The E-commerce Leader

[00:00:00] the other shocking thought is if you want to expand and grow the business, a lot of people will, everyone will, I guess, generally buy a business in order to grow it. Right. If you want to grow it, if you want to double the. Revenue in, it depends what you can do with the profit margins, but let’s assume the profit margins are about the same.
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[00:02:03] okay, let’s go on to number six. So these are more marketing criteria than financial ones, um, but they’re obviously tying very closely.
[00:02:10] The first one is it’s not really a criterion. It’s not KPI. You can’t put a number on it, but the product category, I think some categories you need to avoid. Clearly for me, electronics is one that from personal experience, I know can have a terrible defect rate. Plus it’s highly competitive. And you’re competing directly with the Chinese, uh, big factories.
[00:02:28] So that’s what I would definitely avoid. Everyone needs to think about that. I mean, I think that, you know, what I’ve just said, like strong competition and especially strong, low price competition is one where you might want to think about that. And then so the supply side issues that are known to be pretty bad, doesn’t mean nobody should buy electronics, but I would tend to avoid it because it’s hard to assess that stuff.
[00:02:50] Let’s let’s keep it in the KPI frame though, and you can put this in the KPI frame, which is to ask the question, um, what is the, what are the, what is the performance of the category in which you’re selling and is that performance on an upward trend downward trend? Is it, you know, you maybe use the Boston consulting matrix, you know, uh, as a, as a, as a category, is it in cash cow mode or is it, you know, Disaster and so it’s not just a business level KPI.
[00:03:23] It’s the category level KPI. Maybe it’s the way to look at that 1. that’s an excellent question. I think that’s a different question, but I think it’s also really important. And I neglected to put it in our list. So you’re quite right. I think if something is in a downwards trend, that’s bad. I mean, I suppose the product category for me is.
[00:03:40] Is I guess you got to split it into two bits then number one. Is it downwards or upwards trend? Which is absolutely critical you’re bang on and it’s the boston consulting matrix 101, which I missed The other one though is certain types of uh products come with built in problems. Um, so you might for example They’d supplement, you might avoid legal issues, um, like, you know, which isn’t a KPI, but it’s, you can’t put a number on it so much as the risk of it, the business being a hundred percent suspended can be quite high.
[00:04:07] Like if you’re selling, um, CBD products and an unclear legal environment, FDA stuff, whatever, it’s hard to put a number on that. But again, you’ve got to decide whether you, you have a, an expertise to deal with that situation. Let me make the counter claim though, that, um, you know, If, if, uh, everyone wants to go to the green pasture of the cool category where it’s easy to make money, then you’re going to have a tragedy of commons there with a lot of, you know, a lot of blood in that field.
[00:04:38] And if you find a backwater product category that maybe does have some structural barriers to get into, maybe you have to have a licensure or, uh, some kind of FDA approval or something like that. A business that has such, uh, you know, kind of, uh, gates and, uh, hurdles. Um, even if it’s maybe even a, you know, a backwater category that’s not sexy, it doesn’t grow fast, but there’s a consistent demand for, uh, you know, for product in that category.
[00:05:07] There certainly might be interest there because, um, all things being equal, if you know, the fidget spinner category is the place you’re thinking about, um, you know, having a product, you’re probably marching to a big, huge gladiator ring and you’re not going to be the biggest gladiator. You know, I’d rather be in a small backwater where you can be the leader of a small niche that’s so small, no one wants to go into it, you know, or stuff like that.
[00:05:37] I’d agree with that entirely. So I would say, I mean, that again brings us squarely back to the Boston Consulting Group Matrix, which you’ve mentioned rather than me. I’m not the guy who’s obsessed with that, but I think it’s so valuable and you’re quite right. I should have. I can’t believe that I didn’t include it.
[00:05:49] But basically, I guess what you’re saying is you can either be a big fish in a small pond that is growing. That’s a terrible metaphor. Explaining again, big fish in a small pond, On that growing, which is your star business, which is ideal. Or you can be a big fish in a small pond that isn’t growing much, but, but you are the big fish, so it’s a cash cow.
[00:06:06] But either way, that brings me to the next KPI, which is measurable percentage, which is your market share of your product or products, depending on how widely spread your products. I’ve got a bigger business, which is in multiple micro markets. You’d have to do this by market, but to simplify it down. The market share as a percentage of the revenue in the market as a whole you’re in if you’re on amazon It’s fairly straightforward.
[00:06:28] You use the tools to see what the market revenue is per Cluster of keywords to put it in simple terms And then what percentage of that does your business have and again if your business is, um in a shrinking category And it has small market share. It’s what’s known technically as a dog in boston consultant group terms And you should sell that if you own it And if you’re buying, you should not buy that.
