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The E-Commerce Reality
So, we’ve been talking about scaling e-commerce businesses — and it’s tough, isn’t it? It’s really hard. I feel for the founders. It’s like you need to get this perfect recipe right: get the right ingredients, at the right time, in the right order.
Yeah — it’s about having the right customer, in the right place, at the right time, with the right stock. There are so many different variables to consider in e-commerce. It’s quite a difficult sector to be in. If you think about our tech clients and SaaS clients, it’s a totally different ball game.
E-commerce definitely has some nuances, and it’s definitely got harder over the last few years. If you think about Google, Facebook, and so on — they’ve sucked so much value out of the DTC market. They’re firmly embedded in that value chain; they’re the ones making loads of money out of e-commerce. So now, heading towards 2030, it’s tougher than it’s ever been to make money in e-commerce.
You go back maybe 15 years and you could get away with some horrible habits running an e-commerce business and still probably be profitable. But these days you have to get most things right, most of the time — otherwise you really don’t make much margin, and you can certainly run out of cash just like that.
That’s a really good point, and I think attribution compounds it. With that iOS update — where you can’t actually identify what marketing spend is working and what isn’t — it’s made it really tricky for business owners to know where to pump the money in.
Absolutely. Even 10–15 years ago in big corporates — I used to be a CFO — trying to attribute marketing spend to channels, activities, and clients was incredibly difficult. Even with all the resources of a massive business, it was still a bit of a guessing game, particularly when you add brand advertising. It’s relatively easy to go “meta, this ad, this product — is it working? AB test it.” But when you add other channels and some brand spend, the pot gets murky, and you have to go back to first principles: how much am I spending, am I actually making money, can I spend more to make more?
But I do like e-commerce businesses because it is quite a numbers game — and that really appeals to my inner accountant. Once you can see the numbers clearly, you can see what’s working and what’s not.
Metrics and The First Sale
I like to look at it as “Paul’s recipe for e-commerce businesses” — what margins you’re aiming for, how to think about marketing spend, how you need to see all the various metrics. It’s very difficult to make profit on the first sale in an e-commerce business. You’re really lucky if that first purchase makes any substantial money. So you’re kind of betting the house on: are they going to come back?
Yeah — are they going to come back, when precisely, and how much are they going to spend? And after they come back, will they come back again?
So it’s that game of: you’re probably going to have to squeeze the accelerator quite hard in the early stages to get new clients and introduce your brand and product to them. A bit like a car — once you’ve got up to speed, you coast, you’re more fuel-efficient, and the profits start to come in. You get those repeat purchases, and if people love your brand or product, they come back.
Product dynamics and repeat purchase behaviour
The e-commerce businesses that really struggle are the ones without great repeat purchases. They might have a great product, but it doesn’t lend itself to buying every week, every month, or even every year. That makes for quite a difficult environment. The product you’re selling really affects the financials of the business.
If you’re selling toothpaste online, for example, you’re going to consume it and repurchase it — probably every month. You could even get people to stock up, or build a quasi-subscription business. But if you’re selling a one-off purchase — a TV, say — your customer acquisition cost becomes much more important, and the value they generate off the back of it matters even more.
You might be selling a big-ticket item, but if you’re only selling it infrequently, your business model is going to be really tough unless the cost of acquiring the customer and providing the product is relatively small compared to what the customer is prepared to pay. That product dynamic is like a little story inside every e-commerce business — you’ve got to figure out how that product operates financially, as well as what it does: is it toothpaste? Is it a towel? An item of clothing?
Hero products and Average Order Value
You’re also going to have some products that bring the customer to your store — your hero products. They bring the customer to your website and to your store. So: what are they going to buy when they come for that item? What are they going to do with it?
Ultimately, when you’re doing that marketing, you’re getting a basket of spend — and this is where AOV comes in. If you’re spending £20 to get a customer and they’re only buying £30 worth of stuff, it’s almost impossible to make any money. The basket size has to be big enough that you can recoup that fixed cost of acquiring a customer, because Google and Meta do not want to give you a customer for much less than £20–30 most of the time — and often it can be substantially more than that.
So they need to be spending multiples of your acquisition cost, given that you also have the cost of the product, the cost of shipping, and everything else. If you’re not getting a £60–70 AOV as a minimum, you’re going to really struggle to scale that first customer acquisition profitably. And ideally in the US, it needs to be over $100 AOV. That’s what good looks like.
Marketing and Agency Management
One thing I find quite hard when speaking to founders — particularly those who are earlier in their journey, six-figure businesses trying to get to seven — is that they’ve not done this before. They don’t know what good looks like. They’re coming to us for that “what do I do now?” conversation. They don’t know what they don’t know. This is where we can step in and help.
