According to various sources, 80 to 90% of new e-commerce businesses go out of business within the first few months of launching. It is not typical of the e-commerce industry only – the statistics are similar for all new companies. It is a well-known fact that running a business is difficult and it requires proper knowledge, experience, preparation, time, and financial resources.
In this article, I focus on those reasons of failure that I have had an opportunity to observe during more than a dozen years of cooperation with e-commerce enterprises carrying out operations of various scale, and at different stages of development. Mistakes happen not only at the beginning of the road; they can also affect well-developed companies.
Why e-commerce fails: Understanding e-commerce businesses failures and successes
It should be noted that it is usually a combination of several factors that leads to the end of a business. Most mistakes are naturally made at the beginning, but as the complexity of the organization increases, other, more serious challenges arise, which can bring trouble even to smoothly running e-commerce businesses.
Insufficient commitment to your e-commerce business
When talking to budding entrepreneurs, one often gets the impression that they have a misconception about running an e-commerce business. What could be simpler – I will set up a store, add photos and descriptions, buy cheap, and sell more expensive. Practically everything will do itself.
Such e-commerce companies are frequently set up as an adjunct to running another business or doing a full-time job. Although there is nothing wrong with such an approach – many successful businesses are ‘after-hours’ projects – one should be aware that it is a business that requires a lot of attention and time. The mere handling orders or communicating with customers is exceptionally time-consuming, and then there goes marketing, inventory management, handling returns, optimizing the website and managing content, managing finances, taking care of regulatory compliance… the list of responsibilities is endless.
A beginner online store owner must combine several roles:
- the one of a founding father, defining the vision and strategy,
- the one of an operations manager, handling orders on a daily basis, taking care of relationships with service providers and vendors,
- the one of a webmaster, managing the website or coordinating the work with the agency / freelancer responsible for the store,
- the one of a marketing manager, creating and implementing marketing strategy, and working on increasing website traffic,
- the one of a customer service manager, responding to inquiries and managing complaints,
- the one of an accountant, managing finances, doing accounting, dealing with tax returns, etc.
When starting an e-commerce business, you simply have to be aware that the results will depend on the effort you put into running it.
Impact of Poor Product selection on your online business
A common cause of problems is the choice of products. Many people decide to sell a range of goods they have no idea about, or they choose a product that is ‘difficult’ to sell online.
When choosing a product, you need to select one that you know something about – ideally, it should be something associated with your passion or interests. You will then be able to better understand and respond to the customer’s needs. It will also make it easier for you to conduct marketing activities, prepare product presentation taking into account what is really important to the buyer, or indicate the UVP (unique value proposition) of the company and the USP (unique selling proposition) of the product. This also gives you a chance to build a relationship with customers and become their trusted advisor.
Operating in a specific niche significantly increases your chances of success; you are perceived by the customers as a specialist in a particular field, which makes them more likely to buy something from you. Let’s take a simple example: if a customer is looking for specialized shoes for runners, s/he is much more likely to buy them from a store offering ‘shoes for runners’ than from a sporting goods store or a store offering various types of footwear.
You also need to check whether it is profitable to sell the selected product. How much will it cost you to acquire or produce it, what will be the delivery costs, marketing expenses, operating costs? You must specify for how much you would have to sell the product in order to make your business profitable and, more importantly, you need to see whether you can sell the product at a price you would be satisfied with.
How to find out if a product is in demand? Use tools such as Google Trends, Amazon Best Sellers, social media, or industry reports to determine interest in a particular product.
An even better idea would be to validate whether the product will actually sell. It is a step we strongly recommend to all new e-commerce companies to take. Before you decide to spend tens and hundreds of thousands to launch a ‘full-fledged’ store, try one of the two options:
- check whether your product will sell on online marketplaces like Allegro, Etsy, OLX, Empik, Amazon, eBay (depending on your product and target market),
- set up a simple store on a SAAS (software as a service) e-commerce platform such as Shopify; add products, check the traffic by running a PPC campaign, and see if you can generate sales. If not, ask yourself what the problem is. The price? Poor quality product? Not good enough photos or descriptions? The poorly selected target group in the marketing campaign? Try to ask customers abandoning the shopping cart why they did not decide to make the purchase.
