You’ve heard all the reasons why businesses fail: lack of capital, poor product execution, or too much competition seem to be the most frequent excuses. Lately, it’s become more common to hear about retail stores closing due to competition with online stores and marketplaces such as Amazon. If e-commerce businesses are the killers of brick-and-mortar success, what makes an e-commerce store successful in the long term?
One of the biggest advantages of an e-commerce business, without a doubt, is the low barrier to entry. The proliferation of software platforms and tools in the last 10 years makes it really easy to set up, launch and operate an e-commerce store in a matter of hours — and for less than US$100.
Compare that to opening a retail store: a lot of time and energy is spent finding and leasing an appropriate space, remodeling it to meet specific needs, hiring staff to be present to satisfy customer demand (no matter how small), then advertising its existence. These differences may seem obvious and make you wonder: Who would go through the hassle and expense of opening a physical retail store when e-commerce is so easy?
The Long Game
OK, so getting started in e-commerce may be easier than other businesses. Achieving long term e-commerce business success, defined as operating a profitable ongoing concern, is another story.
There are a lot of notions about what is required for e-commerce success. Luck. Timing. A large worldwide audience. Money for advertising. To be clear, it’s just not one thing. It’s a confluence of conditions and elements — and not all are under the control of the online store operator. Most importantly, the foundation of e-commerce success consists of three components, almost exactly equal in importance.
These components are the same as they were when direct-to-consumer selling was called “mail order.” Back then, a paper order form was completed, and a consumer mailed it along with a handwritten check to the seller. The product selling business reduced friction by providing a postage paid envelope to make it easier to send in the order. The tools are different today, but the principles underlying success are the same, even though e-commerce seems like a “new” industry.
Important Factor No. 1: Product
The first component for long-term success is your product. This factor encompasses a multitude of details surrounding the creation, procurement, fulfillment or delivery of whatever it is you are selling. What you’re selling doesn’t matter: it can be a hand-crafted product, a manufactured product, or a thing someone else makes and you distribute.
To keep things simple, let’s assume you are only offering well-made, high quality products. Naturally, the business is doomed without that. Success actually will depend on details surrounding the item.
One detail that matters: Your finished product cost (or landed cost) should be no more than 30 percent of your actual offered retail price. In other words, a high margin is imperative. A 70 percent margin may seem like a road to riches, but what erodes that number the most is marketing. Marketing expenses include advertising, promotions, affiliate commissions and the like. Logistics, product returns and customer service can eat away margins too.
A consumable product — that is, one that needs to be replaced more frequently than another — tends to have an increased chance of garnering more frequent purchases and a higher lifetime value for the business. Subscription box offerings are popular because of this. A recurring revenue stream as part of your revenue model will help stabilize cash flow and help you sleep at night.
“Logistics” refers to the collection of processes and components that start with the origins of your product (handmade or manufactured), the way it’s stored before shipping to the customer, and exactly how it’s delivered — the kind of container (box, envelope, tube or other), the delivery service, and the cost.
A firm understanding of your logistics in your business — from the start of the procurement process all the way through a direct-to-consumer sale and the handling of any returns (including policies and procedure communications to your consumer audience) — is an important part of the e-commerce puzzle. If logistics don’t work well, the entire enterprise is in jeopardy.
Examples of what this may look like: A $12 item that costs $10 to ship; or a perishable product that requires refrigerated warehousing and special cold pack shipping containers that cost more than standard.
The greatest product in the world must be priced correctly, be cost-effective to ship and have manageable logistics, but even the best product is just one third of the overall equation for long term e-commerce success.
Important Factor No 2: Audience
If you have your products dialed in, margins are where they need to be, and efficient logistics are hammered out, who will buy? You may have the answer to that, but how big or small your potential audience is, and how you are going to reach it must be well defined. Also ask this: How does your audience like to engage? Where do your buyers reside on the Web and in the world?
Perhaps your target audience was the inspiration for the products you’ve chosen to sell. Great — understanding how you’ll talk to that audience and gain sales will start with understanding who and where they are. If you’ve built a product or catalog of “must have” items, you’ll use different tactics than if your offerings are “nice to have.”
Serving an audience with “must have” items will help you weather any stormy economic times. If your product and its value proposition attract a core group of loyal buyers, then you’ve done a good job of securing a sale when a competitive situation arises.
Making your product the first choice of visitors to your website regardless of price will help enable you to enjoy long-term success.
Marketing strategies won’t be discussed much here, as you can start to market your product line only after the three important factors are balanced and ready.
Important Factor No. 3: Value Proposition
Your value proposition is more important than ever today: Why should someone buy your product?
If people are shopping for your type of solution, they’re looking on the vending machine that is Amazon, or searching Google to find it. The lowest cost tends to “win” on Amazon, but a true e-commerce business also has its own standalone website.
One reason you must have your own website is that it’s very hard to communicate your brand’s message via Amazon. It doesn’t share your buyers’ email addresses, and lack of a basic and owned email marketing channel hampers your relationship with your product buyers.
What you can do on your own website or in your product pages is let people know why your product is superior and what you stand for. Maybe you have a social cause or benefit tied to your business — great, let people know. Maybe your product line is faster/better/cheaper than the best-selling brand — talk about it. How a consumer’s life will be improved by doing business with you must be clear.
Your advertising will communicate your value proposition, but this doesn’t mean that you should be flaunting your products with fancy adjectives. A slogan that explains your company’s vision or a phrase you use to describe your products is NOT your value proposition.
Make sure you keep the focus on the product buyers, and not on your brand.
Striking a Balance
The even balance between the three important factors — product, audience and value proposition — is key to becoming a successful long-term e-commerce business. No one factor can have a heavier weight than another. It is this symbiotic relationship that creates the magic of a long-term endeavor and ongoing concern.
If you know you don’t have the balance required, be careful. While there may be exceptions to this rule of important factors, forcing the issue to have an exception just for your business probably won’t end well.
Even great product execution can’t make up for a weak audience or lousy customer service. Conversely, a solid value proposition is not a substitute for poor product execution and a weak audience.
As your business grows, the three important factors may need to be re-examined from time to time to sustain the long-term health of the business. If you have a new product launch entering the mix of goods you already sell, use the three important factors to determine if the new product will work or not.
If you are in e-commerce for the long haul, the three important factors will help guide you on a long path to success.
Phil Gorman is founder of ECOMMevents and E-Commerce Day.
