I've recently had a chance to speak with a founder of an ecomm business that's doing about ~$30M in sales. I was shocked to see one person scale something that large from nothing and got curious about the business model. Those who are familiar with ecomm businesses, a few questions:
1. What is a typical EBITDA margin on this kind of business? I think they have both Amazon and D2C website. Are these businesses' margins scalable?
2. What is the end goal for these businesses? Keep trying to grow? Buy another ecomm business? Sell? What kind of multiples (and what are the metrics) do these ecomm businesses sell for?
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What is a typical EBITDA margin on this kind of business? I think they have both Amazon and D2C website. Are these businesses' margins scalable?
The biggest metrics that matter are LTV:CAC over 30, 90, 180, and 1 yr and 2 yrs, spend-to-revenue, and margin. The LTV:CAC piece will change profitability significant but I can usually guess FCF or EBITDA on the above alone and be pretty close.
The most highly valued brands sell product on a subscription basis and have a ridiculously health lifetime value to customer acquisition cost. Best example? Chewy - all data is public too.
What is the end goal for these businesses? Keep trying to grow? Buy another ecomm business? Sell? What kind of multiples (and what are the metrics) do these ecomm businesses sell for?
What's the end goal of any business? I can tell you LMM multiples but it really depends on gross margin, how diversified acquisition channels are and most of all.... LTV to CAC.
Anything with good LTV:CAC (over 4:1) at scale ($10M+ at least) is gold. I have a brand we own right now with ~$10M run rate and a ridiculous LTV:CAC, probably around 8:1+. Dropped everything we are working on and pumped more cash into it + time b/c I know we can get it to $30M+ PA in two years and sell it at an 8x+ once the time is right but probably won't sell unless we get a really stupid offer.
Lots of good public comps available BTW. Hate to bring it up again but I think Chewy is really the best example of a publicly traded eCommerce company to look into.
Finally I think it's worth differentiating a DTC brand VS eCommerce retailer. Two very different things. If you want to know more you can PM me and I'll send you my Calendly link, happy to jump on a call.
Thanks for the response. A few questions re your focus on LTV / CAC:
1) are you speaking in context of subscription ecommerce products only? When I think about non-subscription ecommerce products (headphones, or lawn chairs for instance), I think it’s a bit tougher to calculate the LTV number without data over a long period of time?
2) for subscription products are you getting accurate enough churn data in your due diligence in order to calc LTV? And for LTV I assume you’re using gross margin not revenue?
Appreciate the value you bring to this site.
1) are you speaking in context of subscription ecommerce products only? When I think about non-subscription ecommerce products (headphones, or lawn chairs for instance), I think it's a bit tougher to calculate the LTV number without data over a long period of time?
No, I mean across all forms of revenue. Think of categories like beauty products, pet food, or food & bev. All have a sticky customer that tends to come back time and time again even without a subscription component. Lots of ways to drive this...you can do really cheeky things like line up the amount of product per package with the average time it takes for someone to visit the site again organically to figure out how much product should be in each shipment etc.
Calculating LTV is 100% a pain in the ass and many people even those running large companies have no clue how to do it. It's not a perfect science either and really varies depending on what BI setup the co is running. Magento and Adobe Analytics for ex would be very easy to play with data. Vanilla Google Anaytics + Shopify = manual PITA.
2) for subscription products are you getting accurate enough churn data in your due diligence in order to calc LTV? And for LTV I assume you're using gross margin not revenue?
Accuracy is hard unless a company is old and slow growing. A company that goes from a $10MM run rate to $20MM run rate in a year has likely had a lot of fundamental changes in the business which impact LTV (hopefully in a good way).
We only use it as a baseline + directional. If organic traffic is dropping and LTV is trending in the wrong direction, it's not a good sign. Conversely, the opposite is great. For LTV calcs, really depends on context but we also like to think of GM after ad spend not before.
Other ways LTV gets fun:
a) LTV by first purchase - either product or product type level. Optimize spend towards products with stickier customers.
b) LTV by acquisition channel. Are customers acquired via influencer marketing stickier than unassisted conversions coming in from programmatic display? If so, you know you can afford to spend more to acquire on the channel with better LTV.
And then the above is all impacted by cash the co has. Sure your LTV might be awesome but can you afford to wait that long without whoring out your cap table?
Quick aside about LTV. No one knows how to calculate this, unless you have actual historical data (which if your business is young good luck). A substitute is CAC payback period, how long before a customer has paid off their CAC. In e-commerce this has gotta be fast, unlike SaaS or other business models where churn is lower.
Also be wary of very low CACs - there is lots of “creativity” that some companies put into their CAC calculations...
Do you have an example of the "creativity" you're referring to?
Yeah, so a lot of companies won’t report fully loaded CAC instead reporting direct CAC (which is not as important a metric), ie, they won’t include marketer salaries and other overhead costs. So when you talk about CAC, you have to talk fully loaded to get a sense of what the true CAC really is. The creativity doesn’t stop there though, since none of this is GAAP companies can fiddle/adjust/rework metrics ad nauseum (famous example WeWork community-adjusted EBITDA which was just “earnings before all expenses” pretty much).
For sure, unless someone has tactical experience it's not something they'll be able to diligence at all. Too many ways to manipulate the CAC side of things. You need to do your own ground-up analysis and the only way to do that is with a team who is very tactical in all aspects of digital customer acquisition including building out an internal attribution model to figure out what part of spend is really driving new customer acquisitions.
LTV CAC has to be the single most swagged metric I've ever seen in my life. It's so consistently bastardized that when produced by someone else, it should always be taken with a grain of salt. Agree 100% with you.
+SB
I cannot register how much time is spent on unraveling and understanding both LTV and CAC in e-commerce and even sometimes software deals. In each deal I've worked on, each buyer had their own idea of what each side of the equation should include based on their own analysis. Nightmare fuel, especially when you're the analyst digging through shitty site and BI data exports to qualify the LTV:CAC metrics provided by the seller for the marketing materials and you can't bridge it.
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