Beyond scale, what determines whether an e-commerce company can reach an attractive business model (i.e., return on investment)?

Albert Hong

Albert Hong, Associate @ Blackstone; formerly @ BlackRock

Répondu il y a 138w · L'auteur dispose de réponses 427 et de vues de réponses 1m

Whether it is because I am stupid, inexperienced or naive, I like to think of everything in as simple of a form as I can make it.

In the case of e-commerce, you are trying to get people to buy things off your site. Simple as that. To make this an attractive business model, you need it to produce as much profit as you can, for as long as you can. Again, simple as that.

The formula for such a statement is as follows:

  1. Get as many people as you can to buy things on your site (addressed)
  2. Maximize the margins on the things those people are buying on your site
  3. Maintain (1) and (2) for as long as you possibly can (ideally, forever) i.e. long-term value proposition

Given that (1) is addressed by scale, you're left with (2) and (3).

With respect to (2), maximizing the margins, assuming you are not selling a good or service with no substitutes/competition (which, if you are, good for you), it becomes a function of either adding perceived value greater than incremental cost required, or simply subtracting cost outright.

Therefore, an attractive business model, as it relates to (2) and ignoring any other value-add feature/all else equal, will feature above average margins that are (important!) the clear, measurable result of efforts to squeeze out as much fat and friction out of the cost equation as possible, ne pas an anomaly that makes you sit there scratching your head wondering how long the music will last. And importantly, here, I'd note that this isn't just about cutting costs and being stingy about office supplies. Things like investing in frictionless UI/UX, exceptional user flow and app/web optimization are all examples of ways to maximize margins, as they improve purchase velocity. It's a big, encompassing category.

ne pas holding all else equal, you can also maximize margins by increasing incremental perceived value by an amount greater than the cost required. This, we can conveniently lump into addressing (3): long-term value proposition.

This third and final input in the formula above is the real determinant at the end of the day, and really what this all boils down to. How do you take a large group of users buying on a platform where you have optimized the margins as much as you can, and keep them buying on your platform over anyone else's, for as long as you can?

To pull this off, you not only need to establish premier, why your business needs to exist today (value proposition), but also seconde, what makes this proposition likely defensible enough into the foreseeable future from everyone else, including the Amazon's all the way down to the Spring's of this world.

At the end of the day, consumers perceive value on really just a handful of dimensions:

  1. You save them time
  2. You save them money (which then saves them time re-earning that money)
  3. You save them a headache, even if it takes time/money
  4. You provide access (by exposing them to things they never knew about, or conversely, could obtain on their own even with awareness)

Pretty much every business in existence falls into one of these four categories.

So the trick is to figure out which of these four categories your business fits in today, but also why you will continue to stay in your categories relatif to everyone else, into the future. For as long as you can.

It's easy to spot the problem right off the bat. Slotting into category (1) and (2) is largely a losing battle with the dominance of companies like Amazon and Jet. It is entirely a scale game, as even if you figure out how to squeeze every last bit of cost out of the process, bigger incumbents will likely not only follow, but then simply squeeze you out on scale/volume discounts. Operational management is a highly optimized science in today's world and the odds of you making enough of a difference in saving money or time relative to Amazon or Jet.com in the realm of shipping goods or services to your customers is highly, highly unlikely and definitely not likely to last as a competitive advantage.

This leaves categories (3) and (4), which predictably, has been where the vast majority of e-commerce startups have focused on. Examples of things that slot into category (3) and (4): curation-based e-commerce platforms that open your eyes to new fashion trends and designer items, apparel startups that save men the headache of having to pick an outfit, apps that save you the headache of piecing together a travel itinerary involving multiple flights, or even things like Turbotax where you are willing to save yourself the headache at the expense of money and process a tax form much easier.

I believe this trend of category (3) or (4) ideas dominating the e-commerce landscape is destined to continue; if not due to the simple fact that the opportunities left unexplored are far more numerous, then due to necessity as everyone figures out trying to beat existing juggernauts in pricing/efficiency wars is an expensive and, more often than not, a futile game.

The final issue is defensibility. How can we know that an attractive business model today will last into the future?

I know the question is gearing towards identifying a unique, specific
business model characteristic or trait to look out for, but I truly think the
answer is less of a trait and more of a mentality/approach; the only way this
can happen is with identifying firms that exhibit a constant and vigilant
attitude towards asking the following question: if someone else came in and
redid our business, what would they change and would the incremental value-add
be worth our customers' time to leave us? Nothing else matters. It doesn't
matter if you have the most innovative model in the world with the most unique
products. Technology changes, tastes change and nothing ever remains the same,
so to attempt to point at one thing as a determinant of success in the long-run
is a futile attempt in my opinion. That determinant should change over time, as
does everything, including the consumer.

