What are some barriers of entry to running a successful eCommerce business?




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This is a Quora question I was asked and my answer is as follows.

My sense is that a minimum qualification for “successful” is profitable on an EBITDA basis (net profit or earnings before interest and taxes, depreciation and amortization) such that your profits will pay back your original investment in a defined time frame.

Defined time frame is different for everyone, but could be 3, 5, or 7 years or some other time frame you require for payback on your original investment.

If we take that minimum definition for “successful”, I think the biggest barrier for new entrants is not knowing the right set of metrics that will get you to success.

It usually takes trial and error and general testing to learn what those metrics should be for your business. Even if you have direct experience in your specific industry, each company is different so the metrics will be different.

A big metric includes average order value, which as a general rule should be north of $75, because anything less and you will not be able to pay your operating costs.

But, that is greatly affected by may other big factors, principally the acquisition cost of each customer and the customer lifetime value of that customer.

If you have optimized marketing where your customer acquisition costs are low, you might do just fine with a lower average order value.

And if you can retain your customers so that you can count on repeat purchasing, then in general your marketing costs will be much less because it costs, on average, 7x less to retain a customer than acquire a new one.

Knowing these and many other metrics in your business takes time and that is often the enemy of ecommerce startups, because the more time they spend to learn this, the more cash they burn, not only reducing available cash, but also increasing the payback period on the original investment.

To reduce the complexity of these and other metrics, I have an infographic on the flow of money in a consumer product company organized into a profit and loss statement and how the main metrics fit together.

You can use this to model your ecommerce business and see how the metrics fit within the context of profit and loss.



I post what I see and do in consumer products. But I am just one person with my own perspective. I want your opinion and observations from your point of view. Please comment below so I and others can learn. Thank you!


About the Author:

I am a startup and growth company expert: sold 1, built 5, and crashed 2. I develop, launch and grow consumer products through uncommon methods that can lead to more sales – faster – and can make a company and its products more appealing to consumers and resellers, with less risk. More about me here.

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