traditional paid programs can quickly cost a lot more than the dollars they bring in.
So, how do you effectively generate traffic for your site? First, no matter what tactics or channels you choose, you must measure, track and manage your ROI. Invariably, some channels will work better than others, and the amount you spend will vary as you figure out what works best for any one of your customer profiles. Once you’ve determined your target customer profile, and you understand where they go online and off, spend the initial phase of your program testing and experimenting until you find the magic trigger.
These programs need not be expensive, and some don’t require any cash at all. But they can make a difference. RueLaLa’s early success was based on a referral program that leveraged its existing user base. The re-launched Fab.com uses social media advertising and referrals. There is no cookie cutter approach to "making it work." Instead, you need to test your marketing program, iterate, test and iterate, until you find the right trigger for your business.
How much should you spend marketing? The best rule of thumb is to use the net present value of your customer life time value (CLTV). Basically, that’s the gross profit generated by a customer across different periods in time, discounted to the present.
But many start-ups haven’t been in business long enough to know what their customer lifetime value actually is. In that case, be conservative and assume that your customer will purchase only once, and use that value. How much should you spend to acquire that customer? The marginal cost of acquiring your next customer should not exceed the CLTV.
Your conversion metrics show how well you’re able to convert your site visitors into customers. Some visitors are coming to your site ready to buy from you. Others may be coming to your site because some third party partner of yours offers them a reward for doing so. They have no intention of buying. These two kinds of traffic will have very different conversion rates.
Conversion rates vary greatly by vertical, so it is difficult and dangerous to generalize. For high-end luxury e-commerce sites, conversion rates may be about 0.03%. Those who sell mass-market goods could see conversion rates of several percentage points. The blended average is approximately 1.5%, but you should use your own industry as a benchmark.
There are a number of variables that can affect the size of the order you’re getting. They include the product mix, sales incentives and up-sells, for starters.
Broadly, there are two categories of ecommerce sites: those carrying their own products, and those selling others’ goods. So be careful how you compare your sales to those of your so-called peers. If you’re selling your own goods, your gross sales figure is really the face price of the good. Net sales figures account for any discounts.
In the case of aggregators such as flash sites, “sales” can mean something else entirely. They often report and market themselves based on the value of gross sales. For them, “gross sales” really means the value of the merchandise sold through them, not the amount of money that goes to the ecommerce site itself. So, if you are running an ecommerce business with your own product, don't be disheartened if your top dollar value does not match those of the flash sites. Before accusing yourself of growing sales too slowly, make sure that you are comparing apples to apples.
This column only gives the briefest introduction to some of the metrics you’ll need to track. There are a number of other very important figures such as the net promoter score (NPS), frequency of purchase and return rates, that I have not addressed. No matter which numbers you choose, measuring, iterating, and running your business on metrics is, in the end, the best approach to building a successful ecommerce company.
RUDINA SESERI | Columnist | Partner, Fairhaven Capital
Rudina joined Fairhaven Capital at its inception in 2007. She has invested in and serves on the boards of Crowdtwist and FashionPlaytes. Previously, she was a senior manager in the corporate development group at Microsoft Corporation. She is co-chair of the New England Venture Association.