[00:06:49] And most Amazon businesses are in that category in my experience. Um, which is to say that they have maybe 3% of a big market that’s stagnant. Well, that’s highly unattractive. And normally you’ll find these market criteria are reflected. So the numbers rather reflected in the profit and loss. So the profit and loss is low profit.
[00:07:08] And then it’s going down year on year. That’s probably because you are in a category that isn’t growing. Plus you don’t have anything special when you’re competing against the world and his friends. Um, many of whom have pricing power that is beyond your power. The, the, the Chinese guys will be able to price lower than you.
[00:07:24] And then other brands, household brands will have price higher than you. So market share dominance or percentage of market share. I’ll also just compound the drama there, which is to say that in many marketplaces and platforms, and this is true, sort of universal for e commerce because Google is the top level dynamic that I’m describing here in a moment, which for all sites, whether it’s a platform or your Shopify site.
[00:07:49] Um, and, and this is the idea of like a winner take all or winner take most. outcome. And there are many, many contexts in which winner take most outcome is reality. And so, so, for example, on amazon. com for the U. S. Amazon. It’s, it is the case that winner take most is a very, very common thing. Now, if you’re in a massive category and you’re like, I’m 19th, but I still make 3 million a year, that’s cool.
[00:08:18] But as the market dynamic changes and the winner continues to take most, it’ll be a corrosive place to try to be the 19th position person. Um, and, and, uh, and, and in Shopify, it’s the same dynamic because Google will be the arbiter.
[00:08:38] Um, and so if you’re buying a business where you’re the 19th competitor and, um, you know, that seems okay, then just realize that as the dynamics change in the marketplace, you certainly could be squeezed more and more and more. Um, and the, uh, the better position in my mind back to this top level idea. A moment ago is to be the leader in a small category.
[00:09:02] Definitely. Well, you guys are an absolute case in point. It’s not an Amazon focused thing, but as you say, Shopify, we’re all vulnerable to huge platforms, [00:09:10] basically Google or, um, Amazon and possibly Facebook or, you know, YouTube. These are huge platforms. I’m YouTube’s Google anyway, isn’t it? And you have dominated an obscure niche.
[00:09:20] I mean, haute couture for dolls clothes, how niche is that? And you guys have dominated it and it’s been a successful business for you for what, over a decade now. And you’re a classic example of what you want. That’s a very viable business in my opinion, because of that. Kind of market positioning and most businesses, especially the ones I see on Amazon are exactly what you described.
[00:09:40] They’re like 19th in the row. If the trend has been up in terms of the market growth, you may have seen your absolute revenue grow. And this is one place where, by the way, revenue is important, but only in a specific way. You may have seen your revenue grow in absolute terms of year and year for ages, whilst simultaneously losing market share.
[00:09:59] And that’s a very dangerous place to be. You’re going to be a bit like the white equity running over the cliff after the road runner looking down and seeing nothing. And then you disappear. If you are 19th and you want to be a seller, then the obvious place to sell to is one of the top 18 sellers ahead of you.
[00:10:20] Trade buyers are always the best people to buy from, especially your competition, direct competitor knocking on doors saying, I want to buy your business is always your best day. Because they’re always in the mindset of rolling up their category. And if they can roll it up and consolidate four or five, six of those businesses and become the market leader, then that’s their path to success.
[00:10:39] And, um, you know, so, I mean, there’s a way to sell a business, even if you’re 18. Um, so, okay, this is great. Okay. So let’s keep going. So I believe we’re on number nine and then, uh, but we’re going to have a 10th. Somehow we have nine and 10th. Yeah. Well, that’s because we put in the performance of the category as in the market science, you know, is the market growing, which you, you introduced state Jason, quite rightly bringing the BCG matrix back into things.
[00:10:59] So the last two are very, very. Familiar marketing metrics, which hopefully most digital entrepreneurs obsess over and if they don’t, they probably should. But as a buyer, I really look for this number. 1 is the conversion rate. Um, because if you’ve got a high conversion rates, whether it’s on whichever platform you’re on relative to.
[00:11:18] The platforms on Amazon, I would look for 20 to 30% conversion rate in most categories, which is quite high, but very doable on Shopify. It might be a 10th of that depending on the category, whatever it may be. So, however, if that’s relatively high, then what I can do as a growth mechanism is to put more money into traffic and, or, you know, grow traffic assets, whether that be Google based blog, Amazon ads, better SEO on Amazon or on Google, et cetera.
