eCommerce companies are all unique, but like every business, they can have similarities and generally have three key drivers; Acquisition, Conversion and Retention. As part of the due diligence process, you should focus on these critical areas to help stress-test the business and ensure it matches the business plan. Here are ten initial questions to consider during the eCommerce Due Diligence process.
To simplify, I have broken it into three key areas: Acquisition, Conversion and Retention.
Acquisition marketing Due Diligence
1) Review historical Cost-Per-Acquisition data to give you an idea of how it has changed over time. At the same time, cross-check this with the level of competition to see if the business plan takes into account potential changes over time based on the increase spend vs competition vs size of the market.
2) Brand building vs Direct Response: Many eCommerce businesses focus on direct response campaigns to drive sales, but in eCommerce, understanding the elements of creating a brand (you can generally charge more) and how the business is addressing this area. If the budgets are split between the brand and direct response campaigns, are they reporting them separately? What are the goals for each campaign?
3) During review for eCommerce Due Diligence, you need to ensure they are focusing on the proper channels, don’t forget youtube is a huge search engine, and Baidu is not just massive in China but used by Chinese ex-pats in other countries. Is the company focused on a specific channel (Google?)? If so, what is the opportunity to grow and what will happen if they have an algorithm change or ads become too expensive? When will it become a cash drain? Does the company have a complete marketing strategy for moving forward?
Conversation Due Diligence
Once the company has driven traffic to the website (or app), it is critical to understand what people are doing during the eCommerce journey and, most importantly, how they convert.
4) Review hard and soft metrics. Hard metrics are conversation rate, is this industry average (above/below), if not, why not, and what is the opportunity? Soft metrics: traffic which is not converting, understanding what this traffic is doing, spending time on the website, looking at multiple pages, adding to basket or signing up for the newsletter. These are all useful metrics as we can put a value on this traffic and look to convert in the future.
5) Is the company focused on CRO (Conversion Rate Optimisation)? Do they run multiple tests to understand what people are doing and when on the website? Most importantly, do they have the questions they want answered?
6) The company needs to be aware of the critical journeys and report and monitor these monthly to ensure they know how the customer wants to shop.
7) Can they demonstrate this? Do they use analytics properly, are all pages tagged, and do they have a strategy for accurate and regular reporting?
Retention Due Diligence:
The final part of a rounded eCommerce Due Diligence audit is retention. Once the company has driven traffic and converted it, the customer needs to be retained.
8) Retention rate vs churn. The company needs to clearly understand retention, which customers purchase, and how often? Levels of churn and drop out of the funnel monthly. How is the company changing this?
9) Not all customers are equal. How are they ensuring their best customers are retained, and more importantly, when they attract similar customers, how are they moving them into a retention model?
10) How are customers attracted them back when they have churned? What are they doing to win back the customer, and what is the process?
Each business is different but the above should help understand the initial fundamentals of an eCommerce business.
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