Why depth of channel and market size matters in Ecommerce

Facebook and Google have been a boon for advertisers. The size of engagement and the massive dataset they have collected from their users allows for an unparalleled amount of targeting. Brands and agencies have a number of levers to pull from, including but not limited to precisely targeted demographics, interest graphs, and of course, scale.

New startups that have taken advantage of these two channels have grown at an unprecedented rate. Dollar Shave Club has used these online channels to reach over $200M in revenues this year. Blue Apron’s media buying has helped as well. It has reached a $1B runrate and is almost ready to IPO.

However, for every success that’s broadcasted by the media, there’s competitors looming. For every Dollar Shave Club, there’s a Harry’s. For every Blue Apron, there’s a Peach Dish, Home Chef and Purple Carrot.

But as competitors form, the cost of acquisition gets prohibitively more expensive. Companies end up competing for the same user. Soon enough, you might end up spiraling toward a point where well-funded competitors are willing to spend more than you for a user. If you choose to compete on price, that’s often a war the better funded company ends up winning or ends up with you depleting much needed cash saved for product and operations.

There’s usually 2 solutions to this game: market size or differentiated product. There’s no getting around CAC/LTV economics. The right answer is to usually do both, but let’s pick the easiest for now and leave the differentiated product for a later blogpost!

Picking the right market within a channel matters.

A channel that has a big enough market is hard to deplete and can sometimes maintain several competitors of the same size. That’s why despite price competition the auto insurance industry in the US is able to maintain several companies of $1B+ size and almost every major auto insurer advertises on TV! That being said, for a new product category, it’s often hard to tell how big the market is; however, a rough estimate always helps.

Market size and depth of channel remains a critical factor for choosing your product and getting it to market.