[00:11:43] You’ve got the nine months of traffic, Jason, that you’ve created still fantastic list, then those will all convert into sales. And that is therefore quite probable. I can grow the traffic and grow the profits at the same time. Whereas if the conversion rate is low, it makes everything in the machine hard to grow.
[00:12:01] And basically means that it’s a very unattractive business for me. Um, so there you go. So the conversion rate is really, really high on my, my agenda. Okay. This is an interesting one because, um, it’s, it’s fascinating to think about. I think I have a little bit of a contrarian view on this one, like I did on the revenue versus profit.
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[00:13:04] because, uh, for example, um, if your conversion rate is, let’s just say there’s a business that has a million dollars in sales, a hundred thousand dollars in profit, and it has, and it’s all Shopify business. So it’s not on Amazon. It’s all Shopify. And I see that business and it’s got a 0. 5%. Conversion rate, the industry averages 2%.
[00:13:27] So it’s got a negative delta there, you know, point a percent and a half negative, but it’s still got 100, 000 in net profit. I’m thinking to myself, the 1st thing I’m thinking to myself when I. Make that deal is I want to buy that business, um, immediately, because if you can get that conversion rate up, which there are many ways to do that, um, then you’re going to increase the value of that business immediately.
[00:13:52] I mean, those are some things that’s the kind of business where you could change the, the value of that business in two, two days, you know what I mean? That that’s not because, because of the conversion rates so low, um, you know, that there’s structural reasons why that happens. And, um, so if it’s real high, it means the business is optimized.
[00:14:13] The traffic that’s being brought to the site is converting well. And the seller of that business would know that. And it’s kind of be like saying, I’m using all the tools in my toolbox. And as the, if the seller would say that, um, and then the buyer would come in and say, wow, I don’t have any other tools I can bring to the party either.
[00:14:34] But if you came into it as the buyer and you said, man, this seller is not doing like 14 things that I know are going to improve the conversion rate. I need to buy this thing right now. Yeah. Not mentioned the 14 things. Yeah. Not mentioned. Yeah, that makes sense. I mean, I guess what we’re talking about, it’s interesting that this is so personal.
[00:14:53] I mean, I would say a couple of things that strike me. One is that. You’re more focused than I am on buying a business that has more growth potential, which I think is very intelligent. Maybe I’m just too risk averse or I’m, I’m sort of wanting to step into stream of cash and, and less wanting to get my hands on it.
[00:15:12] And that may be personality thing. It may come from the fact that you’ve done a lot of acquisitions. So you’ve seen how to do this. I’ve seen a lot of businesses. on the Shopify side that have a low conversion rate that we change. With technical structural, uh, site changes. So, you know, I mean, there are things that suppress conversion rate on Shopify.
[00:15:35] Now, Amazon’s a whole different marketplace dynamic, you know, set of differences, but, but on Shopify, there are things that occur on the website itself that suppress a conversion success. And so once you, and I, I work with clients every day on this. So once you see those things and you know them and you, you can identify how a site is being hampered.
[00:15:58] And it’s success, uh, because of structural technical issues, then you’re like, uh, let’s fix those, you know, and then it’s kind of, you know, it’s like, it’s just work a day type stuff, like being a plumber, seeing water everywhere. Yeah, it’s something wrong, you know, so yeah, so I mean, it’s an interesting issue though, and I, I do agree that it should be a key kpi that you look at.
[00:16:22] It could be that your kpi would be a lower end of. You know, not ridiculously bad, but the lower end of my mood would be to look at the upper end. See, this again comes down to sort of almost a philosophy of business buy. And this is true for investing in the public stock markets as well. Do you want to buy a, um, A reasonable business for a bargain price or do you want to buy a great business for a medium price?
[00:16:45] And I guess the there’s no right or wrong answer to that. It comes down to having some clear criteria and having I guess above all to the point you’re making the generic point is Having a really clear idea of what you’re competent to change and what you’re not competent to change and we all have different Criteria for that.
[00:17:05] I mean, personally, I would rather buy businesses that don’t require me to change too much of the operational side, not because I’m not confident in that, but because I want to focus on acquiring businesses and bolting them on as a way to grow them rather than change the operational side. But it does make me think that I could be looking at this the wrong way.
[00:17:22] So, I mean, there’s, there are lots of ways to cut this. Here’s the, the thing that you’re under, here’s the thing you’re learning. When you look at conversion rate. What you’re learning is whether the traffic that’s coming to that product page is a good fit for the item. Now, on Amazon, as a seller, you don’t even think about that dynamic.