E-commerce Failures through Lack of proper research and strategy
Another common mistake is the lack of defining and understanding your target group on the one hand and the competitive environment on the other. Without specifying who your customers are, why they should buy from you (USP), who your competitors are, and why your potential customers prefer to buy from them (competitive analysis), you will be groping in the dark.
A well-recognized market is the key to building a successful e-commerce strategy. So how should you prepare market research?
- Define your target group – demographic data (gender, age, location, etc.) are only part of the puzzle; more time should be spent on analyzing behavioral data (needs, problems, emotional reasons, approach/attitude to life). An interesting tool to help you get to know your audience better is Customer Journey Mapping.
- Competitor analysis – make a list of direct and indirect competitors in your niche.
- Evaluate their websites (in terms of communication, aesthetics, usability, performance, and content published),
- evaluate their marketing efforts (what channels they use, what they focus on in their advertising campaigns, identify their unique selling proposition – USP),
- check their pricing strategy (how much their products and services cost, what kind of promotions and discounts they offer and how often they do so),
- read all customer reviews of your competitors’ products and services – are there any recurring topics?
- check what their delivery policy, lead times, and delivery costs are. Are you able to offer more attractive terms?
- By analyzing your competition in these aspects, you can identify areas in which you can do better or differently, and thus offer a unique value proposition (UVP) to your customers. You will be able to take the information about your competitors’ strengths and weaknesses into account when creating your own e-commerce strategy.
- Trends in your niche – observe the market, trade fairs, social media, blogs, podcasts; try to keep up to date with what is happening in your sector. Not noticing a big trend coming up is a mistake that can be made even by the largest brands.
- Talk to your customers – If you already have an operating e-commerce business and are generating regular sales, start talking to your customers regularly. The earlier you implement the habit, the better. ‘Talking’ means here a real conversation – do not be afraid to make a phone call to your customers and ask them about their product evaluation, the course of the transaction, their impressions of the customer service, managing returns, etc. Other ways in which you can collect valuable feedback from your customers include:
- Social media – direct messages, comments analysis, polls.
- Research agencies – you can commission professional surveys of your target group, focus groups, in-depth interviews.
- User session recording – with tools such as Hotjar, you will be able to analyze customer behavior (where they scroll the website to, what they click on, where they encounter usability issues).
- Surveys – ask your customers (e.g., via newsletters, social media, offering a discount on their next purchase) to complete a survey in which you will have an opportunity to ask questions that deepen your understanding of customers’ preferences and expectations.
- Customer service tools – analyze inquiries received by your customer service department (website chats, email inquiries, etc.).
- Community building – a Facebook group, a Slack channel for your community, and enthusiasts of a particular niche will be a mine of insights about your customers’ needs.
Putting the customer at the center is the secret ingredient of your business that directly affects customer satisfaction and loyalty, as well as brand loyalty. The effect you may expect is an increase in sales and growth of your e-commerce. You can use the knowledge gathered in this way to improve customer experience, build a better offer – expand your product range, use more effective marketing strategies, and build your competitive advantage. By putting the customer at the center of your e-commerce strategy, you significantly increase your chances of success.
Lack of business plan for your e-commerce
The lack of a business plan is one of the major sins of e-commerce beginners. Creating such a document helps define your business goals, identify potential challenges, and develop a long-term plan to achieve those goals.
A good business plan will include elements such as the company’s vision and mission, market analysis (challenges and a method of addressing them), product range description and pricing strategy, marketing strategy, a method of sourcing products, description of logistics, and technologies or software used to support the business.
