Profit First Ecommerce — Lessons from Growing Pela Case
I recently started sharing more of our principles, strategies and tactics in how we’re scaling Pela Case from 0 to 7 figures and now trying to go from 7 figures to 8 figures in GMV. This is meant as a compliment to that writing.
Whether you’re a new direct to consumer eCommerce brand or a large, mature brand/retailer, this is relevant for everyone in the industry.
If you’ve followed some of my other stuff, I have shared before that I don’t fully believe in highly scalable eCommerce as an approach to building these types of businesses. Today we’re going to go through the key variables every eCommerce business needs to have in order to be successful.
I’ve been working with brands and retailers on building their eCommerce businesses for more than 10+ years now and one of the more common topics I am asked about is what are the key ingredients that make for a great eCommerce business?
With the sheer volume of courses being peddled about online these days (mostly from people who’ve never actually created a “great” eCommerce business), I really wanted to share my thoughts on the subject. If I’m being blunt, there’s simply too many coaches/gurus/experts trying to make a quick buck by flashing some screenshots of sales numbers and sadly people are taking the bait and buying this garbage.
So what exactly makes for a “great” eCommerce business?
Sustainable Profit > Sales
You see, the problem with the “how to build a 7 figure eCommerce business” garbage is that they are selling on the vanity metric of sales (yes, I know I even use the vanity metrics in my own posts). After all, who doesn’t love the idea of owning a million dollar business? Thing is, I can guarantee anybody millions in sales if I had the cash to burn on ads. That doesn’t make it smart…just flashy.
This type of sales messaging bothers me even further because revenue scale actually can provide an indication of things like complexity and maturity, but big sales numbers in isolation are not enough to judge a business.
Instead I like to think of things in terms of sustainability and profit. Can I sustainably generate healthy profits while growing a physical products business? The profit part can be achieved without the sustainable part. And you can sustainably generate millions in sales without making a damn dollar of profit. Doing BOTH is fucking hard.
First, are you intent on building a sustainable business? I have to ask because there’s a ton of Alibaba to Amazon private label product businesses that are just short term arbitrage plays. This is not my jam, so if its yours, stop reading now.
We’ve been scaling Pela Case using this profit first philosophy. We don’t grow unless we can do it profitably. Otherwise, it’s just fuelling our egos instead of our bottom line.
Obvious question. How? How do we build a physical products business that is profitable in a sustainable and predictable way?
It all boils down to business model approach.
Profit First Business Models
For some reason this has eluded a lot of eCommerce startups over the last decade. There have been some truly fabulous (cough — fab.com — cough) flame outs in the eCommerce game. Powered by big venture capital, these companies scaled up to impressive sales numbers but did so on flawed business models. Their gross margin sucked. They tried to scale their way out of a shitty, low margin business model. Doomed from the start.
So what exactly is a profit first model? I think all great, sustainable eCommerce businesses have some combination of these 5 core variables:
1) Can I make a product for a very high gross margin? 70%+
2) Does the product have a potentially great repeat purchase rate? (lifetime value of a customer)
3) How costly is it to ship the product(s)?
4) Potential return rate?
5) What is it going to cost to acquire customers? (competitive landscape)
The dream would be to find a product category that contains ALL 5 of these variables. Keyword, dream.
Instead, I like to try and find businesses that have 2–3 of them and that’s a strong indication that there’s a sustainable business model to be created (profit).
Also, notice what isn’t on this list of variables? Amazing product. Strong vision. Core values. Purpose. Passion. Pick-a-fluffy-buzzword.
Allow me to unpack each of these 5 things a little further. Hopefully this helps you think about your own business, whether your a startup or already doing big eCommerce volume.
High Gross Margin
This one is probably the primary reason that most bricks-born multi-brand retailers are struggling. Their margin sucks and they are now competing in a digital landscape where those with the most margin can spend more to acquire customers. Amazon effectively beat the market to a pulp by willing to take a bath on acquiring customers because they’d make it up in the long run, something most multi-brand retailers can’t wrap their head around.
If you are going to bring a product direct to consumer in digital channels you need to have as high a margin as possible. You’re not competing against people with the same product, you’re competing with everybody for attention (audience/traffic).
Margin combined with repeat purchase rate is the dream.
Margin helps you with high shipping costs.
Margin protects you against returns.
Margin helps soften the blow of customer acquisition.
Repeat Purchase Rate
A combination of high gross margin and a strong repeat purchase rate is about as dreamy as they come. It is also incredibly rare and very hard to defend for a long time since there will be plenty of competition hot on your heels.
If you don’t have super high margin, but you can still get a decent repeat purchase rate in combination with one of our other core criteria then you have the potential to have a profit first eCommerce business.
Cost to Ship
Predictable and low costs to ship in as wide a territory as possible. Global is ideal. That’s how simple this variable needs to be.
The more expensive your product is to ship, the more friction you’re going to have in your ability to generate profits. Here’s why:
A high cost to ship item either needs high margin or you have to try and charge customers for shipping. Charging customers for shipping undoubtedly lowers your chances of converting visitors into customers.
Return Rate Potential
Just as shipping costs can crush your margins so can returns on the back-end. The last thing you want is a business with the potential for a high return rate. You’d need some pretty incredibly high margins to absorb a high return rate. A lot of fashion and apparel fall into this category of businesses, especially with eCommerce where there is no way to try before you buy without added shipping costs.
Cost of Acquisition
This last core variable is a real challenge with eCommerce now. The costs to acquire customers through the major channels has been on a steady rise every year.
You have two choices.
1- You can continue to try and acquire customers through newer, more innovative methods. This costs you time and money.
2 — You can continue to spend the money to compete for attention, which effectively leads to more margin erosion over time.
The goal is obviously to keep your cost of acquisition as low as possible relative to your gross margin. Unless you also have a great repeat purchase rate and can give up profit on those first customer orders by making your profit on future orders.