[00:17:46] You never think that thought. Is this traffic the right traffic? Because it’s all Amazon traffic. But as soon as you start selling on Shopify and you’re the one driving the traffic from your various marketing activities, then you have this traffic to product match that is definitely, um, Explained by the conversion rate and that’s just one aspect of the conversion rate working or not is whether it’s good traffic Uh, not just cold traffic or hot traffic, but like the right customer or [00:18:20] prospect, you know um and and so those are the things you’re Starting to understand when you see the conversion rate inside a shopify site in particular And so, you know, if you buy a business that has a really low conversion rate, what you’re saying is the traffic that’s showing up is not the right buying.
[00:18:38] It’s not buying traffic for this product. It’s not the right customer. Um, and whether you have the trade skill to make that change happen to find the right customer is really the heart and soul of you creating value in the business. And the thing is you’re, you’re talking about much more sophisticated control of the entire dynamic.
[00:18:59] I mean, what I see on Amazon businesses a few years ago, a lot of them had terrible listings, which is the, you know, the end of the funnel you’re talking about. I knew we don’t control the traffic much on Amazon. So in that case, a few years ago, changing it. Yeah. It’s the same idea. If you saw a business that had horrible, no bullet points, horrible description, bad product images.
[00:19:19] And they’re still making money. Then you say to yourself, gosh, I can affect the conversion rate by doing these. That would absolutely be true. I have to say that I haven’t really seen that. I’ve seen businesses with horrible PNL and really amateurish, terribly, even not exactly fraudulent, but some of the numbers were just terrible.
[00:19:36] I mean, I thought, well, trailing 12 months has a specific meaning. It means 12 months. And they gave me 24 months and tried to pass it off as 12 in one case. I’m like, that’s ridiculous. And yet I’ve not really seen people with awful Amazon lists. Things that’s, it’s interesting that in 2023, that’s no longer very common, unfortunately, otherwise you’re right.
[00:19:53] I would, I would leap on something with terrible listing that was still converting. They’re probably out there though. And if you’re in the Shopify arena, then there are so many more parts of the puzzle that are under your control that to your point with your skillset, then it makes so much sense. It’s too well, it’s too well known a practice now on how to optimize, uh, Amazon, uh, you know, it’s shopping product, but, but on, but on the wide world of small businesses, Shopify or not, if you see a business for sale and it has a garbage website, um, and they don’t sell on Amazon and they, you know, what, you know, it’s like, what are you buying?
[00:20:30] Well, if you’re buying a business, it hasn’t even broached the. e commerce area, then, you know, I mean, these are the things to look at. I mean, this goes way beyond just evaluating an Amazon business opportunity, you know, and, and the real, in my view, the real opportunities, the real money is to find a good business that has not, you know, kind of elevated itself to those obvious next steps.
[00:20:56] Does it have an e commerce, uh, you know, it’s a presence on, on let’s say Amazon. And then beyond that, does it have an omni channel? e commerce present with its own Shopify direct to consumer site and those things those are the elements you bolt on to a Business you might buy that adds, you know tremendous value and they’re not that’s not rocket science.
[00:21:15] That’s pretty straightforward business Uh effort these days for e commerce operators, you know, that’s true. I mean, I guess uh, it yeah this is all about having a plan to grow the business and one thing as a business buyers is Hopefully it’s becoming very, very clear from my discussion is like you have to have a particular plan for growing it.
[00:21:36] And that’s why I think you have to have very specific criteria because the things that you would have as trade skills that are incredibly reliable and you’re very confident and are very different to the ones that I would have for anyone else buying. Um, One other thing I just want to mention is a simple KPI too, because these are deep waters we’re in is again, you know, relatively simple, but then it’s probably a lot implied by which is your pricing power, which I know you’ve written the entire book about.
[00:21:57] So certainly suddenly you’re expert and Jason and think about and your pricing power relative to direct investors is something again, I find Amazon sellers tend not to think about, they often think about their pricing power 6 months or 12 months ago. Um, Which isn’t going to really help you. I think you’ve got to prepare compared to direct competitors.
[00:22:15] Don’t take the average for, you know, helium 10 or jungle scout, um, results for a particular market, um, keyword because that’s just too general. But if you look at your specific direct competitors, can you price higher than them? And what percentage can you price higher? And again, that’s really important because it has a very direct impact on the bottom line, which is the bit that I really care the most about.
[00:22:35] That’s a great question. It’s a great KPI. And the question, you know, to the prospective seller would be, when was the last time you changed your prices? Or when was the last time you tested your prices? And if they say, we haven’t for years and years, then it’s sort of an open question as to whether they have pricing power or not.