So with all this said, it leaves us with the following characteristics that are likely determinants of an e-commerce platform with an attractive business model:

  1. Financial discipline and absolute control/awareness over costs
  2. A demonstrated focus on category 3 or 4 business models (saving people a headache or providing access/awareness), ne pas a business model that depends on pricing and efficiency
  3. A clear and defensible value proposition over other existing alternatives as of today
  4. A constant, fearless and tireless rigor towards examining that same defensibility amidst a sea of both daily and long-term change.

Find the rare e-commerce business out there that exhibits all of these qualities, and I'd bet my money on it any day. Seems a bit obvious when you write it down, but I'd also bet just as much money that most investors struggle to find one fulfilling all four.

Jonathan Brodsky

Jonathan Brodsky, SVP of Chicken Soup for the Soul, fmr Director at 1-800-flowers

Mise à jour il y a 129w · Cette réponse a remporté un Prix ​​du savoir · Voté par

Marc Bodnick, Co-Founder, Elevation Partners · Author has 699 answers and 2.1m answer views

In case you don't want to read everything I'm going to write below, this can be summarized by:

Good companies are the ones that put your happiness above their short-term financial needs.

The (much) longer answer is that this is an unbelievably complex question. There are many, many ways for an e-commerce company to have an attractive business model. I'm going to dive into a few specific examples, and then we can see what's awesome (and what's not) about them. I'm going to limit this to stores that are primarily online (so I'm going to skip some really good examples like Walmart, Henry Schein, Patagonia, and others that employ a variety of online and offline retail strategies).

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Let's start with the really big divisions in retail:

  1. The 'everything' store. This is what Amazon does, what Jet does and, in some ways, what eBay does. Jet and Amazon compete on price, selection, and convenience (both in terms of ease of interface and also ease of getting stuff fast), while eBay - which has a LOT of stuff - competes on uniqueness of product.
  2. The 'consumer needs' store. These are companies like FreshDirect (you need groceries) and 1-800-flowers (you need gifts... and any of you who forgot this over Valentine's Day are probably painfully aware of this). These companies compete partially on price, but also work hard to push quality, variety and the benefit to you of shopping with them. They do this through a variety of methods, such as marketing, customer service, UI/UX, and a whole lot more... and I'll get to some of that, below. I want to note that, while these companies do have a massive selection, they are usually aimed squarely at the mass market. You're not going to find, for example, foie gras on Fresh Direct (probably because of ethical considerations), nor are you going to find the key raw ingredient you need to make my favorite Indian dish (which we're making at home tonight), saag paneer - they don't sell paneer cheese as a stand-alone item. They do sell farmer's cheese and queso blanco, both of which are acceptable substitutes for paneer, but I like the real thing:

Beyond scale, what determines whether an e-commerce company can reach an attractive business model (i.e., return on investment)?

Likewise, you can't buy a crocus at 1-800-flowers (although you can absolutely buy irises, and I, personally, think irises are just as pretty):

Beyond scale, what determines whether an e-commerce company can reach an attractive business model (i.e., return on investment)?

The point of this isn't to slam these two great companies, but simply to illustrate a point - they're not everything stores, even in their niche. By contrast, I can find paneer and (with a little effort) crocuses on Amazon. FreshDirect and 1-800-flowers have simply made the decision that catering to the small number of people who might want to buy these two items is a waste of time and energy (and they're probably right).

3. The 'specialty' store. These are the guys who are specializing in carrying things that other people don't. For example, iGourmet sells paneer (and foie gras):

Beyond scale, what determines whether an e-commerce company can reach an attractive business model (i.e., return on investment)?

And Bulbs Direct sells crocus bulbs:

Beyond scale, what determines whether an e-commerce company can reach an attractive business model (i.e., return on investment)?

If you're being nitpicky, you probably want me to find a florist who will give me cut crocuses so that it compares apples-to-apples with 1-800-flowers' offerings. To those people, I point out that 1-800-flowers sells other bulb plants, and so it's still their choice not to carry the crocuses. And, honestly, it's a flower. I don't care that much about the flowers. I'm not the Little Prince.

It's worth noting that all kinds of stores are really specialty stores - from my beloved ski shops to Henry Schein (medical equipment, mainly for professional use) to about a million other examples. There are a lot of companies who specialize and get really, really good at what they do, and they compete on having that unique mix of products more than they compete on price. I'd put Warby Parker in this group of companies as well. Individual eBay sellers also tend to be specialists. These are my favorite companies.

