Even established e-commerce companies can fail. Wedding apparel e-commerce retailer Brideside abruptly closed down recently after seven years, and Canadian e-commerce service provider Hubba recently closed down after ten years.
Maybe you have developed a winning business model or have found a rich niche but hidden bad practices can lead to ruin when financial pressures come. As Warren Buffet said “Only when the tide goes out do you discover who’s been swimming naked.”
In this article, we look at the 11 most common reasons why established e-commerce companies fail. This list could be the difference between your ongoing success and future failure
1. Low margins
Does your company have fair weather margins? When sales are strong and costs are stable, your low margins may be sufficient to cover all your variable and fixed costs. But what happens for example if the cost of your inputs or interest rates rise? You need large enough margins from the start to provide you with the breathing space for all occasions.
2. Low prices
One cause of low margins are prices that are too low. Many e-commerce companies compete on price. But success cannot come at any cost. Set your prices so that you will be competitive and have a healthy margin and review them regularly. Prices are also an important input into Customer Lifetime Value
Ideally, you do not want to compete on prices alone. Look for other ways to provide value to your customers. Also explore market segments where price is less important or there is less price competition.
3. Poor payment terms with suppliers
Prices are not the be all and end all with suppliers. One area that is often overlooked is payment terms. Initially most suppliers will require 70 percent payment up front with the remaining 30 percent paid before shipping. Of course, over time you can generally negotiate for a smaller percentage up front. But when you are first choosing a supplier consider the payment terms along with the price. A lower price is nice but if you are required to pay a higher percentage up front this may force you to borrow which adds to your costs.
4. Expensive funding
As we move into the world of rising interest rates, greater care is needed when considering borrowing terms. Loans can be like marriages, if you don’t take note of the finer details, the honeymoon can quickly turn into a nightmare. Is the interest rate fixed or floating? Is there a honeymoon period for the interest rate? Are there any interest rate triggers?
It is also important to match the maturity of the loan with your cash flows. Don’t use your credit card for long term capital investment. Restrict credit card use for very short-term liquidity smoothing.
5. Low Customer Lifetime Value (LTV)
A low customer lifetime value not only affects your bottom line but puts a ceiling on your ability to acquire new customers.
The most important way to increase LTV is to retain your customers for longer, especially high value customers. At the start, e-commerce companies rightly focus on new customers but as you become more established retaining high value customers needs to become a priority. Thankfully, digital marketing makes this easier. Identify your high value customers and potential high value customers and target them with specific advertising to encourage repeat purchases. Also consider a membership program or loyalty discounts to strengthen the relationship.
Another way to increase LTV is to work on increasing average order value. It is relatively easy to recommend complementary products to your customers at checkout. Bundling or bulk discounts is another way to increase average order value.
Other ways to increase LTV is to increase your prices, lower COGS, or focus on niche market segments with high margins.
6. High Customer Acquisition Costs (CAC)
Every e-commerce business dreams of “going viral” but most grow by acquiring their customers. And whether it is through SEO, SEM, PR, social marketing, etc. customers cost money to acquire.
For an established e-commerce company, it is important that you closely monitor your CAC over time. This is because diminishing returns will eventually affect every marketing channel. Over time each channel results in fewer customers per dollar spent. Maybe email or Facebook initially had a big impact for your company but at some point in time or level of spend each new customer will become too expensive.
How do you know your CAC is too high? You can track its relative performance over time but the best measure is to compare it against your customer’s lifetime value. A rough rule of thumb is that LTV should be at least 4x CAC. You should also aim to recover CAC within the first purchase.
7. Low conversion rates
So you have spent big money to increase traffic to your site but at what rate are those visitors becoming customers? A low conversion rate is obviously a waste but it also affects your CAC. Don’t waste effective marketing with a low conversion rate!
Monitor your site’s conversion rate over time and compare it against industry averages. If your conversion rate is too low then find out why. Is your website too slow or too complicated? How long are visitors spending on your site? How many are getting to checkout? How many carts are getting abandoned? By asking these questions you will be able to identify potential problems that are hindering your conversion rate.
8. High Returns
Returns are a killer for any business. Not only do you lose a sale but you also risk losing a lifetime customer. And for physical goods, there is the cost of return postage and what to do with the returned goods. Up to 25 percent of returned goods are thrown away.
For e-commerce, returns are a bigger problem than physical stores. Physical retailers in the US have a return rate of 5 to 10 percent. For online stores this increases to 15 to 40 percent. The worst product category is shoes.
A certain level of returns is unavoidable but e-commerce companies can introduce measures to curb and mitigate returns. An obvious measure is to have a clear and simple returns policy. This will give security to your good customers but will also guard against those that try to abuse your trust.
You should also have a clear policy on what you do with returned goods. For example, Amazon inspects each returned good and determines if it can be resold as new or used. There are also many third party service providers who are also willing to buy returned goods.
9. Lack of investment
You may have dreamed of bootstrapping your way to success but unless your growth is already exponential you could let your current growth limit your future growth. Whether it is through debt or equity, increased investment can help you expand your business faster. And of course in many e-commerce niches, speed is critical.
10. Poor expense management
Expense management may have been easy when you first started but as your business grows you need good internal systems and monitoring in place to ensure good expense management.
I have met with clients that have multiple subscriptions for the same SaaS product or who have ongoing mystery expenses. Improving expense management is a great way to reduce your overall costs.
The first step to improving expense management is to improve monitoring, then you can improve internal controls.
11. Poor cash flow and cash management
We all know that cash flow is like oxygen for an e-commerce company, you need a regular supply. Despite this 32 percent of e-commerce companies fail because they run out of cash. Too many e-commerce companies swing between extremes of lots of cash to not enough.
There are a lot of ways to smooth out the cash flow in your business. Sales promotions during slow periods, more efficient inventory management, and good relationships with suppliers.
But one of the best ways to manage cash flows is to monitor it better. A patient cannot get treatment if he doesn’t know when he is sick. Does your company track cash flow? Monthly reports from your account don’t count. By the time you get the report, the data is no longer relevant.
Companies need an easy way to track their cash flow in real-time. Improved bookkeeping will improve timeliness and dashboards will make tracking your cash flow against key metrics much easier.
You may have enjoyed a long period of success with your e-commerce business but remember that success is an outcome not a virtue. You need to stay on top of your business and not assume that what worked yesterday is still working today. Many of the eleven causes of failure can be avoided by tracking key related measures. The good news is that the new generation of financial dashboards makes it easier than ever to track these variables. Vigilance is a virtue and pays handsomely.