The Lifecycle of an Ecommerce Business: Avoiding the Black Hole

Nobody said starting an ecommerce business was easy. Despite most reports that ecommerce was going to dominate all retail within just a few years, the reality is that physical retail still holds the dominant position and that doesn’t show signs of changing anytime soon. The commerce road is littered with online brands that couldn’t solve the profitable customer acquisition equation in order to sustain growth. Diseconomy of scale seems to be more prevalent than economy of scale when it comes to building an ecommerce brand.

With that in mind, here’s a typical lifecycle that many ecommerce brands go through as they try to make it:

1) Launch

The business founders have done their market research and found an opportunity. They hustle to create the site and find early customers. These customers are tailor-made for the new site and become the prototypical heavy users who make the business economics look great and serve as no-cost marketing agents as they spread the word through social media. The lifetime value of these customers is huge and the acquisition cost is low — the business model is humming!

2) The Days of E-Wine and E-Roses

With a financial forecast spreadsheet built based on these perfect early customers, the brand raises a boatload of investor money, hires a bigger marketing team, and starts fueling growth. There are still plenty of customers that look like the early adopters, so while the viral marketing may have slowed down a bit, profitably acquiring new customers is pretty easy. Business continues to take off, morale is high, and board meetings are celebratory.

3) Flattening of the Hockey Stick

The brand has maxed out spending from their core tribe of customers, but growth demands have not slowed. As a result, the marketing team gets busy developing new customer personas to target. Unfortunately, these customers don’t have the same spending potential, as they are more price-sensitive and less avid fans of the brand. Targeted marketing to these customers also costs more as competition is fierce to gain their attention. Slowly but surely, gross margins drop, average lifetime customer value decreases, and board meetings start to get a little tougher.

4) Customer Acquisition Event Horizon

Despite best efforts, customer acquisition costs have surpassed lifetime value of those customers. The brand’s marketing folks are tweaking the spend, running multiple tests, and exploring lesser used channels in order to change the curve and inject growth back into the business. With a somewhat well-known brand established, physical stores inevitably get suggested and often attempted to find and attract even more customers. Meanwhile, one of the original strategic investors is starting place feelers out to the corporate M&A teams at Wal-mart and Amazon.

At this stage, very few online retail companies are able to avoid getting sucked into the profitability black hole. At SesameOpen, we believe that decentralizing the online storefront represents one of the best opportunities to change the customer acquisition profitability curve. By combining the best elements of physical retail and ecommerce, a new retail channel is created that can help ecommerce sites and their product suppliers boost their profitable growth.

Learn more on our Telegram group at https://t.me/SesameOpen.

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