Ecommerce is hot at the moment and valuations are going through the roof on the back of the Moonpig IPO, we can expect more big fund raises to follow this year. That’s not to suggest investors will take out their check book for just anyone though. Long-term, there simply isn’t enough capacity in the market to sustain so many businesses chasing the same consumers.
2019 was a black year for bricks and mortar and by the same token, we can expect a similar cull in the online space in the near future. You don’t have to look too closely to see where the axe will fall, the industry’s dirty little secret is that many ecommerce businesses are poorly run.
Peek behind the slick marketing campaigns and you uncover a host of poorly optimised websites, unreliable supply chains and late delivery – and that’s just for starters. However, all of these are hygiene factors and fixable if the businesses in question are able to use their data to identify where the rot lies and prioritise remedial action.
They need to do so with some alacrity. With increased competition following the ‘pandemic pivot’, the ecommerce brands that will rise to the top are those that can take market share in their particular niches before the competition does.
A changed market
While ecommerce has been a lifeline to many businesses during the pandemic, the market is going to become much more competitive as we come out the other side.
For every great idea there seems to be at least one competitor who will take your original thinking and look to scale faster, whether that’s in a different market - or sometimes even in the same one.
The greatest risk, however, lies is consolidation. Roll-ups like Amazon marketplace specialist Thrasio and umbrella groups like The Hut Group are building strategic market advantage by bringing together diversified portfolios of sellers. Together, these benefit from economies of scale and the enhanced bargaining power over factors like freight and warehousing. Cost savings are then passed on to customers and the independents risk being priced out.
Growth at all costs
It’s clear the ecommerce sector is about to become even more dog-eat-dog and there’s a limited timeframe for businesses to scale sufficiently to remain competitive. From that perspective, the clarion cry for all players has to be growth – and the faster the better.
Often this will be reliant on third-party funding, while there are numerous options open at present any investor will be looking for evidence of a sustainable growth strategy. That translates to one that is informed by cold, hard data.
The best possible light
So, before embarking on a funding round a business needs to have its data story and analytics processes in place. Investors increasingly want to tap in to real-world/real-time data as part of the due diligence process. Previously, data was compiled into a ‘data’ room – a secure online locker – to be manually reviewed in light of the four measurement pillars of legal, operational, commercial and technical. This data was not ‘live’ and was usually two to three months old – but we know much can change in three months.
Now, investors are able to call on digital due diligence tools that plug direct into the APIs of the target’s ERP and related systems, these anonymise the data and automate the analysis. As well as looking at current business performance, the investor is also able to review at the target’s unit economics in granular detail. They use this to identify the growth potential, or otherwise, across multiple channels from new and established audiences.
So before talking to an investor, you need to be able demonstrate you are using your data to inform commercial decisions. As such, it pays to make sure you understand exactly what your data tells you and align this to your growth strategy before pitching.
In practice, that equates to first understanding your current and potential audience. It doesn’t matter if that’s niche, after all ecommerce is a place of very rich niches. However, you do need to be able to demonstrate how you can build on that customer-base, whether that’s through additional channels/ product diversification in your domestic market or through (well-considered) internationalisation.
Feeding in to this, demonstrate you’re on top of the marketing. An aggressive customer acquisition strategy is a prerequisite in the current landscape. Google’s decision to factor out cookies from Chrome will make acquiring customers more challenging again next year so it makes sense that businesses focus on growth – with or without external funding - in the meantime.
Where you find new customer is a moot point though. There are so many new platforms coming to market that it’s hard to keep up, so you need to show you’re balancing outreach strategies with ROI. From that perspective, also make sure there are structures in place to objectively measure returns, rather than relying on platform-provided tools and/or what your marketing agency tells you.
It’s not just about reaching new audiences though; you also have to demonstrate you’re making the most of your existing customers. In particular, pay close attention to repurchase rates and lifetime value metrics to identify and segment your high-value cohorts and nurture them as brand advocates.
Maintaining customer loyalty means maintaining trust – and investors will be looking closely at TrustPilot scores. Consequently, you need to be sure your inventory, payment and fulfilment processes are up to scratch and that each have back-ups for disaster recovery. Eternal data vigilance is required to react to any anomalies – such as failed payments, basket abandonment, clusters of returns etc – that may point to a potential issue and nip it in the bud as quickly as possible.
Avoiding self-inflicted wounds
Given the breadth of opportunities in this space at present, investors of all shapes – whether that’s an ecommerce finance firm, a scale-up outsourcer like THG, an angel investor or private equity business - all will be looking out for particular red flags that suggest why they shouldn’t part with their cash. There are a number of pitfalls that businesses looking for funding should avoid at all costs.
The first is perhaps obvious, your data infrastructures need to be future-proofed given that investors are increasingly peering into them direct. This means working from a single, specialist cloud-based database that already feeds into the broader sales and marketing suite, or has the potential to do so. After all, a growth opportunity can be found through operational data as much as marketing.
Investors will take note of who within the business is conducting the data analysis. If the responsibility sits solely within the marketing team, or - worse - the IT team, then the bigger picture risks being lost. It’s worth recruiting (a) specialist cross-departmental data scientist(s) that is reviewing the unit economics on a daily basis. This shows you recognise the value in the data you hold and understand the direction the market is taking.
Next, make sure you’re capturing the right data. This should be generating, or has the capacity to generate, actionable insights - when you ask the right questions. There’s little point capturing everything from the outset if it’s just going to sit in a data lake that simply grows ever deeper.
Rather, build outwards from a clear starting point – usually insights into what acquisition channels generate the best ROI – so each layer adds further actionable insights that can drive growth. This approach demonstrates the type of strategic thinking an investor will be looking for in a leadership team.
Aligned to this, you need to make it clear that there’s a long-term vision in place. Chasing short-term profit over long-term revenue is simply bad business, so pay particular attention to lifetime value. If the investor sees recurring examples where the cost of acquisition has been higher than the purchase price for one-off sales then expect difficult conversations to follow.
An investor will be weighing all the evidence presented by your processes, technology infrastructures and staffing to gauge at what stage your business is at on its data transformation journey – from chaotic to intelligent.
A simple rule of thumb is If you aren’t applying data to drive commercial growth, you aren’t yet at the right stage in your data transformation journey to talk to investors. Having the capacity to understand what your data is telling you is the defining factor between a successful application and a failed one.
The ecommerce honeymoon period is nearly over. Early movers that have got away with it so far – and potentially did good business during lockdown - need to focus on data best practice, or risk going the way of the dinosaur as the market evolves.
Fran Quilty, CEO and founder of e-commerce data specialist Conjura