E-commerce Profitability

Unlocking Profitable Growth Globally: A Data-Driven Approach to Selecting the Markets to invest in

Marcus Tagesson
September 18, 2023

In this blog post, we will delve into the world of data analysis and strategic decision-making, unveiling how e-commerce businesses can optimize their international market choices. This in-depth examination will, step by step, go through the most important things in a data-driven approach, revealing how it can lead your business on the path to greater profitability. If you get this process right, this could be a game-changer in your e-commerce journey.

Identify your core markets

While most businesses are aware of their core markets in terms of top-line revenue, it's more important that you are assessing the core markets based on deeper down metrics. Evaluating profitability and future potential is crucial. But data on profitability and future potential per country can be challenging to find if you have yet to invest in a proper setup. The following paragraphs provide some more guidance.

Your core markets should be the primary focus of your marketing, shipping, and customer service efforts. This approach ensures establishing an appealing brand, keeping customer acquisition costs low and retention high during scaling without sacrificing your profitability. Trying to target too many markets simultaneously is a common mistake that you should avoid.

Unit economics
- do you make money on your orders?

The simplest way of getting a high-level understanding on what is driving your business is to look at all direct costs affiliated with an order. Just go through this formula on a country by country level:

Gross Sales - Returns - COGS - Shipping, Fulfilment and Transaction costs -  Cost of Returns - Customer Acquisition Cost (CAC)

You then get two outcomes, either a positive or a negative contribution.

For those markets you still want to operate within, positive or negative, it is crucial to delve deeper into each individual order. By identifying patterns and similarities between unprofitable and profitable orders, you can eliminate the unprofitable ones, ensuring optimal efficiency and profitability while maintaining growth.


Markets with negative unit economics and a great LTV to CAC ratio?

One of the most critical factors in deciding on a country's future growth potential is understanding the customer acquisition cost (CAC) ratio against the customers's lifetime value (LTV). As a rule of thumb, the LTV should be at least three times higher than the CAC, but the higher the better. If this ratio is not met, it might not be financially viable to accept investing in a market with negative unit economics on the first order. This ratio, together with the unit economics, should be the two guiding stars when deciding on where to invest less, or more, resources.

Consider the time and effort needed to assure a satisfying service level

The general service level and, more specifically, the logistics full journey can significantly impact an e-commerce company´s profitability.  It can both kill loyalty and enhance it. Therefore, make sure that the countries you ship to satisfy the level of service you want to associate your brand with and that your customers expect. If there is a mismatch, you risk to waste precious time and money on this market until you find out why it is not delivering the proper returns. Consider how long it will take for products to arrive and how easy it is for customers to track their orders, how reliable the shipping provider is in that country, and what customer service you can provide.

All this boils down to understanding the alternative cost of the invested time and effort in making this great for each market, something often overseen when looking at unit economics and future potential for a market.

Don't be afraid to pivot

Even with the best forecasts and strategies, entering a new market can still be unpredictable. There are just so many things that affect the outcome. Instead of over-planning and experimenting to long with many markets, try to adopt a ruthless investment or divest strategy. Be ready to pivot and adjust your approach if the market isn't performing as expected. Be open-minded to customer feedback and insights, and use that information to make tactical decisions.

Summary

Effectively targeting countries for e-commerce profitability requires a comprehensive approach. Key considerations include:
- Understanding your core markets further down in the P&L
- Evaluating unit economics, including all direct costs
- Assess the time and effort needed to provide quality service to ensure long-term growth

It is crucial to remain flexible and adaptable throughout this journey. If a specific market falls short of expectations, adjust your strategy accordingly. Remember, decisions should be based on concrete data rather than the fear of missing out. Also, remember that if you decline a market today, it does not mean you cannot return in the future. Ensure your choices are data-driven, not based on FOMO. By adhering to these principles, you can make informed decisions that drive both growth and profitability in the ever-changing e-commerce landscape.

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