Ecommerce business owners face risks. Some may keep you awake at night. Others are routine and you really don’t think about them.
The ones that keep you awake at night are most likely the least understood — or outside of your control. A key to business success is to mitigate your risks by better understanding the issues and how you will react to them. If nothing else, you may sleep better.
The Business Aspects of Ecommerce
This article continues my series on the business aspects of running an ecommerce firm. To date, the series includes the following installments.
- Who Needs an Ecommerce Strategy, Anyway?
- What's the Value Proposition of Your Ecommerce Company?
- Choosing Sales Channels to Reach Target Consumers
- 7 Key Ecommerce-Infrastructure Decisions
- Building the Right Ecommerce Team for Success
- Is Your Ecommerce Model Profitable and Sustainable?
- Achieving Your Ecommerce Business Goals
For this article, I'll examine two different types of risk and how you can leverage them to build a better business. I’ll call them "operational risks" and "assumptive risks."
If you have an established business that’s running smoothly, you still have risks that can slow your growth or halt your sales. These "operational risks" are ever present and frequently outside of your control. They could include the following.
- Search engine optimization risk. Google changes its search engine algorithms and your website traffic drops by 50 percent overnight.
- Hosting risk. Your website hosting company suffers a series of failures and your stores are offline for hours.
- Price competition risk. Your largest competitor drops prices by 30 percent and your sales suffer.
- Supplier risk. Your top-selling product line is suddenly pulled from the market and you are faced with a huge loss of revenue.
- Shipping risk. A container load of products from an overseas supplier is stuck in customs because of a change in policy or an error in the shipping manifest — you have little inventory to sell.
- Marketplace risk. You sell products on Amazon that it does not carry but it suddenly sources the products itself, at a much lower price.
In those examples, the risk is not something you can directly control. Market forces, economic conditions, competitive strategies, and governmental regulation can impact your business. But, you can make contingency plans to mitigate the risks.
For example, if you are heavily dependent on Google's organic search traffic for your sales, make sure you understand which keywords convert and set up AdWords advertising campaigns that utilize those keywords and landing pages. In the event you are affected by an algorithm change, you can quickly turn on pay-per-click campaigns to remain visible to those searching on your keywords.
If your competitors decide to lower prices, you need to be in a position to quickly respond. Consider how you might lower your prices in response, or introduce a campaign to emphasize your superior service, free shipping, or rewards program.
The point is to take the time to identify the operational risks that would most impact your business. Think through ways to mitigate the impact if any of those scenarios were to actually happen. Make sure you prioritize. Once you deal with one type of risk, move it down the list and look at the next one.
If you are a startup or expanding into uncharted markets or products, your risk lies in the assumptions you use for planning your new venture. You have to make assumptions, since you have little or no historical data to draw on.
For a new ecommerce business, your assumptive risks will likely include:
- Estimated website traffic;
- Conversion rates;
- Average sales order size;
- Cost per acquisition from advertising;
- Operating costs;
- Gross margins;
- Market demand for your products;
- Cost and time to build out your website.
As with operational risk, you must first identify the assumptive risks you face and prioritize them. Rather than first thinking about what to do if the results are different than your assumptions, you need to test your assumptions as much as possible to validate them.