– People are treating ecommerce and business fundamentals as something new.
– Emphasize the importance of understanding CLV (previously known as LTV) and contribution margin in determining profitability.
– Marketers who hype up these concepts as if they are new, suggesting that seasoned professionals have been aware of them for years.
Focus on understanding and optimizing unit economics and cost of goods sold in order to ensure profitability on first-time purchases and compete effectively in the market.
Every week, I wake up to a LinkedIn post about e-commerce and business fundamentals as if they are something new. If I’m being honest, I’m pretty shocked that people weren’t actively aware of these things before.
The hot topics right now are CLV, which was actually called LTV for a long time, and contribution margin. In simpler terms, they answer the question: are we profitable on an order when we include acquisition costs, the cost of goods, and associated ancillary costs of fulfilling that good? Additionally, how much on average will we make back within a fixed time period to become profitable? Basically, can we reliably acquire customers at a loss and make up for it with repeat purchases over time?
Let me help you out with this one: don’t do this.
As much as everyone is complaining about how much it costs today to acquire a customer, it’s largely because everyone is still doing it the same way as in 2012 and expecting the same results. There are multiple stages to e-commerce done properly, and you better figure out what numbers make you profitable on the first purchases in aggregate. No questions asked.
If you can’t find basic math that works and are entirely reliant on a confidence interval to make you money down the road, you don’t have enough margin to support revolving customer needs and sentiment.
If you’re hearing this from an ad agency, they are going to tell you to keep creating and testing creative until you find a winner. I’m going to tell you that your products lack clear differentiation and a high enough perceived value to bring in sales at the margins necessary for your business to survive.
The main part that most people overlook is that there is more access to similar products than ever before in the market.
We’re not limited in options. We’ve got arguably a sea of the same.
Not to mention, the same factories making things for brands often sell directly to consumers as well under different brands. I can’t make this up.
So, this is where I think that marketers hyping this stuff up lately are dumb. That means that these things did not play a role in what they were tracking until recently.
Anyone talking about this stuff like it’s new and important likely wasn’t using it before or wasn’t concerned about it. Funny how business dries up for agencies and they suddenly have new magical understandings of fundamentals.
Us seasoned folks have been harping on unit economics and COG multiples for years, knowing how much can be optimized and also what you can’t control for.
They are uncomfortable conversations. That’s the way real business works.
No more is this more evident than with cpg companies selling heavy liquids. Or anyone selling anything with high variability around sizing. This is just asking for unwanted issues.
So let’s go back to the basics.
If you cannot sell an item for a first time order at a profit including all associated costs you likely do not have enough margin to compete in the market.