I’ve got scenarios where a marketing person will come to a client and say, “I’ve done a great job on your marketing, but your bucket’s leaking on returning customers — that’s the problem, not me.” And you know what? I’m going to go and validate that, because I’m not going to trust that at face value. I’ve found a few times that actually that isn’t the problem. Marketing is not bringing in the volume of customers they say they’re bringing in. They’re bringing in the revenue, but the average order value is actually higher — so the order number is down. That’s a completely different conversation: “No, marketing — you haven’t done what you said you were doing.”
And agencies want to sell ads, right? They want you to spend. So the whole marketing and agency side is really geared up to spending your money and convincing you that yes, you can live off a 2x ROAS.
You won’t make any money off a 2x ROAS. I haven’t seen any e-commerce business that will consistently make money off it. So it’s that gross margin question — what’s the minimum you’d expect? Can you live on a 45% gross margin? I’d argue not. I always say to e-commerce businesses: 60% gross margin is the target to aim for. Not everybody can quite get there, but 60% is gold standard — not platinum standard. There are businesses doing better than that, but 60% is certainly gold standard.
And it’s specific, depending on exactly what you’re selling, because some things are going to have better margins than others by nature.
Demand Planning and Inventory
When I think about the fuel you need to scale an e-commerce business, it comes down to: you need some cash, you need to buy some stock to sell some stuff. Sounds simple. It’s not.
You’ve either got too much stock or not enough stock — never just the right amount. And it’s so hard in a small e-commerce business to have the data to predict how much you need and when. There’s loads of seasonality with certain products — Christmas, Black Friday, and everything else. If you’re not attuned to forecasting, you can definitely find yourself at points in the year in a feast-or-famine situation.
It’s a really dangerous area. If you overstock in a certain product or type, it could shut you down. That demand planning piece is so important, but it’s also very difficult to do. And we work with businesses that are usually quite small — they haven’t got the staff or the people in-house to help with demand planning. So they’re trying to do it blind, doing what they think is going to work.
And often smaller e-commerce businesses — even six or seven-figure businesses — don’t have a lot of cash to tie up in stock in the first place. If you don’t make profits, you’re not going to add to that cash pile to be able to invest in stock and scale. What I see more often than not is: they’ve got stock but no cash, or they’ve got cash but no stock — and they flip-flop between those two extremes.
Back to that recipe point — if you’ve got the recipe right, you know what you’re doing. If you don’t, you’re messing around trying to find what good looks like, but you might not be making the right decisions.
Sea vs. air shipping as a planning indicator
You know, what’s the one thing e-commerce businesses tend to do with shipping? They give it away for free to the customer. But because they’re not planning stock, they tend to ship inbound by air. And as we know, sticking stuff on planes at the last minute to get it into your warehouse is an expensive business — you’re just choosing to trim your margin. A sign of a well-planned e-commerce business is a healthy sea-to-air ratio. The recipe I’d suggest is roughly 80/20 — 80% sea, 20% air. If you’re consistently sitting at 50/50, you really need to go back and look at your planning.
And it’s a really good giveaway for how well you’re doing on stock forecasting. Don’t look at stockouts — just look at how you’re shipping it. Basically, it shows that everything comes down to planning, preparing, forecasting, and thinking ahead. If you’re not thinking ahead, you can’t make decisions now without understanding the impact later. You just can’t run a business like that.
And picking up on that planning point: if you’re not planning forward — what are my sales going to be, what’s my marketing investment, what stock do I need to buy — and you’re not getting that financial plan in place, how do you know you’ve got enough money to play the game? You probably don’t. You might be able to buy the stock, but if you can’t afford to pay your marketing bill to Meta, you’re not going to go very far. You’re going to have a lot of stock that you can’t sell.
Cash Flow and Supplier Strategy
If you look at some really big UK brands like Gymshark — when Ben Francis was asked what allowed him to scale so quickly and so big, do you know what he said? It was the way he bought stock. What he actually meant was that he paid for the stock to his suppliers after he’d already collected the money from customers.
In our finance world, we’d call that a negative working capital cycle. Basically: sell it before you’ve bought it. Just-in-time taken to another level. And he credited that — which was something of a happy accident, getting really good terms with his initial suppliers — as giving him the fuel to scale the business. Without that, they’d have never had the cash, they’d have needed to seek investment, and he’d have been diluted as a shareholder on that scaling journey.
We’re quite used to seeing that kind of investment journey in tech and software businesses. E-commerce can be just as capital-intensive if you allow it to be. A lot of businesses pay a deposit up front, then half when it’s on the boat, then the remaining 25% on landing — so you’ve paid for it all, and then you take 90 days to actually sell it. That’s a lot of money to tie up in your supply chain unless you’re super profitable or you’ve come into the game with a lot of capital.
