The real reason most ecommerce businesses fail in 2019!
There are tons of reasons a business fails, in fact I am sure you have all heard that 80% of businesses fail in the first year. That stat is just a myth, the failure rate of small business in the first year is actually only 20%.
What is concerning though, is not whether a business it able to survive, but whether it is able to thrive. Only 50% of business will get to their 5th birthday and only 30% to their 10th.
The allure of starting an ecommerce site is that the financial commitment is low, and there is the promise that you can grow it to a household name, but why are so few successful at this?
The biggest reason an ecommerce brand fails
They are not able to keep their customer acquisition costs (CAC) and their customer lifetime value (CLV) in the correct balance!
Seems simple enough, keep what you spend to get a customer lower than what they will spend with you. However, this relationship between the cost to acquire a customer and what the value they provide your store is the downfall of many new businesses and established retail giants alike.
Brands spend too aggressively on acquisition early on through paid social ads etc and then are never able to reel it back in. They become reliant on upping acquisition costs to stay competitive.
This is all learned behavior though. If we take a look at the last 5 years of ecommerce, we can see how brands became addicted to this way of doing business and why they need to change.
The history of ecommerce, and how the CAC:CLV ratio got so out of whack
5 years ago ecommerce success was… easy
The year is 2014, and we have entered the perfect storm for ecommerce. The tech was easier than ever with platforms like Shopify and Bigcommerce replacing incumbents like Magento. You did not need to hold inventory (dropshipping), and you could reach super specific audiences for cheap through social ads.
The ecommerce and entrepreneurship communities were flooded with content on how to get rich quick with a Shopify store. Videos like the examples below were commonplace, and the crazy thing was, they were true. Brands were finding wild success by finding products elsewhere on the internet and running paid social ads to the right people.
While the level of success found by dropshippers and get rich quick junkies has fallen off in recent years, the transactional and ad heavy tactics they employed would stick around.
For the last 5 years DTC took over, still employing heavy paid tactics
While the early years were focused on finding someone else's product to sell, the last two years have been dominated by DTC brands (direct to consumer). Brands that are creating their own products and marketing/selling them directly to the consumer they were built for.
After a few years, the market caught on to the fact that many of the products they were buying from these online retailers could be purchased for a 10th of the price on platforms like Alibaba and Wish. But DTC brands saw that the marketing distribution that made their predecessors so successful were still super targeted and super cheap. They just needed to increase the trust level and quality of the products.
These DTC brands started to grow, and so did the industry. Many of these brands becoming household brand names like MVMT, Allbirds, and Dollar Shave Club.
Many of these brands benefited from using social ads as their core growth strategy and brand building technique before the social ad gold rush was over. But because these brands have become the gold standard, new brands attempt to replicate their playbook which is near impossible today.
Why the winning ecommerce strategy of old does not work today
At the start of this post I introduced you to the CAC:CLV scale. Every business must maintain a CLV that is heavier than the CAC to get them. For the last half decade (and even further back on a smaller stage) brands have been keeping a correct ratio by keeping the CAC side of the scale as light as possible, without much effort put into making CLV heavier.
Focusing on keeping CPCs low and conversion rates high, brands were able to leverage social ads to drive a high volume of purchases at a low CAC. Because CAC could be kept so low, there was not much of a need to focused on the CLV side of the scale. But in 2019 that is all starting to change.
Social ad prices are becoming increasingly expensive
There are 820,000 ecommerce stores using Shopify. As the number of stores increase they are still competing to attract a similar amount of eyeballs. Demand is increasing but supply has stayed the same forcing prices to go up and up.
Between 2016 and 2019 there has been a 588% increase in the average cost per click of a Facebook ad
In 2016 the average CPC of a Facebook ad was $0.27 USD and in 2019 that Facebook ad is now costing $1.87 USD per click. That is a 588% increase in cost in just 3 years, and based on the desire to sell online, I see these prices continuing to rise.
The DTC brands that were finding success through these channels were paying 5x less per click during their growth stages then anyone will today. Yet so many brands are coming in still trying to use the exact same playbook that venture capital firms now exist solely to supply ecommerce brands with enough money to buy social ads… it is insanity. I am not the only one who thinks this way. Here is a great twitter thread about taking these options.
Social ads are not the cheap targeted way to get in front of a customer that they used to be.
