Finding a good, profitable eCommerce business to invest in can be tough, especially considering how many bad ones there are. In the United States alone, there are more than one million active Shopify stores already. Amongst those businesses, not all that glitters is gold. Of course, there are many factors to consider when assessing an eCommerce business, but amongst the most important aspects are its customer acquisition expertise, the defensibility of the business, as well as their customers’ feedback.
Customer acquisition in layman's terms means bringing new visitors to the site and having them make purchases. eCommerce businesses can be assessed on their ability to do this. One thing to consider here is how much it costs the company in paid advertising to get a new customer, which is also known as Customer Acquisition Cost or “CAC”, and the resulting return this customer generates known as Return On Ad Spend or “ROAS”. Of course, many customers can come back to purchase again, so their Lifetime Value or “LTV” can be taken into consideration. One indicator of a business worth investing in is if CAC is low in relation to the product value while the ROAS and LTV remain high (ceteris paribus).
Moreover, not all customers cost money to acquire. Search Engine Optimization or “SEO” is a great strategy for potential customers to discover a company’s product organically. Here, the eCommerce business should rank highly for relevant keywords.
One way to understand an eCommerce business’ customer acquisition expertise is by getting access to their Google Analytics (or similar) account. Here, most relevant data is displayed and can help a prospect partner or investor better understand the target company through its metrics.
Warren Buffett invests in businesses that have a so-called “economic moat” - and that has served him well over the years. A moat refers to a company’s ability to cultivate a competitive advantage over other businesses in the market in order to defend its outsized profits and market share. Unfortunately, many eCommerce businesses do not have a strong moat, i.e. something that makes their business defensible. Those that do are worth investing in as a rule of thumb.
A moat could be the brand of an eCommerce business. A good indicator here is if competitors have to charge lower prices for similar products to compete or if the brand’s name has very high search volume or is somewhat synonymous with the product.
Another way to make sure the business is defensible is through a unique product. Great companies will sell a product that its competitors cannot simply copy, for example because they have it patented or the exclusive distribution rights to sell it.
Some would argue the best way to determine if an eCommerce business is worth buying into is by asking its customers. If they love the product and are happy to pay a premium price for it, then that is a great sign and indication of brand loyalty. Finding out what customers really think of the product is key in identifying the right business to invest in generally. All of this is easier said than done as customers can be difficult to get a hold of. If the owner of the eCommerce store cannot provide any customers to interview, they can usually be found on review sites. For example, many businesses are listed on Trustpilot or Birdeye. Alternatively, online forums in the product category will discuss how happy or unhappy customers were with their purchases.
Another method is looking at the company’s return rate, i.e. how many of the purchased goods are sent back for a refund. This rate varies from product category to product category, but it allows the business to be benchmarked against its competitors. If the average return rate is below that of its closest competitors, the business is more likely to be worth investing in.