Three Things to Look out for in an E-Commerce Business

E-commerce has taken the world by storm, completely revolutionalising the retail industry. Just last week Jeff Bezos, founder of the largest e-commerce company in America, overtook Bill Gates to become the richest man in the world. His company’s market capitalization grew 500 times since its initial public offering. And yet, even now, industry experts think that this is just the tip of the iceberg.

Investors who are looking to get into the action, however, need to be familiar with how the industry works and what they should look out for in e-commerce companies.

As such, I have listed three important aspects of an e-commerce company that investors should look at.

Annual active consumers

This metric tells us how many people are actually buying goods on their platform each year. Investors should look out for companies that can consistently increase their consumer base over time.

More customers on their platform equate to higher sales and revenue over the long term. An e-commerce company that has a dwindling annual active consumer rate should be a red flag to investors, indicating that consumers are moving away from their platform to competitors’ sites.

Product offering

Consumers are extremely fickle and may hop between sites. However, one way that e-commerce companies are able to create loyalty amongst customers is ensuring that they offer a variety of products that meet customers’ needs. The best way to do that is holding a wide range of products at competitive prices.

Investors should, therefore, look out for companies that are consistently expanding their product offering and creating a competitive e-commerce landscape.

Business model

There are two main business models that e-commerce companies operate via.

First, there are some companies that hold their own inventory and earn the difference between the cost of goods and price of goods sold. This model is usually capital intensive and companies need to build their own warehouses to store their inventory.

On the other hand, there are companies that simply facilitate the transactions between third-party merchants. These merchants could be either individuals or small businesses. E-commerce companies that use this model have lower capital expenditure requirements but are subject to the kind of products that the third party merchants offer.

The Foolish bottom line

E-commerce is growing at an astounding rate. Investors who are looking to invest in companies that operate in this space should familiarise themselves with how the industry works and what to look out for in each business.

Meanwhile, for more (free!) investing insights, sign up here for your FREE subscription to The Motley Fool's investing newsletter, Take Stock Singapore. It will teach you how you can grow your wealth in the years ahead.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.