Most importantly, a good business plan will primarily comprise a financial plan. Its key components include:
- Revenue projections based on sales forecast – taking into account factors such as demand, competition, seasonal nature of business, and changing trends.
- Initial one-time costs and fixed costs of running the business.
- Initial capital needed for the period in which your store is not yet profitable.
- Cashflow projections – how much cash you will have at each stage of development.
- Break-point analysis – a specific moment at which your business becomes profitable, when revenues exceed costs and you start making a profit.
When planning the finances of your business, consider various scenarios. Assume a pessimistic variant as well (taking into consideration unpredictable expenses). Do not rely on wishful thinking; try to be as objective and rational as possible in your assessment. The already mentioned business validation techniques will also be helpful in assessing your business potential.
Poor or mediocre online store UX
Let’s start with how to define UX in this case. In my opinion, it is an issue that is too often simplified and reduced to a matter of functionality (or functional prototypes – the arrangement of elements on individual sites and their behavior). In fact, when talking about UX, you should think about the entire online user experience, which includes the following issues:
- site performance – the loading time of individual subpages, smoothness of operation, reliability,
- aesthetics – graphic design, colors used, typography, graphic elements, quality of photos – everything that affects the emotional perception of your brand,
- usability – whether the site is simple and easy to use, whether the user is able to perform all the desired actions, find information and products,
- perception and trust in the brand – shopping security, reliability, reviews, and ratings of other buyers.
How will you know whether your design is good enough? There are several factors that should give you food for thought:
- Low conversion rates – if there is traffic on your site, but no sales are generated, it may mean that the design is ineffective (but it may also mean other things, e.g., that you are mistargeting your advertising efforts),
- High abandon rate – users quickly abandon your site without engaging further (this could mean issues associated with the perception and trust with your store/brand),
- Poor loading times – if the site takes too long to load, it can be very frustrating for users, and they will end up abandoning your site.
If you have doubts about the quality of your store’s design, it is worth looking into a UX audit service for e-commerce. A relatively small investment can pay off very quickly. Usability experts will help you identify the areas of your website that will have the greatest impact on increasing your sales.
Stand out or die: Competitive E-commerce Business Landscape
When starting an e-commerce sale, in most cases, you will have to compete with other companies offering the same, similar, or alternative products. The times of ‘first come, first served’ in e-commerce are long behind us, and you need to stand out in some way in the eyes of your customers.
Why is it so important?
In the long run, it will significantly reduce your cost of customer acquisition – instead of typing ‘store for runners’ into the search engine, the customer will type in your brand name. A recognizable brand of character helps create more engaging messages and advertising creations.
What are the components of an e-commerce company’s brand?
- Visual identity – logo, distinctive colors, and graphic elements that make up the unique look & feel.
- Brand personality – tone and style of communication (formal or casual, serious or playful?). The way you communicate should reflect your mission, vision, and personality; it should be consistent and repeatable across all communication channels.
- Brand values – i.e., the beliefs you support and the principles that guide your company. They should be consistent and reflect the values of your target group.
- Brand experience – the entirety of the experience that customers have when interacting with your brand: from a website visit to customer service, everything should be consistent and kept in the same tone.
Inadequate or poor online marketing activities
If I were to name one area that a fledgling e-commerce owner should focus on, without hesitation I would point to marketing. Poorly planned and executed marketing activities are the area that has the biggest impact on your business’s inability to bounce back, let alone grow systematically.
There are plenty of mistakes that entrepreneurs make in this area, and the most common include:
- The already mentioned failure to define and understand your target group, which results in misguided advertising campaigns. This applies to both the advertising creations themselves and the choice of channels by which you reach your audience.
- Focusing on acquiring and forgetting about maintaining the already acquired customer. Marketing is expensive, and the already-acquired customers are usually more profitable; moreover, they can generate referrals.
- Ignoring data. When conducting marketing activities, it is important that you understand which of your campaigns are working and which are not, i.e., which have the best return on ad spend (ROAS).
