an in-depth analysis of
Average Growth Rate
There is no “average growth rate” in ecommerce. Splitting companies by quartiles reveals that some ecommerce companies grow dramatically faster than others.
By month six in business, top performing ecommerce companies have separated from the pack, reaching a monthly revenue over $600k, 329% higher than everyone else.
Average Order Value
Top performing ecommerce companies have an Average Order Value (AOV) 36% higher than everyone else ($102 vs. $75).
Top performing companies create a “renewable resource” of loyal customers. By the end of year three in business, a majority of their revenue is coming from repeat purchases.
After three years, companies in the top quartile have almost 4x the number of monthly orders, resulting in 279% higher number of all-time orders.
At the beginning of 2014, Jeff Jordan of Andreesen Horowitz wrote a widely quoted post that examined the rapidly changing retail landscape. His takeaway was simple: “We’re in the midst of a profound structural shift from physical to digital retail.”
In 2013, the growth of ecommerce significantly outpaced brick-and-mortar both domestically and worldwide. 2014 kept up this pace of growth, and according to recent projections from eMarketer, this trend is going to continue in the coming years.
These numbers are a positive sign for the ecommerce market, but they conceal an important fact. Behind these averages are ecommerce companies that have achieved breakout success, far beyond standard industry growth rates. In 2013, jewelry retailer Alex and Ani grew 250%. NoMoreRack, a flash sales site, also hit a 250% growth rate. Flash sale site TheRealReal was even higher, growing 295%. These companies are outperforming the market by leaps and bounds.
In this report, we look at the data to find out what separates the leaders from the laggards, and help you determine if your company is one of the best.
The first thing we wanted to explore is what average ecommerce growth looks like. To do this, we plotted monthly revenue from the date of a store’s first purchase onward.
This chart seems to show that the average ecommerce company is making $1.1M per month at the end of its third year. This statistic, however, is a dramatic oversimplification. As Avinash Kaushik famously said, “The interesting thing about averages is that they hide the truth very effectively.” To tease out the profile of top performing ecommerce companies, we needed to look deeper.
While ecommerce is steadily gaining market share in the retail industry, certain categories have been more successful at gaining traction online than others. Apparel/Accessories and Houseware/Home Furnishings categories have above average rates of ecommerce penetration, but Food/Drug and Health/Beauty haven’t had the same success.
It would seem then, that retail category would play a role in a companies ability to grow, but this doesn’t seem to be the case. Across the five categories we explored in our research, there is no significant difference in their growth rates.
As companies get bigger, it becomes harder to sustain a rapid rate of growth. Jeff Jordan calls this effect “gravity.” We expected to see this effect play out in our research, and it did.
This insight is helpful for companies in two ways:
Over the past decade and a half, the face of ecommerce, from ad platforms to shopping carts, has changed dramatically:
Because of these advancements, we were curious to see if ecommerce companies founded more recently grow faster in the early days of their company.
2013 is the most recent year we can make accurate estimates on, but the data indicates that companies founded more recently get to $10 million in annual revenue at a much faster pace than companies founded in earlier years.
This is likely the result of an ecosystem of changes: more high-quality ecommerce talent on the market, better technology tools that help retailers with everything from reducing cart abandonment to fulfilling orders more efficiently, or venture capitalists showing a greater interest in the ecommerce market. But one thing is clear, there has never been a better time than now to start an ecommerce company.
Our first round of analysis revealed a few interesting tidbits about growth patterns, but other than year founded, we didn’t uncover any clear indicators that tell us whether a company might become a top performer.
The increase in technologically-savvy consumers
Consumer shopping behavior has changed dramatically with the adoption of emerging technologies such as mobile and social media. “Generation Z,” those aged 18 to 24, are now spending one in ten of their dollars online.
In Q2:2014, purchases made via tablet or smartphone increased 48% YoY, three times the growth in desktop purchasing. Gartner found that mobile commerce currently generates 22% of digital commerce revenue, and predicts mobile revenue in the U.S. will account for 50% by 2017.
FedEx and UPS committed to addressing previous seasonal constraints by hiring seasonal employees. While the larger ecommerce companies, with Amazon setting the pace, are increasing their ability to handle their own deliveries and warehousing.
Emerging international markets
All-in-one logistics providers have made it easier to penetrate international markets by making international shipping and transaction processing smoother.
Product and brand differentiation
Ecommerce stores like Birchbox, ThinkGeek, and Nine Naturals have found that the best way to compete with Amazon is by creating highly differentiated product and brand experiences.
Store-based retailers catching web-only
Traditional retailers saw 22% growth in ecommerce sales over the 2nd quarter, a pace faster than overall ecommerce. However, the influence of the online channel as it extends to offline is continuing to evolve, and many physical retailers are learning to balance new growth with the proper pace of closing physical locations.
At this point, we needed to get away from averages and look closer at top performers to gain a better understanding of who will become the next break-out hit in ecommerce.
To do this, we split our sample into quartiles based on total revenue in their third year of existence. The fastest growing companies are in the first quartile, next-best in the second, and so on.
This data paints a sharp contrast between the very best and the rest of the pack. The top quartile (Q1) companies are crossing $60 million in total revenue by the third year they’re in business, the rest of the pack hasn’t crossed $15 million.
