This article was originally published on Pando.com
It will surprise a lot of entrepreneurs to learn that building an e-commerce business with $10 million to $20 million in revenues is not that hard. It also surprises many to learn that it’s not actually that valuable. This is in stark contrast to, say, a SaaS business, which is very difficult to build to that level but valuable when you do.
As I read this week’s board deck for one of our portfolio companies, JustFab, I was struck by one of the reasons this discrepancy exists: marketing leverage. Most retail businesses (traditional or online) have to spend marketing money to acquire a new customer at scale. Small e-commerce companies can be exempt from that – if you fill a niche and you have distinctive product-market fit with a set of customers, you can and should land them virally or cheaply. But as the business grows, you need channels of acquisition that you control beyond sitting around and hoping your customers tell their friends.
Having a product that delights the user and drives high levels of customer satisfaction (which leads to high levels of referral) is crucial for building a killer business. It separates the great businesses from the good ones at scale, and in the early years, it is often sufficient to drive growth with no need for paid media. It is an important topic, but one for another day. What demands further inspection is the fact that many companies stall out when it comes time to transition off organic growth and add paid media as the primary growth vector as they scale.
Customer acquisition costs money and this is where things get tricky in retail. What is the lifetime value of a retail customer? It’s a non-trivial question. In SaaS, for example, this far more predictable due to the subscription model.