Even though ecommerce is currently among the most vibrant sectors of the UK economy, 70% of all e-commerce startups fail in their first year. That’s more than double the average rate of general business failure in the UK. It seems bizarre at a time when the sector is making its greatest number of sales outside of the pandemic. In fact, ecommerce now accounts for 30% of all retail sales. So, why are so many ecommerce newcomers failing? And what can you do to prevent your business from adding to that number?
Why do so many ecommerce startups fail in their first year?
With such a great disparity between startup failure rates within and without the ecommerce sector, it’s easy to assume that the problem lies with the industry. However having worked closely with e-commerce brands for several years, I can’t help but observe that the primary issue lies with newcomers underestimating the sector’s challenges. I’ve seen multiple startups faltering due to the same three fundamental reasons.
Preparedness
Ecommerce looks easy. You just need stock and somewhere to sell it. You don’t even need to build a website anymore, with platforms like Amazon, Etsy, eBay, and the various social media marketplaces opening up a global audience. Which creates the impression that anyone can start an ecommerce business from their kitchen table, as long as they have the capital to invest in products. The problem is that the reality is a lot more complicated. You can’t just choose products and take them to market. You have to identify a niche, research products and find suppliers, take stock photos, make product videos, and create compelling descriptions. Then you have to focus on inventory, logistics, and service. And that’s just the start. Of course, there are ways to simplify many of these things – the fulfilled by Amazon (FBA) service removes the problem of inventory and distribution, for example. But that doesn’t take away all of the difficulties. Consequently, people end up investing their savings in a course that will teach them the fundamentals of their intended business model, but because they’re unprepared for the time, effort, energy, and money it takes to make the business thrive, they’ll end up letting it fold.
Trend jumping
Many successful businesses are built on a big idea. And with social media, big ideas seem to come along almost daily. The problem is that with every trend comes multiple people sharing the same great idea, looking to take advantage of its potential. So, while one or two people may benefit from ‘the next big thing,’ many, many more will invest and fail because they weren’t the first to the party. Too many ecommerce businesses launch with limited market research on the back of an idea spawned by an online trend. And most of them fail to realise their potential because trends go as quickly as they come.
Limited experience
Running a business is hard. It takes time, money, and perhaps most importantly of all, understanding. So, even if you have the first two, a lack of experience can see you come crashing down in ecommerce. And too many people try to enter the sector without a firm grasp of the fundamentals of business financial literacy. They don’t understand how to use a balance sheet, how to manage profit and loss, or what drives their numbers – which usually means that at the end of the first year, their numbers simply don’t add up. And if they’ve not worked in sales before, they may not understand the simple basics of sales, marketing or market research, which can lead them to make inappropriate decisions, ultimately impacting the viability of the business.
How can ecommerce startups improve their chances of making it through the first year?
Making a success of an ecommerce business again comes down to three main things: research, commitment, and focusing on the essentials.
So, before you start, properly research what you’re getting into. By all means, run with your big idea, but look beyond social media before investing in it. Think about where you’re going to sell and how you’re going to manage the logistics. Consider the future potential of your business – are your ideas based around a one-hit wonder, or does it have the potential to scale and grow? Who will be your audience, and how can you serve their needs better than anyone else currently on the market? And how can you ensure that you gain a worthwhile profit margin on your products? You’d be surprised just how many ecommerce startups forget about tax.
When you’re confident that you have a solid business idea, you then need to think about time. Do you have the time and the inclination to spend on the business? In the first few years, a new business can be all-consuming. So, you have to be willing to invest your time and energy into making sales and proving that your business works. All that matters is that the right people are seeing your products or services and you’re making sales.
On top of that, you have the financials. Once your business is established, you can invest in accountants, sophisticated admin tools, dedicated website creation, and improving user experience. But you must focus on your bottom line until you’re making a decent amount of sales. On ensuring that you’re not running at a loss. That you have cash flow. And that you’re keeping track of your profit, loss, and other financial data. You may benefit from financial advice at the end of the first year, but you don’t need to worry about that until you make decent sales.
There’s a lot of potential in ecommerce right now. The sector is far from saturated, so if you’re looking for a new business challenge, now could be a great time to move. But if you’re going to do so successfully, you’ve got the lay the foundations by learning how to run a business first.
