That’s a nice little $40M ecommerce company. Call me when it scales




It will surprise a lot of entrepreneurs to learn that building an e-commerce business with $10 million to $20 million in revenues is not that hard. It also surprises many to learn that it’s not actually that valuable. This is in stark contrast to, say, a SaaS business, which is very difficult to build to that level but valuable when you do. As I read this week’s board deck for one of our portfolio companies, JustFab, I was struck by one of the reasons this discrepancy exists: marketing leverage. Most retail businesses (traditional or online) have to spend marketing money to acquire a new customer at scale. Small e-commerce companies can be exempt from that – if you fill a niche and you have distinctive product-market fit with a set of customers, you can and should land them virally or cheaply. But as the business grows, you need channels of acquisition that you control beyond sitting around and hoping your customers tell their friends. Having a product that delights the user and drives high levels of customer satisfaction (which leads to high levels of referral) is crucial for building a killer business. It separates the great businesses from the good ones at scale, and in the early years, it is often sufficient to drive growth with no need for paid media. It is an important topic, but one for another day. What demands further inspection is the fact that many companies stall out when it comes time to transition off organic growth and add paid media as the primary growth vector as they scale. Customer acquisition costs money and this is where things get tricky in retail. What is the lifetime value of a retail customer? It’s a non-trivial question. In SaaS, for example, this far more predictable due to the subscription model.

For a concrete example, take the above chart which shows JustFab’s North American business. (I redacted the exact numbers, but it’s at large scale.) As you see, the company has been able to nearly double revenues year-over-year, on virtually the same advertising spending as the previous year – in fact, advertising has been flat for three years. This isn’t some magical outcome based on large-scale viral adoption. Rather, it’s just good marketing execution to land new customers who like the product coupled with a model that gets them back on the site an average of 30 times a year, providing repeated opportunities to sell to them. Given that a customer who sticks for the first couple months has an expected length of membership of several years, that’s a lot of selling opportunities. Another way to look at the marketing leverage they get out of subscription:

Re-engagement is the key. This is important because the sneaky problem with e-commerce is paying to reacquire your existing customers. As an investor, I see a lot of companies with a killer product who have built $10 million in revenues at a rapid clip. (Understandably, most burn some cash to get there, but if companies didn’t burn cash to build, I’d be out of a job.) In almost all cases, these businesses have an “at-scale economics” slide in their pitch deck that shows a customer will be quite profitable in time – buying from them several times a year, and thus justifying the $42 spent to acquire them as something that will be easily amortized across future purchases. Re-engagement drives higher LTVs, which enable the ability to spend more on acquisition. Unless you’re Amazon, the capital markets won’t let you grow and burn cash forever. As these companies grow, however, they find they continue to burn cash at an unsustainable rate. One big contributor is the lack of marketing leverage: that customer you acquired for $42, you have to pay $20 again getting him back. Maybe he typed your site name in Google and clicked on the paid link at the top to navigate there, or after ignoring your emails, he finally clicked through on your 40% off coupon. Either way, now that customer cost $62 to acquire.

Zulily is the darling of the e-commerce world (and Wall Street) right now, and rightly so – it’s a great product, and it’s on a growth tear with very reasonable capital consumption. In time, it will have to demonstrate meaningful earnings, and to do so, I believe, it will need marketing leverage. From 2012 to 2013, Zulily grew revenue nearly 110 percent – an awesome rate – reaching an impressive $696 million last year. Marketing spend was up just 62 percent, after an 85 percent increase the year before. The company is certainly demonstrating some marketing leverage while still showing phenomenal growth – hence a breakout e-commerce story.

Much more common is a fate like It grew revenues 18 percent last year (to $1.3 billion) – about the rate of overall e-commerce growth – but to do that, it spent 46 percent more on marketing than the year before. The result, excluding a one-time tax gain, is $16 million in profit (roughly 1 percent margin). That’s a lot of work to sell stuff for a buck that costs you 99 cents, and hence a market cap of 0.4-times-sales, compared to Zulily’s seven-times ratio.

I fear this fate is in store for many popular e-commerce businesses today who are hoping their curation of distinctive products and the brand are enough to lock their customers in. Retail customers are fickle and forgetful. They will find other merchants they like, and even if they continue to like your business, they will forget to come back to shop. That is, unless you create a systematic method of re-engagement with no marginal cost.

