4 Strategies to Build a Strong Foundation for Your E-commerce Business
I teach a workshop on How to Build Your E-commerce Business. With e-commerce changing the landscape of the retail world, it is a popular topic with up and coming entrepreneurs and established brick-and-mortar businesses that want to expand their markets. One of the challenges I have with effectively presenting on this is that many people want to jump straight to choosing an e-commerce platform. They are eager to get their products online. However, regardless of if you are new to entrepreneurship or have a brick-and-mortar business, running an e-commerce business comes with its own challenges and considerations that need to be taken into account before a platform is selected.
You need a strategy. Your strategy will inform which platform will best suit your needs. As you begin traveling a path to building your e-commerce business, the answers to the following questions will form the basis of your business.
1. What is your ideal future?
If you were to imagine 3, 5, or even 10 years from now, what do you hope you have achieved in your business?
This is a goal-setting exercise that my mentors have recommended and I have done many times over the years. I have always found it fairly challenging. I can generally hold up to a year in my head and anything beyond that feels too nebulous. However, thinking beyond a year, pushing past impostor syndrome, and really considering what an ideal future could look like is extremely valuable.
This passage from Alice’s Adventures in Wonderland, by Lewis Carroll, always comes to mind when I am struggling with goal setting:
“Alice: Would you tell me, please, which way I ought to go from here?
The Cheshire Cat: That depends a good deal on where you want to get to.
Alice: I don’t much care where.
The Cheshire Cat: Then it doesn’t much matter which way you go.
Alice: …So long as I get somewhere.
The Cheshire Cat: Oh, you’re sure to do that, if only you walk long enough.”
If you don’t have a goal, it doesn’t matter what you do. You will end up somewhere. Why not make sure it is somewhere you want to go? Goal setting and thinking about an ideal future is hard and can feel intimidating, but it is important for making sure you are going down a path that you will be happy with.
Some e-commerce specific questions you can consider as you imagine your ideal future include:
- Are you selling the same products?
- Do you have a physical location?
- Are you selling internationally?
- Are you selling B2C or B2B?
- Do you have relationships with other wholesale retailers?
- Where is your product being manufactured?
Your ideal future might change over time, but, in connection with your e-commerce strategy, it will help you determine what the need-to-have features of the platform you start on so it can support you as you grow. In the larger scheme of your business, it also gives you parameters for making decisions that will help you reach those goals.
2. How will you measure progress?
If you know where you want to end up, how will you know you are making progress? The idea is that you can’t improve what you can’t measure. You need to identify your Key Performance Indicators (KPIs). These are metrics that tell if the work you are doing and the experiments you are trying are moving your business in the right direction.
Choosing your KPIs
Your KPIs will vary depending on your industry and business. Klipfolio is a great online resource for examples and how to measure them. Some example KPIs for an e-commerce business might include:
- Returns – How many returns do you get per month? Per week? What is an acceptable number?
- Average order size – Do larger orders improve your profit margins? If so, how can you encourage additional purchases?
- Conversion rates – How many people who visit your site, end up buying something?
- Cart abandonment rate – How many people make it through the full checkout process, but don’t finish the transaction?
- New customer orders versus returning customer sales – How many of your orders are from new customers, and how many are returning? It is easier to sell to returning customers so how do you get them to come back?
These are just a few of the KPIs that you can set to monitor. Your KPIs will give you information on how people are using your e-commerce website, if they are doing what you want them to, and show you areas that you need to change or improve.
3. What is your business plan?
Many early-stage entrepreneurs cringe at the thought of writing a business plan. Many don’t write one at all unless they are seeking bank funding (where they have to submit one). The problem is that the traditional business plan is a 40-page behemoth. They are overwhelming and can feel like a distraction from the actual building of your business. However, they can also be powerful tools in forcing you to think through what you want to do and how you are going to do it.
To that end, don’t dive into the business without a plan. Unless necessary for funding, the brick business plan is probably not necessary, but try something like the Business Model Canvas. It is a great way to think “just enough” about what you are endeavoring to do, without taking up an enormous about of time and effort. It is a one-page snapshot of your business that forces you to really think through the following:
- Customer Segments:
Who are the customers? What do they think? See? Feel? Do?
- Value Propositions:
What’s compelling about the proposition? Why do customers buy, use?
How are these propositions promoted, sold and delivered? Why? Is it working?
- Customer Relationships:
How do you interact with the customer through their ‘journey’?
- Revenue Streams:
How does the business earn revenue from the value propositions?
- Key Activities:
What uniquely strategic things does the business do to deliver its proposition?
- Key Resources:
What unique strategic assets must the business have to compete?
- Key Partnerships:
What can the company NOT do so it can focus on its Key Activities?
- Cost Structure:
What are the business’ major cost drivers? How are they linked to revenue?
You should have answers to these questions before you go too far down the rabbit-hole. Thes answers to these inform all of your decisions going forward. They will help you decide things like which e-commerce technology you start on, the types of advertising and marketing to invest in, and the roles you will eventually need to fill in your company.
4. Can your product make money?
You have probably heard the saying, “Turnover is vanity, profit is sanity but cash is king”. I cannot stress enough how important it is to create a cash flow spreadsheet and run your numbers. Your business cannot run on hope for long. You need to know if your business can make money eventually. Otherwise, you need to adjust your business plan and identify alternate revenue streams. The business might not be immediately profitable, but a cash flow spreadsheet will help you set revenue goals (some of which will connect back to your KPIs) and you can get a baseline.
In its first iteration, your cash flow spreadsheet is going to answer some fundamental questions that will impact how (and IF) you move forward with your business. Some of these questions might be:
- Where is your cash coming from?
- How much profit can you make with your expected revenue and costs?
- How much do you need for 3-6 months of fixed costs?
- What is your cost of goods sold? (Beginning Inventory + Inventory Purchases – End Inventory = COGS)
- How much do you need to put aside for taxes/GST?
- How much do you need to implement your marketing plan?
As your business grows and evolves, you should look at it often and update it as your revenue and expenses change.
Before you pick an e-commerce platform you need to know where you want your business to go, how you are going to know if you get there, have a plan for the steps you are going to take, and a finger on the pulse of your financial situation. These are vital in setting up a strong foundation for your e-commerce business and give you tools to make informed decisions about how you set it up and which technologies you choose.