Customers hate to be sold to
I am a millennial (insert your jokes here), and my generation and younger do not like to be told what to do and especially not what to buy. We go out of our way to avoid being sold to.
This is evident in our adoption of ad-blockers. The under 35 crowd is significantly more likely to have an ad-blocker installed than older generations. But ad-blocker usage is up across the board.
About 47% of internet users around the globe are using an adblocker, meaning that half of the people you are trying to reach will never even see your ad. Before your head goes to “I advertise on mobile so it doesn't matter” 25% of North American browsers have an ad-blocker on their phone.
Power is in the hands of the customer
The final reason the tactics of old are not as effective, is because the customer is more informed than they have ever been. The answers to our questions are just a few clicks away.
Need a solution to a problem? Just ask Google.
Need to know what people think of a product? Just head to the review board.
Is a product worth buying? Consult your favourite Youtuber.
Should I spend my money on this? Facetime your mom.
Because the answers to anything we need is readily available at our fingertips, we don’t need a brand to tell us. In fact, we would actually prefer the brand not tell us. We want to discover it on our own.
Today we do not want someone to sell us on a product, we want to come to the purchase decision on our own.
This is why it is so important for brands today to focus on enabling someone to decide to buy, rather than trying to sell them the product.
What do successful brands focus on in 2019? Retention!
Because of rising ad prices, increasing competition, and diminishing customer attention, it is harder than ever to keep the CAC side of your ratio really light. While you can use content and community to reduce your CAC, it takes time to build up.
Successful brands still use paid channels like Facebook and Instagram, but they know it is expensive. Instead of trying to keep CAC light, they treat it as an investment and focus more heavily on the other side of the ratio. They focus on maximizing the value of each customer they have already paid to acquire.
They use tools and tactics to increase the likelihood of a second purchase and maximize the value from each existing customer. They look to create ongoing engagement, return purchases, and customer advocacy/virality.
They focus on customer relationships and communities
The brands that are rising lately are focusing on creating brand communities. These communities are usually created as a result of producing content on a blog, Youtube channel, podcast or instagram/pinterest images. They give value away in the form of tutorials, how to’s expert advice, and reviews to establish trust like Ipsy or Beardbrand featured below.
They give the customer a way to engage with the brand that does not require them to make a purchase. The relationship is emotional in nature rather than transactional. Communities can also be created around strong rallying points such as supporting a cause like Ten Tree or 4Ocean.
These communities allow brands to keep ongoing engagement, stronger repeat customer rates, and a high amount of ongoing virality as people share both content and products. Check out my Skillshare lesson on the power of community building to learn even more, or message me for an example brand doing this well in your industry.
They keep a healthy CAC:CLV ratio
There is very little published on what a good ratio is for ecommerce, so let's turn to an industry where this ratio is the golden rule… SaaS (software as a service). SaaS companies strive to have 3x CLV to CAC. This means that every customer they pay to acquire is 3x more valuable than what they paid.
While there is no generally accepted “good ratio” for ecommerce we can use the SaaS industry as a benchmark. If you are a subscription ecommerce business you should look for a similar CAC:CLV ratio of 3x. If you are not a subscription business you need to be above 1x to be profitable and should really be striving for 2x or higher.
You should be striving for 3x higher customer lifetime value than your customer acquisition costs
When a brand keeps a good ratio, they are able to grow profitably/sustainably without needing to “make money later” after reaching a certain size. Because everyone says that aggressive paid acquisition is a temporary thing to hit a certain size, but it is like a drug. I have never seen a brand take that approach and quit their addiction.
A new ecommerce playbook is being written
The guiding principle has stayed the same, keep your CAC 3x lower than your CLV. But the playbook to accomplish it has changed drastically. Brands can no longer focus on finding the cheapest channels to push advertisements.
Instead, brands need to be focused on creating as much value per customer as possible. The current playbook for success is:
Build a community of potential customers with content
Find ways to engage with them beyond just a purchase (emotional > transactional)
Use tools like subscriptions, loyalty, and email to encourage each acquired customer to return
Offer ways for your existing customers to attract new customers for you
Is your online strategy following a dated playbook, or are you blazing forward on the new trail? Let me know in the comments section below, or let’s talk about what you are currently doing and where to improve.