E-commerce – what is it?
Commercial transactions that take place over the Internet are referred to as e-commerce. With the advent of e-commerce, the traditional retail approach has rapidly evolved into a vertically integrated model that combines both online and offline sales.
A variety of products and services are available through e-commerce companies.
There are three main categories of avenues through which they conduct business:
- Amazon, Alibaba, and eBay are some of the major e-commerce players that are well known to the public and hold a significant share of the market.
- Several companies sell their own brands and other brands’ products, including Zalando and ASOS.
- The types of goods and services retailers provide are becoming more similar as market competition increases.
- Although Amazon remains primarily a gateway for third-party sellers, it has increasingly developed and marketed its own brands.
E-commerce Businesses driving forces
A major change in the way businesses operate has been brought about by the evolution of e-commerce since the turn of the century. There are four main forces that drive this evolution:
There has been an increase in consumer spending in developing countries like China because of urbanization, where people are demanding better living conditions. As millennials become more dependent on mobile devices and the Internet for entertainment and shopping, they are becoming one of the most significant marketplace trends.
A major reason for the rise of e-commerce is the change in consumption habits. People increasingly emphasize convenience, customization, and simplification in their online shopping experiences. New products, information sources, and ways to access them make their lives easier.
Walmart recently copied Amazon’s two-day free delivery service, offered with its Prime membership. Another trend is increasingly efficient delivery services, such as Amazon’s two-day free delivery service, which includes Saturday and Sunday deliveries.
3. Shifts in structure
As a result of changing consumption habits, the e-commerce industry is experiencing structural shifts. By tailoring individual marketing programs to their target consumers on e-commerce platforms, more and more companies are promoting and selling products directly to their potential customers. As a result of economies of scale, many businesses have consolidated.
As mobile devices become more ubiquitous, consumers and businesses use them for a variety of tasks, including browsing social media platforms, interacting with them, and searching for information. In addition to improving their business operations and understanding consumer behavior, e-commerce companies can utilize advanced customer analytics tools.
Since AI and VR provide consumers with a new experience, they are becoming more popular in e-commerce.
E-commerce Key Terms
- Site traffic. An estimate of how many people visit a particular website
- Conversion rate. Based on the total traffic to a site, the percentage of customers who make an order
- Bounce rate. Site visitors who leave without viewing any other pages after entering (“bounce”)
- Order. Several items can be purchased in one checkout transaction
- Churn. Stopping shopping on the site is the percentage of customers who do so annually
- Organic search. Non-paid search engine traffic
- Paid search. Paid search engine traffic
- Affiliates. Traffic from other websites that is paid
Metrics key to valuing a business
1. Customer metrics:
Last 12 months’ orders by customers
At the end of 12 months, what percentage of customers is no longer active
AOV, or average order value
Amount per item, multiplied by the item’s price
The lifetime value (LTV) of a company
Contribution market value per customer, net present value
Cost of customer acquisition (CAC)
New customer acquisition costs
TAM (total addressable market)
Amount of all goods and services sold on the market on an annual basis
ARPU (average revenue per user)
User base divided by total revenue
NPS (Net Promoter Score)
An indicator of how likely a customer is to recommend the business to a friend or family member
2. Financial metrics:
- GMV (gross merchandise value).A site’s total sales value
- Margin or gross profit.For e-commerce businesses, shipping and fulfillment are included in cost of goods sold, so gross profit must take this into account
- The sell-through rate.Stock sold over a period of time as a percentage
- It is calculated by multiplying the enterprise value (EV) by the number of active customers (Equity + Net Debt).
- The equity to revenue ratio is equal to (Equity + Net Debt) / Revenue
- Gross Profit = (Equity + Net Debt) / (EV + Net Debt)
- Equivalent to (Equity + Net Debt) / EPS, DA, and DPA
- The LTV/CAC formula is calculated as follows: (Contribution per customer / Customer life time / Customer acquisition cost)