This distinction becomes even more apparent when we look at the average monthly revenue for ecommerce sites. Shortly after the one year mark, monthly revenue for top-quartile companies is reaching over $1M.
This rapid rate of growth so early on in a company lifecycle points to the significance of natural product/market fit and execution. Marketing spend can get you far, but marketing alone is unable to drive this kind of accelerated growth.
This rapid revenue growth is fueled by excellence in customer acquisition. By month six in business, top performing companies are acquiring new customers at a rate over 3.5x that of their competition (3,800 vs. 1,000 new customers per month).
The 3.5x advantage is maintained consistently throughout the early years of top performing companies. This aggressive acquisition accumulates into a massive competitive advantage — 196% higher number of total customers by the end of year three.
We mentioned earlier that the top performer’s rapid growth is likely a result of product/market fit. It’s when we look at Q1 performance at the order level that this story starts to take shape.
By six months, top quartile companies are bringing in over three and half times the number of monthly orders as the next quartile, and top performers maintain this rate through the three year mark.
Top quartile companies’ rate of monthly orders ultimately translates to a steady increase in a greater number of all-time orders. At the end of year three, top performers have reached well over 500,000 all-time orders, while the next closest quartile has yet to reach 150,000.
This difference does not come from more marketing dollars alone. Top performing companies are great at acquiring new customers, but they also have a product good enough to keep customers coming back again and again.
Top performing companies have a greater number of all-time orders, but that’s not all. The orders are also a higher value. Top performing companies have an average order value (AOV) of $102.39. Companies in the lowest performing quartile have an AOV of only $74.73.
Acquiring new customers is increasingly expensive. Getting existing customers to purchase again is cheap — costing between ⅓ and ⅛ as much. Companies that excel at turning one-time buyers into repeat purchasers have more profitable, sustainable businesses, with higher lifetime values.
We already saw that the fastest-growing companies have higher AOV and almost four times higher number of all-time orders, but we wanted to see how the mix of new vs. repeat revenue changes as a business matures. Take a look at how this plays out across all quartiles:
This looks pretty much as you’d expect. In the beginning of a company’s life, almost all of its revenue is coming from new customers, and that gradually converges over time. By two years in, about 50% of revenue is from new customers and 50% is from repeat customers.
Now let’s separate out our top performing companies.
There is a similar pattern here, but some significant differences show up. The first obvious one is that in month one, around 20% of revenue is coming from repeat purchases, double the rate of bottom performers, as seen in the chart below. This is impressive: top companies are excelling at retaining customers, even in their very first months in business.
But what’s more important is that in top performing companies, by the end of the three-year period repeat revenue begins to take the lead. This is critical to a business’s growth. Growth becomes more challenging as a scale increases. Remember, growing 100% year-over-year at $1M in revenue is easier than at $100M in revenue.
But as a company scales, it also creates a “renewable resource” — its existing customers. A business needs to rely on these customers for loyalty (repeat purchases) and advocacy (referrals) if it’s going to continue to grow beyond initial scale. It’s clear that this is happening in top companies, while the rest of the market struggles.
This is potentially the most significant signal of the ability for these top quartile companies to become lasting ecommerce powerhouses. Building a brand that inspires customer loyalty is the ultimate secret to scale.
Closing thoughts from Blake Lyon, from Lerer Hippeau Ventures. LHV is a prominent venture investor in the ecommerce space.
At Lerer Hippeau Ventures, we believe in ecommerce. Over the past four years, we have watched ecommerce evolve from the “cheaper alternative” to a sector becoming known for innovative products, powerful brands, and data-savvy founders.
This study shares the data behind a shift that we have observed from the front lines. While the ecommerce landscape is becoming increasingly competitive, best-in-class brands are writing the playbook to achieve truly breakout success.
Here are a few of the strategies that we have seen driving these top performing companies:
From solving the inconvenience of mattress shopping (Casper) to delivering all the ingredients for a healthy home-cooked meal (Plated), ecommerce companies are building lasting consumer brands by blurring the line between product and service.
Amazon owns commodities, but best-in-class companies build competitive advantage by engaging with vibrant communities. Bark & Co. has built a strong community around shared interests of dog lovers, just as Chubbies has done with shorts for “bros.” In these companies, customer loyalty fuels growth.
The “What if it’s not like the picture?” hurdle is a barrier that any ecommerce retailer needs to overcome. But some of today’s biggest success stories come from companies who have made overcoming this hurdle a core part of their experience. Warby Parker’s home try on kits for prescription glasses build returns into the process. Birchbox reinvented the cosmetic sample, creating an entirely unique buying experience.
What we see is that the most successful companies excel at two things:
It’s the ability to bring customers back again and again, while aggressively acquiring new customers, that gives best-in-class companies the edge. We’re excited about these companies. They are where product-market fit meets excellence in execution, and they will continue to redefine the ecommerce landscape in the coming years.
RJMetrics is the analytics platform of choice for over 400 online businesses, many of whom are ecommerce retailers. Our global customer base ranges from new ecommerce companies with less than $1 million in annual revenue to some of the fastest growing companies in the IR 500.
The conclusions in this report are based on analysis of the anonymized data of these companies.
If you’d like to understand how you compare on these key metrics, we’d be glad to help.
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