Negotiating payment terms and working capital
The negotiation skills required to bring down any cost that feeds into your P&L — shipping, costings, everything — are not necessarily natural to a founder. I’d say yes, negotiating with the supply chain is often not where people have a skill set. And it’s also something you think “I’ll do that later” — so you put it off. You only do it when you’ve hit the wall.
What you really should be doing is having a strategic conversation as you scale. If you’ve proven you can sell as a six-figure business, you need to renegotiate to become a seven-figure business. You need not just better pricing — you’re buying more, so you should buy a little cheaper — but you need better terms. A lot of people just focus on the price and not the payment mechanics, and that’s really important in e-commerce: having the right payment mechanics with your supplier to make that working capital cycle as short as possible — or, if you’re very lucky, negative.
Financing traps and the path to stability
Starting a business is really hard, and as soon as you make a bit of money, the natural thing is to pay yourself a bit more. But if the business can’t sustain that, you’re shooting yourself in the foot. A lot of founders start with credit cards — that 30-day spend — which is great if you know what you’re doing. But it becomes a release valve: “I’ve run out of money, so I’ll put it on the card.” And then you see quite a lot of e-commerce businesses at various stages getting into revenue-based financing — a doom loop that you can’t easily get off.
We’ve helped several e-commerce businesses put in more fixed-rate, cheaper financing in order to wean off revenue-based financing, become more stable, pay that debt down slowly, and ultimately become debt-free — and start building capital reserves. As you graduate from six to seven to eight figures, all these lessons come out. You can’t afford to be using credit cards as your go-to finance solution at eight figures — that’s the six-figure play.
But the best e-commerce businesses I’ve ever seen — the ones with the right recipe — don’t need any of that. They make the right amount of margin up front with the customer. It’s thought through — or accidentally thought through, because they managed to find a product where the recipe was relatively right early on and didn’t need much tweaking. They’ve naturally got a product that’s relatively high price, good margins, in demand, and in an underserved area where they’re not competing with other brands to spend loads to get attention.
But that’s one in ten businesses, I find. The rest work out they need quite a lot of salt and pepper in the recipe — and sometimes some fundamental ingredients need to come in or out to make it taste right to scale. That’s why so many e-commerce businesses either stay small — an Amazon or eBay seller, a little bit of DTC — and struggle to get the kind of takeoff to grow into seven and eight-figure brands.
Aligning Strategy with Founder Goals
When I first speak to founders, the first conversation I’ll have is: what’s your actual goal? What are you trying to do here, where are you trying to get to? Some will say: “I want to exit in 3–5 years, I’m in it for the money, I want to get what I want and move on and do it again” — serial entrepreneurs. Others just want to prove they can do it. Some have a lifestyle business they want to carry on as-is; they’re happy for it to tick along and don’t particularly want to grow.
Not everybody wants to — or can — get to a nine-figure brand. So it’s really important to understand what the founder’s goals are, because most people are really passionate about the product or brand they’ve created. It’s their baby. But whatever your goals are, you need to align your financial plans to those goals.
My mum always used to say “cut your cloth.” If you’re aiming to have a lifestyle brand, work out what that lifestyle actually looks like for you as a founder. Is that time out of the business? Is that money to do what you want? What does it mean to you? Even “time out” means you’ve got to pay somebody else to run it while you’re not there. You have to have enough profit and margin to allow you to have a team who can do it — otherwise you’ll be sucked into the day-to-day regardless.
It’s a really important conversation when we’re helping founders with their finances, because otherwise you’re pushing water uphill. I’ve had experience of trying to push a business to grow, and after a while I thought: hang on, I’m pushing them to do something they don’t want to do. So you need to understand the actual goal before you get going. Growth for growth’s sake is not always the right answer — and if the margins aren’t right, there’s no point growing because you’re just going to make your losses bigger.
When scaling becomes the wrong answer
I’ve had many a founder crying on my shoulder with an eight-figure business saying they’re unhappy. The business is harder to run and less successful than when they were smaller — and they’re not enjoying it. I always say: you’ve done amazingly well — you’ve navigated startup, six figures, seven figures, eight figures. But the business isn’t in the right place. They’re doing too much, suffering from burnout or fatigue. The numbers aren’t great, so the reward isn’t there. There’s no dopamine hit of “I’m making loads of money” or “it’s easy to operate.” It’s just tough, not making much money, problems everywhere.
That business has not scaled in a way that aligned to what the founder actually wanted. And sometimes you need a bit of a reset on those things.