Even before the global pandemic, the world was moving from bricks to clicks. As part of a structural offline-to-online shift, online retailers have emerged as one of the driving forces in the economy in the decades following the dotcom bubble. The arrival of COVID-19 accelerated that structural shift further, with digital consumer companies emerging as one of the winners in the new normal economy. 2021 figures from Nordea, the largest financial group in the Nordics, show that online retailers now constitute 70 percent of the total global market capitalisation in retail stocks. But far from everyone that sets out to build an online retailer makes it to the top.
Staffan Mörndalis a Partner at Verdane, a Northern European specialist growth investor with a track record of helping digital consumer companies scale their operations that stretches back to 2005. Originally an entrepreneur, Staffan joined Verdane in 2006 where he has helped build companies like Boozt, MatHem and momox into some of Northern Europe’s most successful growth companies, with revenues reaching into the hundreds of millions of euros. In this article, he shares seven building blocks to help aspiring digital consumer entrepreneurs and growth companies succeed.
1. Define your recipe for success. How are you going to beat the competition? One of the fastest ways to answer that is to first decide on who your target customer is, then charge a market price and deliver a superior service compared to the competition. Of course, you will need logistics to work, secure enough stock of your customer’s favourite products and make sure customer service is both available and top notch. Follow up on your progress through Trustpilot scores, Net Promoter Score (NPS) measurements and Customer Lifetime Value (CLV) to make sure your business is headed the right way.
As customers become less sticky, it becomes more important to optimise on profit bidding instead of customer lifetime value
2. Execution eats strategy for breakfast. Without the right team in place, you can’t win. Remember that it is about who you have onboard (and how motivated your team is), rather than about how many people there are on your team. A large organisation is no guarantee of success; team quality is built and nurtured through a strong culture anchored in your company values. There is no overnight fix to building a strong culture, but as a leader it is something you always need to keep front of mind.
3. Be frugal. In our experience, very few online retailers manage to be successful without being very mindful about costs and margins. This theme runs through both fixed and variable costs, including marketing. You will naturally need to strike a balance between being frugal and attracting the best performing team, but if forced to choose between the two it is always preferable to recruit the better candidate – even if it is the more expensive choice. Settle for a smaller but better team, if you have to.
4. Invest in building a brand. Long term, the only way to maintain good margins is to have customers that choose to shop with you rather than whoever sells similar products at a slightly lower price. A brand can be built in different ways, but it is much easier to accomplish if you are able to allocate part of your marketing budget to branding so that you are not only spending on performance marketing. It is also much easier to build one brand than several, which is worth keeping in mind if you plan to make acquisitions and are considering new private label product lines. Try to minimise the number of brands you need to build and maintain.
5. Offer unique products, through own brands or at least through limited distribution supported by a strong brand. It is much easier to take out and maintain a reasonable margin from selling unique products than if you sell products sold by your competitors as well. However, be mindful that selling a private label that is simply a copy of a third party is very different from building your own brand and unique product assortment. Building a brand of your own unlocks a lot more value than the private label, low-price strategy does.
6. Just like your investors will, think through LTV/CAC (Customer Lifetime Value divided by Customer Acquisition Cost).A healthy amount of skepticism is never wrong with regard to customer lifetime value – remember that the competitive landscape and customer preferences can(and do) change. Ensure quick payback on all performance marketing investments, and invest time in understanding what marketing channels provide the best LTV/CAC ratio. Some marketing channels will tend to give you a much lower customer lifetime value, while others may produce very sticky customers (those with a tendency to return to your product or use it more frequently, which is good). Depending on what your analysis shows, you should have a willingness to go for a higher or lower customer acquisition cost depending on the marketing channel to optimise growth. Customer lifetime value can be made pretty granular by deep-driving into different customer attributes, but remember that the more expensive the product, the more customers are likely to shop around. Thus, whatever customer lifetime value you have at present is a risky proxy for future customer lifetime value. As customers become less sticky, it becomes more important to optimise on profit bidding instead of customer lifetime value. In fact, a lot of companies actually sell a high share of their orders at negative contribution once marketing costs have been subtracted. Whilst it is definitely possible to build a great company in less sticky product areas, you need to be great at profit bidding to succeed if you pursue that avenue.
7. To quote Jeff Bezos: “Obsess about customers”. It is surprising how many e-tailers overfocus on getting new customers through marketing instead of making their existing customers as satisfied as possible. Very satisfied customers are not only likely to come back, but are also likely to recommend your firm to others - so even in niches where customer lifetime value is relatively low compared to the cost of their first order, it really makes sense to make your customers happy. Customer obsession will normally also drive internal behaviour that reduces your costs. For example, a logistics operation that works very well will most likely cost less both for the picking and in terms of customer service errands, and a purchasing organisation that manages to stock up on the things that customers really are looking for will likely accomplish a better product margin.
I hope that this has provided you with a couple of nuggets of new and useful information. Above all, remember the value of staying open-minded and willing to learn new things. Online retail evolves very fast, so keep learning and be curious!