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Three Common Errors: Observations on E-commerce Failure
As a third-party e-commerce order fulfillment provider, we are privileged to have the opportunity to closely observe and interact with hundreds of e-commerce sellers on a daily basis. Collectively, these sellers represent much of the cross-section of the online product selling space. Many, for instance, are brand new to e-commerce while others have been in business for a decade or more. Some are pursuing direct-to-consumer (D2C) or business-to-consumer (B2C) models; others are focused on business-to-business models (B2B); and still others are pursuing a blended, multi-channel approach. Products range from small and light personal care items to heavy and bulky retail fixtures. Such variety—in experience, business models, products, and beyond—provides us with an excellent window into the general dos and don’ts of the e-commerce space. In this post, three factors are explored in some depth which appear to us to commonly be associated with seller failure:
- Inaccurate projections
- Capital and liquidity constraints
- Poorly developed ideas
Of course, these observations are anecdotal in nature; however, they very much seem to touch upon underlying principles which are generally applicable.
It’s usually safe to assume that most projections are going to be wildly inaccurate. In fact, scholarly research shows that even experienced practitioners are highly prone to overestimate revenues and underestimate costs. The underlying drivers of this phenomenon are not fully understood; however, behavioral factors such as overconfidence, excessive optimism, and illusion of control, among others, likely play a role either individually or in concert. In our experience, projection errors in the e-commerce space are often related to slower-than-expected product development and sales cycles. For instance, it is not uncommon for our business development staff to engage with startups for years before they are actually ready to go to market. And the delays don’t disappear with launch; indeed, meaningful revenue milestones often take months or years longer to achieve than originally anticipated. Of course, there are sellers who are able to go from nothing to many thousands of orders per month in what seems like no time; however, they usually have either prior experience (not to mention a well-tested FB pixel), a substantial social following, or both. For those starting from scratch, projections need to be aggressively tapered down—especially for cash-planning purposes. The last thing that you want to do is unwittingly launch with insufficient capital to succeed.
Capital and Liquidity Constraints
This leads to a point which may seem obvious, yet must not be (given the sky-high failure rates observed in practice): it generally takes money to build, grow, and sustain a successful business. E-commerce is capital-light relative to other asset-heavy industries; however, plenty of costs and/or investment needs are likely to arise. Consider:
- Website development
- Paid advertising
- Product development
- Packaging materials
- Reverse logistics
- Customer support
It all adds up—and quickly. Inventory is particularly interesting with errors arguably occurring at both ends of the spectrum. On the one hand, you have merchants who attempt to avoid inventory expense by pre-selling product, following pure and/or hybrid dropshipping models, etc. Of course, this can be an effective way to get started when resources are tight; however, such approaches generally don’t scale well as product lead times, manufacturing errors, and other factors tend to drag down the customer experience. At the other end of the spectrum, you have merchants who fear stockouts and source large quantities of untested inventory—absorbing precious quantities of working capital and oftentimes constraining the ability of sellers to move forwards if turn is low. Capital and liquidity constraints are, unfortunately, part of doing business, but careful preparation, quick adjustments, and ample runway to absorb unexpected losses can do a great deal to minimize the likelihood of failure.
Poorly Developed Ideas
For all the attention paid to the development of business concepts, it is remarkable how many sellers go to market with ideas that are half-baked, at best. In our experience, poor results tend to cluster around the following:
- Niche markets that are too difficult to target and/or too small to successfully exploit
- Luxury plays backed by insufficient brand development dollars
- Poorly designed, built, and/or priced products
- Products that demand substantial customer education
- Concepts of any kind for which inadequate financing is available
Remarkably, many sellers appear to do very little market testing before launching their product(s)—especially when they are emotionally invested in whatever it is that they are trying to sell. Of course, testing does tend to come at a cost; however, it can do much to shed light on the shortcomings of an idea long before it turns into a substantial—and, perhaps, unrecoverable—error.