4. The 'surprise me' company. I'm really talking about subscription businesses here, but I call them 'surprise me' companies because that's what they're supposed to do. They're supposed to send you something every month or two that surprises and delights you. These tend to be really specialized businesses, like the Hot Sauce of the Month club from Amazing Clubs or the Wall Street Journal's Wine Club. I love these businesses. They have recurring revenue built in to that first sale. That's awesome. They don't compete on price on a per-product basis (and much of what they sell are gifts, meaning that the person who purchases it never actually sees the product they bought); they compete on giving you more value for your gift dollar than, say, 1-800-flowers above. Also, the products sold through these companies are often not available elsewhere (or at least have a lot of the packaging changed for the sake of the gift set). One of my favorite examples of this is BarkBox. I never would have believed you could have gotten people to buy a regular surprise gift box for their dogs. I would have been very, very wrong. These companies differ from the ones above mainly because of the recurring nature of their sales.

5. The 'experiental' company. These are the companies that sell experiences. Some of them are obvious - Viator sells tours and exploration packages. But some of them don't even charge you, the consumer, anything - they're SaaS companies with an important e-commerce component. These are companies like GrubHub and OpenTable - they rely on the vendor paying them to get the right to deliver you services. You're still transacting through them (for OpenTable, you're 'buying' a reservation, and on GrubHub, you're actually buying food), but you're using these services for the experience and convenience. In OpenTable's case, that experience is a nice meal out. In GrubHub's case, it's a nice meal in (maybe because FreshDirect didn't have the paneer you wanted to buy so that you could make it yourself). These companies aren't even really setting the prices for what they sell - they're just making it way, way more convenient for you to have the experience you want.

So, now we've gone through a few of the many, many business models that are out there. I'm not going to pretend that this is exhaustive, and if you want to tell me in the comments some obvious things I missed, please do. Nor am I going to try to pay attention to the intersection of content and commerce at all right now, as that's a whole 'nother ball of wax.

Ok, first things first: now that we've determined what this part of the world looks like from way up above, let's determine what an attractive ROI is, because having spent a lot of time in e-commerce, it's often unclear what people mean by this. When I look at buying equipment for a factory, I look at how much marginal revenue that's going to produce versus what's there and if that makes sense. For e-commerce, I tend to look at my return on marketing dollars (assuming that my tech spend is somewhat fixed). Again, this is an analysis of the margin - it doesn't include any of your fixed costs of running a business, and that's not how everyone looks at this.

If it costs me $20 to get a customer and I have a gross margin of $10 on the product I sold them, I'm either going to go out of business fast or better convince them to buy a lot more from me (and quickly, too). By the way, this single fact is why, once you've bought something through any e-commerce site, you will be relentlessly dogged by their emails and retargeted ads until the end of time. You already demonstrated that you were willing to give them your money once.

Sometimes, I wish I had never bought that toaster.

Unfortunately, you have no good way of knowing what a good return on marketing spend is when you're starting out, and it's not even all that clear when you're at scale. This is just one of the crappy things you have to live with when you're in the world of e-commerce. If it makes you feel better, this is true for pretty much all businesses. So let's just pretend that you can figure out that, on average, it costs you $15 to get a customer in the first place, $2 each time you sell them something new, and that they're likely to buy 1.7 times in their entire life with you with an average cart size of $70 (these numbers are fictional, and any similarity to any company out there is purely coincidental). Figuring this stuff out is really, really hard, especially lifetime value. No one gets it right. On the acquisition side, you don't know how many other times someone saw your ad before they decided to actually click on it (and if you're paying on a CPM basis, that sucks). On the lifetime value side, well, hopefully your customers are still alive and have the potential to continue buying from you.

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Let's assume your gross margin - what you actually retain after buying the raw materials, assembling the product and shipping it out to the customer - is 30%. This means that, in my example above, you have $35.70 of theoretical gross margin per customer to play with ($70 * 1.7 * 0.3), and it only cost you $17 to acquire that customer ($15 + $2). Your return on marketing spend was 210%, meaning that you not only got reimbursed for your costs of acquiring this customer, but you also got enough to go and find another customer (you have $18.70 of profit after deducting marketing expense), plus enough to have $1.70 of profit left over. Not bad, right? You should sit back and keep marketing until the end of time!

