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Common Mistakes: Observations on E-Commerce Failure

 

 

 

In 2013, I acquired IronLinx Fulfillment (www.ironlinx.com)—an e-commerce-oriented pick, pack, and ship operation based in Kennett Square, Pennsylvania. Since that time, my position at the firm has afforded me the opportunity to closely observe and interact with hundreds of online sellers on a near-daily basis. Collectively, these sellers cut a wide swath through the cross-section of the e-commerce space: many are early-stage, but quite a few are well-established; business models range from direct-to-consumer (D2C) to business-to-business (B2B); and product foci run the gamut from small-and-light to large-and-heavy, from low SKU-counts to high SKU-counts, and from low to high value. This ongoing exposure has and continues to provide me with an excellent window into the dos and don’ts of online product selling. This note explores the factors which appear to me to be most consistently associated with seller failure:

  • Inaccurate projections
  • Capital and liquidity constraints
  • Poorly developed ideas
  • Practitioner limitations

Of course, as these conclusions are drawn from an imperfect dataset by an imperfect observer, their broader application is questionable; however, given the absence of solid research-based alternatives, they seem to represent a viable starting point for both consideration and further exploration.

Inaccurate Projections

A cursory review of the literature on behavioral corporate finance suggests that practitioners of all kinds are predisposed to severely overestimate revenues and underestimate costs when projecting future financial outcomes. Alleged reasons run the gamut from overconfidence to excessive optimism, the illusion of control, some other source of irrationality, or some combination. For early-stage firms, inflow misses often come from slower-than-expected product development and sales cycles while outflow projections frequently underestimate the cost of customer acquisition as well as overlook non-core costs such as those related to logistics, returns and exchanges, etc. For resource-constrained firms (which is the case for most startups), poor projections can easily prove fatal as they tend to result in the sudden and unexpected disappearance of material lengths of an already short runway.

Capital and Liquidity Constraints

This leads to a point that may seem obvious, but which remains elusive for many entrepreneurs: it generally takes quite a bit of money to build, grow, and sustain a successful business. Though e-commerce sellers tend to need neither as much working capital nor as much investment capital as do traditional operations, they still need ample amounts of both to maximize the likelihood of success. Of course, ample oftentimes translates to borderline inadequate (at best) in early-stage scenarios; therefore, the deployment of capital in both of its forms must be carefully managed to minimize errors which can render a firm unable to remain a going concern. From my experience, a common error committed by e-commerce sellers is to allocate an excessive amount of capital to inventory (generally due to exaggerated projections, unmanageable SKU counts, and/or a misplaced desire to reduce unit cost before a market has been materially tested). Countless former clients of mine have sourced container-load quantities of unproven products which ended up in liquidation after months and sometimes even years of non-movement. At the extreme, one former client shipped in more than one million units of an unproven product—of which only a few hundred were ever sold. Mistakes of this magnitude should never happen.

Poorly Developed Ideas

For all the attention that seemingly goes into the development of business concepts, it is remarkable how many product sellers go to market with ideas that are half-baked at best. 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 minimal brand development dollars
  • Poorly designed, built, and/or priced products
  • Products that demand substantial customer education
  • Concepts of any kind for which adequate financing is unavailable

Not all ideas obviously fit into these (or other) problematic categories; however, through careful market testing, the likelihood of extreme errors can be substantially mitigated.

Practitioner Limitations

Ignoring the upper echelon of online platforms and large brands, e-commerce seems to attract a fairly weak field of practitioners (though there are most certainly exceptions). In no small part, the social pressure to conform and pursue traditionally-accepted career paths is responsible for keeping many highly-educated, talented, and interested people from becoming product sellers—thereby creating a void which is often filled by those with little professional training, few resources, and get rich quick and/or leisure-centric mindsets.