TSH 26: The 4 Stages of Ecommerce GrowthJan 29, 2024
Reading time 2 mins.
I’ve had exposure to a lot of different ecommerce businesses, and I’ve loosely put them into four buckets, with four sets of challenges.
As the name suggests, this is where you start your online journey. I’ve split this into a range from pre-startup, to making $100,00 in sales per month.
A beginner to ecommerce usually begins by wanting to start an online business. Seems logical right? Part of the problem this group faces is that they’re so eager to start the business, that they forget to put time into building a great product.
Typical challenges I see in this group are that the product isn’t strong enough, or doesn’t solve a genuine problem, but rather it’s just a ‘nice idea’. The other obstacles usually involve starting with insufficient capital, which goes hand in hand with not having a budget, and so often businesses will run out of money, and give up, even if they had a decent product or idea.
The group within Start who makes it past go, and get somewhere up to $100,000 a month, will often face the same issue with working capital, when they realise they need to keep adding product to their range to break the $100k per month barrier.
Other issues the sub $100k group face are needing to hire people to help with the increasing workload, but finding they can’t afford it, because they haven’t built a wage budget for themselves, let alone potential employees.
The other common scenario is that although it’s not all that hard to get sales up to somewhere below $100k per month once you have some momentum, going past $100k seems to be the next major obstacle, where the advertising doesn’t seem to be scaling, and things start to dry up a little, or plateau, and you start to wonder ‘what’s next’.
I started my online course, Ecommerce Start for this group of people. You can check the free webinar here, which sums up what that’s about.
The next stage of growth is what I call the Grow stage.
The Grow group has cracked the $100k a month barrier in less than 18 months or so, which obviously means that they've had some good momentum, and probably have a decent product.
The challenge for this group is generally that they’ve grown pretty quickly, even easily, and either aren’t as profitable as they would like, or they’re starting to make serious traction in uncharted waters, and need to know what to focus on next.
The challenge of unprofitability can usually be attributed to a low gross profit margin, or simply spending too much running the business, through not having the experience to set budgets that deliver a high net profit.
The opportunities presented in this group are often through selling overseas, improving conversion rate, or starting to look at a more sophisticated tech stack - some of which can become a distraction to the main goal of being hyper-profitable and starting to really generate wealth.
The Grow group will often face questions around their org chart, or who to hire next, how to set KPIs, how to run projects, and basically how to move from a Start Up to an emerging successful company.
The Scale group of ecommerce companies have hit the $5m and are stuck sub $10m per year. I think that breaking $10m per year is the hardest phase, after the $100k a month phase.
When your sales slow down sub $10m per year, you’re often starting to reach the same audiences with your ads, the ad performance has dropped a little, your social media is starting to stagnate in terms of follower growth, and you’re generally starting to wonder what’s next.
Often you’ll find companies here have dropped the ball a little with their product strategy, in terms of frequency of release, replenishment keeping up with the rapid growth, and possibly a lack of innovation when it comes to growing the addressable market.
Typical reasons for product neglect here are simply not having the systems in place to keep up with the growth, for example inventory management systems or demand forecasting tools, and the expanding team - more people can often mean more problems. At scale, small errors that may have gone unnoticed as a smaller business can start to become significant. For example, a freight increase of 2% of revenue can start to impact cash flow as well as profitability, and those 1-2 per centers may not have been the lowest hanging fruit as a small business.
$10m plus is a fun place to be. I call this the ‘Dominate’ stage, where you’re out to build your empire. I find if you’ve reached $10m by growing profitably, and at least 20% year on year, then you’re on the path to $15m. At this point you’re again in uncharted waters, but have clearly done a lot correctly - assuming you’re profitable. Profitability can dip at this level if you take your eyes off the small things, and expenses can have the nasty habit of growing as fast or faster than sales.
I believe this is the point where you want your net profit margin to actually start to increase, as you should be fixing some of your costs, while you improve your efficiency, therefore increasing profits. If your net profit is 15% up to $10m, I want it at 25% by $15m.
At this point you may be thinking about bringing your warehousing internally to save a percent or two on your fulfillment costs, and you would almost certainly be exporting, and would want to ensure your freight costs are still hovering around that 10% of revenue mark, so a freight review may be on the cards.
You’re probably thinking about a new website, in new countries - a move which can do nothing for sales but add plenty to costs if you’re ill-prepared. Brands often do this because they think it’s the next logical step, rather than being the next best thing to focus on. I always play the odds - I focus on what is most likely to increase my profits next.
Often the journey to $10m and above can be a lonely one, as you may not have many peers in the same position to debrief with, or you may be aren’t enjoying it as much as you thought you would be - you may also be a in a debt cycle where you need to keep borrowing money to keep up with growth, or inventory shortcomings, which means you may not be buying that dream house, and wondering why your bank account hasn’t hit a million dollars consistently.
For that reason the $10m Empire group often needs mentoring and peer support, and a place to come and discuss problems and opportunities, and to share ideas.
So there we have it - my 4 stages of growth. Which one are you in?
Until next week,
If you want to work with me, here's how:
1. Take my Free Ecommerce Masterclass '90 Days to Ecommerce Success' here.
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4. Shopify Start - My online course that teaches beginners how to use Shopify
5. Ecommerce Start - My online course that teaches people how to start an online business and turn a profit in less than 3 months.
6. Ecom Nation - Digital marketing for your business - Recently named Australia's best digital agency.
7. Buy my book, Shopify for Dummies
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