- Overfocusing on PPC – the fastest way to bring traffic to your store is through paid advertising, whether it is through Google Ads or various social media channels. Although it is a way to generate site traffic practically immediately and for a long period of time, you must realize that if you rely on this method only, after a while you may regret it. As time goes by, the market may become more and more saturated, your ads may lose appeal (and even their new versions lose their effectiveness), competition may appear, which will force you to pay more for the same click (which will lower your ROAS). That is why it is important to simultaneously invest in other channels – SEO, content creation, community building, social media, and email marketing.
- Focusing on short-term goals – forgetting to build brand positioning, and awareness of your brand in the eyes of your audience. Not understanding what a sales funnel is and what a customer’s purchase path looks like.
- Lack of testing and optimization – even if you have effective ads, it is important to constantly try to optimize and improve them, and test new concepts and ideas to reach your target group. It is also common for entrepreneurs to conclude after one unsuccessful campaign that a particular channel does not work, without considering that they may simply lack the knowledge of how to effectively run advertising campaigns using this channel.
- And finally, a surprisingly common mistake of e-commerce beginners: failure to plan a budget for marketing. Throwing the entire budget into products, photos, and an e-commerce engine without leaving any – or leaving a disproportionately small – amount of money to bring traffic to the site is a straightforward path to reduced or zero sales for the store.
Insufficient customer orientation of failed e-commerce companies
It can be easily concluded from this article so far that running an e-commerce business (and not only) is very much based on focusing on the target customers. Understanding their needs and motivations, meeting their expectations, and building a relationship with them are essential for the entire business to grow and generate revenue.
As already mentioned, keeping a customer is much cheaper than acquiring one. Building a positive experience translates directly into customer loyalty and sales repeatability, and can generate referrals to other customers. How to guarantee proper customer experience?
- Ensure perfect customer service – quick responses, availability, pro-client attitude in the situation of conflict. Try to keep the customers well-informed about what is going on with their orders through a proper set of transactional emails, and by offering options for quick contact via phone, email, online chat, social media channels, or messengers such as WhatsApp, Messenger, etc.
- Keep your promises – ensure timely delivery and product quality, enable package tracking, provide easy returns and exchanges.
- Offer personalized experiences – segment customers to offer differentiated experiences and promotional content based on their preferences, order history, or other behaviors observed.
- Monitor online mentions (e.g., via Brand24), respond to negative reviews, thank your customers for positive ones, and encourage customers to provide feedback on your products or shopping experience.
Customer at the center is a recipe for success for both a beginner company and any already developed e-commerce business.
What incompetent resource management can do to your online business?
As e-commerce grows in scale, resource management is becoming an increasingly complex process. There are numerous problems that appear in this area, namely:
- Overstocking or understocking. The former can lead to cash flow problems, increased warehousing costs, blocked capital, and problems with trade credit. The latter may result in your inability to meet customer expectations, which, in turn, can lead to a decrease in customer satisfaction and loyalty, and ultimately sales. Both situations can be the result of wrong demand forecasts and unpredictable macroeconomic and geopolitical changes or new trends.
- Overstocking can also lead to the problem of obsolete inventory – literally understood as products whose expiration date has passed or as products for which demand has run out.
- Increase in fulfillment costs – inefficient warehousing may lead to order completion errors, which in turn results in delays, returns, and additional fulfillment costs, which will effectively reduce the margin.
The solution to the above problems is usually to implement inventory and warehouse management software, monitor sales data and analyze sales trends.
The pandemic has shown us how much the entire e-commerce sector and global trade depend on efficient supply chains. Shortening the supply chain is becoming a priority for most developed e-commerce companies, whether by diversifying and becoming less dependent on a single source of supply, or by strengthening relationships with suppliers to forecast demand and improve communication together.
