In Ecommerce, Beware the Death of a Thousand Cuts

Some businesses fail in spectacular fashion. In the last few months alone we have seen the implosion of several financial and technology companies as it has become clear their business models cannot survive outside of a ZIRP environment. When it comes to ecommerce, this is a rarer occurrence. Not because the average ecommerce business is so resilient, but mainly because the things that will kill you are both myriad and mundane. Call it the death by a thousand cuts.

Ecommerce businesses function by "selling stuff online". But behind this simple phrase hides a world of complexities. From developing digital experiences, acquiring and converting traffic, and fulfilling orders, there are many levers that need to be set correctly to make sure your business is profitable. In practice, it is easy to make small mistakes that compound like a form of malevolent interest.

Let us start by considering the website or app itself, and the brand proposition that goes along with it. While costs of development are relatively low given the prevalence of platforms such as Shopify, this does not mean that it is easy to identify a niche and create an appealing customer offer. Without a strong understanding of your customer, you can easily find yourself in a never-ending cycle of redevelopment as you struggle to find market fit.

Even when you have decided on your positioning, product and pricing are of paramount importance. If you are not able to compete on the breadth of assortment or competitiveness of offer, you might drive traffic, but you will not generate the sales volumes required to sustain your business. This is where many "we focus on popular brands/items" retailers set themselves up to fail.

Marketing is another minefield, as while theoretically everything in ecommerce can be tested and measured, in practice this is only the case in the most sophisticated businesses. With an almost infinite amount of permutations from a creative messaging, ad format, audience targeting, buying and bidding, and attribution perspective, it is easy to end up spending a lot of money without realising a meaningful return on that investment.

When you are making sales, there is also the question of fulfilment. Whereas in a retail environment the process is generally straightforward – the customer walks out with the product – in ecommerce this can be the start of a long and arduous journey. Understanding how to define reasonable promises that are still competitive, and managing to costs associated with those are critical. Free delivery might sound cool, but it can quickly sink your P&L if you are not careful.

The longevity of many ecommerce brands can seem like a testament to their success, but it is more often due to the nature of digital investments. Unlike a flagship store you are not wedded to a non-negotiable one-off investment. However, in its stead we find many more granular financial decisions that can be just as costly in the long run. While one can argue about the virtues of sudden failure vs. a protracted decline, we should not fool ourselves that the eventual outcome is any different.

– Ryan

Cover photo by Zoran Borojevic.