Traction Is the Only True E-commerce Competitive Advantage
Despite having been an angel investor for close to two decades now (not to mention a so-called e-commerce expert), I still get puzzled when evaluating e-commerce startups. That's where e-commerce competitive advantage comes to the rescue.
Entrepreneurs pitching their e-commerce businesses present several positive highlights. For instance:
- "We have cutting-edge technology."
- "We are changing the way XYZ-widgets are bought and sold online."
- "We are the first online marketplace for such-and-such."
- "There are many e-commerce websites that do this, but we will be the first to do that."
- "We will have zero cost of marketing."
- "We are not about shopping, but social shopping."
- "Our e-commerce website will take a hyper-local approach."
- "Our technology is focused on creating the optimal mobile shopping experience."
These claims are not bogus. In fact, several of them could represent a serious competitive advantage. We're still unable to pull out my crystal ball and forecast which e-commerce startup would come out ahead.
But the purpose of this article is not to showcase my helplessness. Instead, we want to talk about one metric that we have used with great accuracy for forecasting how well an e-commerce business will shape up. In one word, that metric is traction.
The Traction That an E-commerce Startup Achieves Is a Great Indicator of All That Went Into It
There are more similarities than differences between various e-commerce startups.
But that is as far as their design and planning are concerned. When it comes to execution, performance is all over the map. And therein lies the rub. Ecommerce businesses that are otherwise similar to several others, but end up achieving much more traction, are presenting a strong early indicator of success.
What Constitutes an Organization's Traction?
There is no precise definition, but let us try: the extent of achievement of an organization's goal is its traction. For instance, here are some of the metrics that an e-commerce business might want to maximize:
- number of transactions
- average transaction size
- number of registrations
- unique visitors
- social engagement
- number of products in the catalog
- number of regions where sales are made
- international sales
and the like...
Without getting into the debate of profits being the only true measure of success, we'll focus on the point we're am trying to make. If one e-commerce startup has achieved much more traction on its chosen metrics, then that business is far more likely to keep achieving greater success.
Isn't That Just Common Sense?
It does sound like it. But often in an investor group, investors do not focus on traction as much as we would have liked them to. That is true at least for companies in the early stage. The premise being that traction is expected to be small, and hence is not an indicator of what lies ahead.
My thinking is that traction is the only valid indicator of the future. We have come across e-commerce startups at attractive valuations, and they often have some interesting secret sauce.
While we have succumbed to the temptation of investing in such businesses, it has always led to a bad experience.
If indeed there is such a thing as a secret sauce, then it should manifest itself in the form of traction. If it does not, then we will not find the deal interesting anymore.
All This Means Is That One Has to Go Back to the Basics
It is one thing to focus on developing fancy business plans and presentations. It is another to actually run a business that has customers, transactions, and hopefully profits. We have moved so far along this path that fancy presentations and slick business plans turn us off. Show us your customers and sales and we might get impressed.