Except, of course, it doesn't work like that. You can't have 0.7 orders from a person - it's binary. You either got the second order, or you didn't. We didn't account for any of your overhead - technology, offices, customer service, and so on. There aren't an unlimited supply of customers out there who want what you're selling. And that's fine. In fact, it's really, really good - it means that, if you're selling something people want, and it's only available through you and a few other places, you can spend money to find your initial customer base... and then just milk them for profit. Forever. You can drop a ton of money to the bottom line, buy yourself a boat, and live happily ever after. And a lot of businesses - businesses that never, ever come close to the scale of Amazon - do exactly that. These businesses focus on their core, rabid fan base that purchases many, many times per year, and are mainly looking to add customers to see if they can get other people to join that core. Here's how:

  1. They find their lane. They just become experts in whatever it is that they're selling, and they focus on that to the exclusion of everything else. One of my favorites for picking their lane is the Sausage Maker. It's a narrow lane, but for people who like making sausage, it's indispensable.
  2. They maximize their selling opportunities. Many companies do this through a mix of ads, social, and selling directly through Amazon (after all, Amazon isn't keeping that paneer I mentioned above in their warehouse - they're using iGourmet).
  3. They control costs relentlessly. In my example above, it cost $17 to get those two sales. If that was $18 instead of $17, you're no longer returning enough marginal profit to both acquire a second customer and retain any profit (in fact, they would be losing money by investing in growth of their customer base). That's the difference a dollar makes. Compound that with the cost of building a website / app, the cost of paying people to answer customer service calls, and the cost of your office space, and you can see how quickly your profit can be eaten.
  4. They are fanatical about customer service and customer experience. You don't actually need the slickest website / app to sell something. Most of the examples I've listed above have, in my mind, websites with pretty crappy visual appeal. But they all make it super easy for a customer to find what they want, they all deliver you the product in a reasonable time frame, the product comes exactly as advertised (and is generally very high quality for the money) and they all are awesome to you if you call with a complaint (even 1-800-flowers, which gets a bad rap sometimes on this front). Many of them are even doing outreach on social media to make sure that you're happy or to address your complaints as you're making them to your friends. All of this is vital. If you're not prepared to lose sleep because your customer was unhappy, you probably don't belong in this world.
  5. They never stop improving their product, process, and service levels. This isn't because they are looking for a holy grail of being the perfect store. It's because you never, ever know when someone else will come along with something better, and you have to make sure that your loyal customers - not the ones who buy from you 1.7 times in their life, but the ones who buy 10 times per year - those people have no incentive to switch. Because it's that small group of core, avid customers that actually gets you enough cash flow so that you can have higher quality problems, and those customers will jump the second they think you no longer care about them. When you're looking for a good e-commerce company, this is what you're really looking for. This is where the company proves to you, the consumer, that they're going to constantly improve in order to keep your business.

When the company starts to fall behind, they start to lose core customers. I'll give you a couple of real life examples of core customers jumping from my own life (and one of retaining):

This morning, my wife was complaining that Amazon Prime is now taking up to 5 days to reach us, well up from the 2 that we're used to (we live in a fairly rural place, so we're not in that same-day delivery heaven that many of you may be in). This has been going on for about 2 months now, and while Amazon makes it right when we complain, it's just pissing us off. Jet keeps sending us coupons to try them and get something like $20 or $50 off our first order... and the next time we need diapers (one of our staples), we're going to buy them from Jet. Amazon has pissed us off. Is it Amazon's fault? As a customer, I don't care. I just want the box to be there when I want it to be there, I pay Amazon for the privilege of it being there fast, and they're not delivering on that promise. I don't even care that Jet will probably take 5 days to get it to me, because that's my new normal right now anyway. And this happened (a very educated guess here) because Amazon is focused on where the bulk of people live, in cities, and doesn't think that those of us who actually need Amazon for staples because we live 30 minutes from a big box store have much in the way of choice.

Another example? Netflix culled one of our kid's favorite movies (Sharks of the Mediterranean - if you have a copy, please let me know in the comments!), and they seem to own all of the US rights to that movie - I can't even buy it anywhere so that he can see it. He asks for it every single day, and has been for about a month. So, Netflix, thanks for giving me a headache, forcing me to screen a whole bunch of other shark documentaries (he likes them, we like showing him educational stuff), and giving me no way to deal with it once you made the decision. That is almost the definition of terrible customer service. And, yes, we're definitely core Netflix customers - we watch almost every single day, at least once per day. And I will jump the second something better comes along, because Netflix has demonstrated that it doesn't give a damn about me. Again, this might not even be Netflix's fault - their rights may have expired or something else - but, as a consumer, I don't care.

