I was with one of our e-commerce CEOs yesterday when I heard this one liner: “Retail is detail”. So simple, but so true.
All businesses involve detail, but retail e-commerce stands out. When you operate with the margins that come from selling goods vs. selling software you have to get things right.
Most commerce businesses are horizontal in nature: reselling goods made by others. These business have low gross margins. The only way to make them work is at massive scale. This is why Zappos was not profitable despite having $1B in sales at the time of it’s exit. The most extreme example of this is Amazon (who bought Zappos). They reached truly massive scale before turning one penny of profit.
Vertical commerce – where you own your supply chain and make your products – is a different story. You enjoy higher margins there, but still have a ton of details to nail.
Here are just some of the details you need to master to build a great retail commerce business:
Merchandising: Your business may have 1,000s of unique products or SKUs that you sell. Which do you stock when? Which ones are moving, etc?
Segmentation: Who’s buying? Which channels yield the best customers?
Unit economics: What are the average order values? First time? Repeat? How many purchases before you recover customer acquisition cost? What is the purchase frequency by segment or channel? What is the lifetime value?
Promotion: You might be making daily decisions about pricing and promotion. These decisions will be based on data about sales performance, inventory levels and a push to meet gross margin targets.
Purchasing: Which inventory items do you to commit to in advance? Which do you buy only as you need them (ie. you sold them)? The number of times you turn over your inventory investment is key to the financial strength of your business.
Shipping: Which carrier is best for which route, box type and weight? Which delivers the fastest? Which costs more?
Fraud: This is inevitable part of e-commerce. If you’re weak here, you’ll get lit up like a Christmas tree. You need to be super tight, in real time, about attempts to pass fraudulent transactions. The bigger the ticket you sell, the more likely you will be a target for fraudsters.
I could go on and on. The point is that commerce is a detail-driven business. So, the team needs to be made up of analytical, quantitative leaders. I have seen e-commerce businesses achieve large scale with only a controller running the finance function. Someone who sweats every detail about the financial performance of the business.
Similarly, the best CMOs for commerce companies could probably pinch hit as the CFO – they’re that numbers driven.
If you’re building an e-commerce company, do you have this analytical DNA in the company? You will need it to succeed. Retail is detail.
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