There is a perception in some quarters that flash sale and subscription businesses have failed as a category. I think a lot of this has to do with high profile companies that didn’t live up to the expectations they set both in their promotion and in the amount of money they raised. While a full teardown of the operational challenges posed by a rapidly growing e-commerce company is worthy of an entirely separate discussion of its own, it is true that the degree of difficulty of scaling these businesses is much, much higher than that of most mobile, social, or SaaS startups.

There was a period of easy access to late stage capital (2009-2011), where I believe investors were seduced by the large revenue numbers these startups generated, and all that capital allowed undisciplined management teams to dig themselves very deep holes with mediocre operations. Thus the pendulum swung, and investors who were once “all-in” on e-commerce were now all out – rather than a more nuanced realization that there are some great companies and some poor ones. With Zulily now public and on a staggering trajectory, and other companies like JustFab, Gilt, and One King’s Lane all clearly delivering great results at large scale, it’s clear that the best of these companies are quite good. As we see several more go public over the next year, it would not surprise me to see the pendulum swing back, and the category begin to get over-invested again.

Some potential models to drive re-engagement:

  • Subscription: Long popular in low-COGS business (media such as Netflix or Spotify, SaaS software, information services like or PeopleSmart), e-commerce is just starting to catch on to this approach. JustFab and BirchBox are probably the biggest examples to date, but others like Dollar Shave Club are knocking on the door.

  • Flash Sales: Gilt (a Matrix company) pioneered this category and continues to make it work. Zulily also uses this as a primary means or driving re-engagement. One King’s Lane is another great example in the home category, and there are countless others. The key here is to make daily content an exciting event – unlike subscription, you only have permission to be in the inbox, not a commitment to come to the site – so you have to earn them back every day. Without great content or unbeatable deals this does not happen. Also scarcity is key. Consumers must feel that they better click through that email RIGHT NOW because if you wait an hour, the best things may be gone. If you are going to use “unbeatable deals” as a vector, you’d better have a compelling reason to believe you (as a startup) will have a structural pricing advantage that can’t be matched by other larger scale retailers.

  • Loyalty Programs: Amazon Prime is effectively a loyalty program that gives benefits back to the consumer in exchange for concentrating their purchases. A Costco membership is a premier offline example with a similar model: “Pay us $50 per year and we’ll sell you everything at cost.” The question is, what benefit can you provide your customers that re-engages but doesn’t just cost you the same as re-marketing to existing customers? Amazon would argue “it’s better to give that money to the customer than Google,” and that’s true. But, remember, you are not Jeff Bezos and the market won’t let you lose money forever.

I think this is an area where there is still room for innovation.

Without a structural re-engagement mechanism, you are banking on having such an amazing product (or value) that the customer comes back over and over. It does happen – look at LVMH offline – but it doesn’t happen often, and usually not at the pace necessary for a tech startup. I’d rather run a business where you have your hands on the levers of growth than betting on a merchandiser who can anticipate trends and always be at the forefront – though having both would be really nice.

This was originally published as an article in Pando Daily.

(Thanks to: Greg Bettinelli, Dana Stalder, Brian Spaly, Michael Carney, and Adam Goldenberg for their help.)

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Josh Hannah

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  • Ak

    Great article as always!

  • Mike Rossi

    Awesome article. Great to see these often-discussed concerns aggregated somewhere.

  • Pat Murray

    Very true point! Love the Flash Sales comments- this is why I think Applauze is doing so great also.

  • Dominique Levin

    I couldn’t agree more with “Re-engagement is the key. This is important because the sneaky problem with e-commerce is paying to reacquire your existing customers.” From our work in e-commerce and retail we know that for a typical retailer only 30% of first time buyers ever come back to buy for a second time. If you can somehow convince first time buyers to come back and buy for a second time within 30 days of their first purchase, then you have a 70% change of retaining this customer for the long-term. Companies like JustFab and Zulily have outsized growth rates because they figured this stuff out early and build in-house customer analytics and campaign teams to re-engage customers. It requires a decent amount of tech (data collection, cleansing, analysis and real-time integration with email/social/web/store for hyper-targeting and personalization) which is not the core competency of many of e-commerce companies. But that’s about to change dramatically. At we help over 100 e-commerce and retail brands understanding one time buyers and repeat buyers and easily design re-engagement campaigns with a highly automated cloud solution. Campaigns like post-purchase next-sell recommendations, replenishment reminders and reactivation campaigns come out of the box and there really is no excuse anymore for an e-commerce company not to engage in this type of data-driven marketing. Therefor I predict there is only a short window of opportunity for Zulily to outperform their peers until this type of marketing becomes table stakes for all companies.