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If you're in e-commerce, you're fighting to keep me (and people like me) at every turn. All Netflix needed to do in order to make this a good experience rather than a bad one was to either email me and tell me that they're taking that movie off (e.g., do a database dump, match up all the movies they're getting rid of with the customers who watched them, and send out a note) or, even better, put an alert on that movie. I wouldn't have been happy, but at least I would have been prepared and I wouldn't be pissed off at them now. These things would have cost almost nothing in terms of time, energy and money.

By contrast, here's an example of a company that keeps us coming back: Patagonia. I know, they're not purely e-commerce, but we live about an hour from the nearest Patagonia store and do almost all of our shopping with them online (we bought a suitcase from them in-store in December). We had an order with them that was delivered to the wrong house. Not their fault - it was absolutely, 100% the post office's fault (in our town, UPS, FedEx and the post office share routes for a lot of the year. As I said above, we're not in a population center, and most of the time, we're all good neighbors and drive the packages to the right place). So we called up Patagonia to complain... and they instantly shipped us the order again. Yes, we buy a lot from Patagonia - probably 5-10 orders per year. I don't know if they would have treated a first-time customer like that, but I'm glad that they treated us like that, and it definitely keeps us loyal and away from competing products from places like The North Face or Columbia or any of the other companies out there with similar products. Of course, it helps that we also really like Patagonia's quality, design, and durability, and we like that they give a portion of profits to environmental causes. But we would have been mega-pissed if they took this order and told us to screw ourselves, and would have been much more open to competitors. And now I'm done with my mini-ad for Patagonia.

Your question, I assume, wasn't really about how to get a good ROI on each individual sale, which is what I've focused on, but, rather, how to get a good ROI on an investment in a company. This turns out to be simple. Look for companies that are doing the above things right, and avoid the ones that are doing it wrong. The only thing that you have to add into the analysis above is the short-term affects of major physical plant and technical investments (these are controllable through 3PLs for shipping, subscription / outsourced websites, and a variety of other methods), and how long those investments will last. It's not a sustainable business if they make $10 million in revenue, have a 20% gross profit margin, and have to spend $2m per year on technology and $1m per year on everything else. This isn't insurance, where you have to look at a long potential tail of losses, or something where there will be massive pension costs or environmental costs one day. The financial analysis is easy.

Don't be fooled by silly accounting tricks - EBITDA is ne pas a real number and is ne pas a real proxy for cash flow, one-time charges that occur every year are not one-time (and this includes restructuring expense), short-term volatility doesn't indicate long-term problems - and talk to their customers directly. The best investment advice I've ever seen is a retail report where they go and do secret shopping along with financial analysis (I'm not going to name the report here, as they value their privacy a lot). They tell you exactly what foot traffic looks like, if the salespeople are happy and doing their job, and how the product line compares to that of competitors - all things that are very material to individual consumers (if you doubt the first one on my list, just remember - people, in general, want to like what other people like).

Then again, I find it easier to refer to this sentence instead of going through the entire analysis above:

Good companies are the ones that put your happiness above their short-term financial needs.

Mira Zaslove

Mira Zaslove, created B2B E-commerce marketplace, oversaw $100+M sales

Répondu il y a 136w · L'auteur dispose de réponses 369 et de vues de réponses 22.5m

I was one of the first employees of a B2B e-commerce company that sold semiconductor capital equipment. It surprised many of my friends that people purchased complex, high-value equipment online. For example, just shipping a Stepper can cost over $100k and requires a lot of coordination. Yet, I sold millions of dollars worth of equipment to clients in US, Asia, and Europe. Surprisingly, I never even talked to many of these clients on the phone— not to mention in person.

The e-commerce model is rapidly changing the purchasing landscape in nearly every aspect of our lives. Customers are increasingly relying on companies to deliver an outcome rather than merely a product.

For instance, I've used Stitch Fix (Stitch Fix (product)) to provide me with a wardrobe, rather than a specific item of clothing. The company, not me, selects and ships the clothes. The company is, therefore, providing me with a valuable service rather than just a specific piece of clothing. Many of my friends purchase their produce (Farm Fresh), meals (Munchery), and ride to work (Uber) in a similar way. They never talk to a salesperson and don't worry too much about the individual products. They care about the outcome.

Price points and delivery mediums are also changing. Subscription models, cloud, and mobile are taking over. And successful companies are leveraging insights from big data, to provide accurate and actionable insights on every click through.

To achieve a profitable business model, an e-commerce company needs to get the following things right:

1. Stratégie:

Solving a Pain Point

Everything under the sun is available some place, and few successful e-commerce companies are selling something new. Rather, most successful e-commerce sites are transforming inefficient markets. The trick is to fix pain points that exist through other sellers.

For a company to succeed, they need to understand and fix challenges customers face when buying products in their space.

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