[00:22:53] Um, but it’s a very, very interesting question because as Charlie Munger said, with, um, With, uh, evaluation of businesses, um, pricing power is the kissing cousin to franchise value. I think it was Warren Buffett who gets quick claim for that quote, but it’s Charlie Munger who talks about it a lot that I remember.
[00:23:09] And that’s in the situation, for example, like Disneyland, he likes to use this example where it’s like Disneyland charges, let’s say 99 for a one day pass. If they say it’s 197 tomorrow and there’s no downturn in demand, then they have a license to print new money and have a new valuation for their business.
[00:23:31] And those kinds of opportunities when you’re looking to buy a business, I mean, that’s definitely one of the things you want to look for, is could you just double the price? And everybody would say, well, that’s ridiculous. There’s never a situation in which that would be true. I don’t know. You know, stranger things could happen.
[00:23:52] So, um, it’s something to think about. Well, I’ve certainly, uh, not so much in direct e commerce examples, but I’ve seen SAS businesses that are acquired in quite a lot of the Amazon focused SAS businesses, software as a service have been acquired by some pretty big companies recently, and two or three of them have literally doubled their prices.
[00:24:10] They will have lost market share. They will have lost revenue. The question remains whether that it’s actually profitable for not, for me, it. I have to say based on one metric and a little bit of a sense for the world there. It’s my intuition is it’s desperate and it’s because they’ve got money guys going pay us our money back Investors wanting a return and and um lenders wanting their money back Whether that’s true, I don’t know Whereas if something like disney chose to do it, they might do it for the same reason But they’ve got a lot more pricing power.
[00:24:40] So it’s a good question I have literally seen I have even advised the client to price so they didn’t go out of stock In crazy periods, like in, in Q4 in whatever, 2020, and they literally did double the price. We weren’t attempting to do that. We were just trying to stay in stock, but when the demand is extremely high in limited periods, you can sometimes double the price.
[00:25:01] But I think that’s another thing I would say to any business owner trying to sell the business. You cannot take. What is in your mind is the price of your product, meaning the best it ever sold for six years ago or six months ago. And think of that as the price or the revenue or the profit. You have to look at trailing numbers and they’re normally not as good as you want it to be.
[00:25:21] And that’s the difference team. You know, where we started our conversation with either keeping, um, objective profit and loss numbers, um, as well as, um, a feeling of intuition about your business because the intuition is often out of whack, unfortunately. Well this is a great list, man. It’s very interesting conversation that gives it a lot of food for thought to think through how to approach the, uh, the purchase of business.
[00:25:44] And I love it. It’s very, very relevant. And what strikes me from today’s discussion is it very much was a discussion, not just, oh, here’s a list. And I think that there is so much, um, personal strengths and weaknesses and preferences that come into this, that you, you just got to go through the process if you’re going to want to do this.
[00:26:02] And the earlier you do this, the better that you got to think about having initial target, STE size, profit percentage, profit trend year on year. Profit multiple that you might expect to pay or, or get, if you’re selling the business working capital requirements, but I think about the product categories that you will avoid or go into the performance of the category.
[00:26:22] You know, is it growing the BCG matrix part one and the market share dominance? You’ve got to think about conversion rate and you’ve got to think about the price relative to competitors, but all of these are really, you’re going to make an initial stab at it. But I think you’ve got to really think deeply about it each and every point.
[00:26:37] And that’s really what’s emerged today. And also there are differences in. Temperament and experience that lead people to, to buy different types of businesses. And it’s a fascinating game. I find it really very, very interesting. And that’s one reason I’ve got into it is because I said, I think correctly for me personally, that it’s very interesting.
[00:26:56] We haven’t even talked about buyer and seller psychology and negotiation, but even the financial side, there’s a lot of subjectivity and there’s a lot of exploring and creativity that comes in, which I actually see is a really positive thing, but it just, you’ve got to just. Put some serious thoughts into it.
[00:27:11] Yeah, totally agree. Well, this is a great conversation. I’m not sure we can summarize the entire list in a concise bit, but why don’t we just wrap it up by encouraging people to check out other content on the e commerce leader. com. Of course, like our show, however you can on the various players that you listen to and [00:27:30] share it with your e commerce buddies, if you have some of those communities you’re a part of, and we really, really appreciate everybody’s support for the show.
[00:27:37] It’s just an honor to be able to talk about the topics that are relevant to the e commerce community and to have people to continue reach out and appreciate us and thank us for this show is always an honor. It’s always flattering and always feels, uh, you know, kind of valuing of our time and effort when we hear that feedback.
[00:27:54] So thank you for those who’ve done that recently and Michael, we’ll wrap it up there. Thanks so much. Thanks, man. Good discussion.
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