  • Hi @David,

    Yes. I ran a $12M/yr ecommerce company back in the late 90’s and your first two sentences really resonate, except I unfortunately(?) knew that it wasn’t worth that much. With ~15% margins but similar overhead it was really more like running a $1M/yr company.

    Lessons learned.

  • I hope you leveraged that experience into a successful next venture!

  • @dskok:disqus – Thanks. Decided to be a consultant for a while and built up some cash, though have plans with a partner that might one day have me pitching you. We’ll see…

  • Omar

    Great article Josh. Quick question- how would you balance between generating subscribers (pre transactional goal) and buyers? Let me be more specific: When a new visitor comes to the website, are you going to spend more time trying to acquire a lead or making a sale? You can’t do both really well. The problem with seeking out subscribers is that your website becomes more optimized for leads. If you focus on sales, it becomes more focused on conversion. Now there is a middle line between those two- every customer that buys technically becomes a subscriber, because they have to submit their email address. So, putting theory aside, how do you really balance these two efforts in a practical manner? For me, this question becomes all the more important when your developing a financial forecast. In the forecast you can either say: [new buyers= total visits X sales conversion rate] OR you can say [ new buyers= (total visits X subscription conversion rate) X (subscribers X sales conversion rate). It becomes too complicated trying to use both in your financial model though, because than you have to start making ratio on assumptions on amount of visits to subscribers vs buyers in a given time frame. Thanks! Omar

  • Omar

    correction: [ (total visits X subscription conversion rate)=(subscribers X sales conversion rate)= new buyers]

  • I don’t accept that you can’t do both well. the flow as a subscriber is completely distinct from the flow you experience as a lead. a subscriber comes through to check their monthly collection and see offers.

    To the extent you have to trade off between the two, prioritize subscribers over buyers. You have their whole LTV to extract cash out of them. But I think you can create a unique flow for each

    Thanks for the comment!

  • Marie Louise Diogo

    This article has enlightened me on the lifetime value of a retail customer and other things, like illustrating the level at which advertising has being stable since 2012 till now, whiles revenue and gross profit are shooting up, but with revenue leading. Although it is not by magic but good marketing, but can one say that budgeting helps to keep the business level raising?

  • Budgeting will help highlight the problem that will occur if marketing does not deliver. But ultimately it will require great creative marketing department to execute and deliver on the numbers.

  • Marie Louise Diogo

    Thank you, for enlightening me on the fact that a good budget does not keep business level raising. But serves as a check as to whether or not business level is raising.

  • BryantMedia

    What if you sell a product most people only buy once? For instance, I am the director of marketing for a safe dealer and all of our safes are drop shipped from the manufacturer and most are highly customized. The average large safe is over $2000. We have managed to bring this to $4.5M in annual revenue, but in order to really see a good bottom line, we need to sell $6M to $8M annually because our Cost of Goods is about 80% of our total sales. We run a lean operation with 4 people and it is tough managing all the logistics and customer service, and we spend about 6% of revenue on advertising/marketing. We have optimized our marketing and advertising very well. My guess is that because we have few repeat customers, we would need to increase advertising/marketing. Any thoughts?

  • Wicked Schwarz

    I want to get into customer acquisition for online businesses as an independent consultant.
    Do you think that there is a market for this?
    And if there is, what would their ideal customer look like?

    Thank you in advance

  • Why not do trade shows where your customers will be? Give them a chance to see your product in person and sell them on the safety benefits of your product. Do a sign up for a custom safety inspection or a chance to win a safe. Use that as a opportunity to reach out to them again.

    Optionally, you could take out ads in retail magazines showcasing your product. You could also reach out to the editors (in a public relations fashion) with a story based on the importance of keeping cash safe (and not stored in a desk drawer!). Obviously, any story ideas that get pitched would be run for free. Maybe it’s time to look into hiring a PR firm to get you guys some media opportunities.

    Remember, media is paid, earned or owned.

  • Hi Adonna, unfortunately trade shows are generally found to be one of the most expensive forms of lead generation. The cost per lead is way higher than most on-line techniques. Occasionally trade shows can make sense where you need to make a brand statement.

  • George Mathews

    There are some very nice e business magazine.

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