‘Non-calculated’ company and why their e-commerce business fail
The lack of a proactive and strategic approach to financial planning and control is the bane of most e-commerce companies. Being a so-called ‘calculated’ company is critical to a healthy business. The lack of proper care of finances sooner or later leads to liquidity problems, excessive debt, and inability to invest in further growth.
The most common mistakes observed in this area include:
- Failing to plan or include all expenses in the budget (or the lack of an e-commerce budget).
- Failure to monitor key indicators of financial health – without accurate and up-to-date data, it is hard to make appropriate and sound decisions. To prevent this, you should have a habit or procedure of periodically checking metrics such as profitability, sales margin, or cash flow.
- Lack of financial control. In order to prevent overspending, it is necessary to implement processes for approving expenses and systematically controlling them.
Excessive spending on marketing. Obviously, marketing is a driver of sales, but without a precise marketing budget and tracking ROI from marketing activities, it is easy to end up in a situation where there may not be enough funds for other areas of the company’s operation and development.
Resting on your laurels: Why e-commerce fails after achieving success?
Achieving success does not guarantee that it will be a permanent condition – the e-commerce market is very dynamic and susceptible to what is happening in the world. No business operates in a vacuum and increased competition has to be considered; the Covid-19 pandemic forced most companies to move into the online world and at the same time showed how unreliable global supply chains can be.
In parallel with macroeconomic changes, customer expectations are also evolving. E-commerce entrepreneurs will have to meet new technological challenges, but also take into account new trends in consumer behavior, such as subscription shopping, voice commerce, augmented reality, sustainability and ethical shopping, social commerce, and personalization.
💡 We have already elaborated on the biggest e-commerce trends of 2023. Check it out on our blog!
Overlooking the changes taking place and sticking to what has worked so far can lead even the best-performing e-commerce companies to bankruptcy, stagnation, or the loss of market share to more innovative competitors.
Key Takeaways on E-commerce Success Rates and why e-commerce businesses fail
To summarize the above discussed issues, let’s try to ask the opposite question – what distinguishes successful and constantly growing e-commerce companies? If I were to point out the common characteristics of such companies, they would be as follows:
- They put the customer at the center – the customer-centric approach is by far the feature that most contributes to e-commerce success at every stage of development. Understanding the motivations, preferences, habits, and purchase behaviors of your previously identified and analyzed target group sets your business on the right trajectory. Excellent customer service, active listening, and building a loyal customer base are what will take your business to the next level.
- They have a differentiator, a clear value proposition, and differentiate themselves from the competition – whether through a unique product, service, business model, or process.
- They do effective marketing and understand the brand power – they analyze how money spent on marketing works, what actually works and what does not. They invest in both short-term and long-term marketing, building brand recognition, and enlarging the base of regular and loyal customers.
- They have strategic planning skills – investing time and effort in defining clear goals, building a growth roadmap, or developing a marketing strategy, a strategy for entering new markets and scaling the company.
- They focus on continuous innovation and are able to adapt to the changing market – they observe changing trends, actively listen to feedback, and suggest answers to customer needs.
- They take a responsible approach to financial management – they prioritize financial stability, predictability, they control expenses, taking care of healthy cash flow. They make decisions based on figures and control key indicators of the company’s health.
- They efficiently manage and organize logistics – they understand the importance of effective logistics and processes in the company. They optimize and diversify supply chains, and streamline the order fulfillment process to ensure customer satisfaction.
- They know how to build a team – they hire talented specialists, take care of the company culture, motivation, and professional development of their employees, which translates into smooth company operation.
As you have had a chance to see, the number of factors that determine the to be or not to be of an e-commerce store is quite substantial. The purpose of this article is not to scare or discourage new entrepreneurs from starting an online store. On the contrary, I would like to make readers aware that running an e-commerce store does not have to be doomed to failure in advance if you go about it properly.
I also want to make it clear that you do not have to do all of the above-listed things perfectly right away. It is much more important to simply take the first step and learn by doing instead of preparing for the start forever.
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