Bootstrapping e-commerce by design
Bootstrapping e-commerce should be your main focus as an e-commerce entrepreneur.
Driving a bootstrapped business is the unmissable requirement to reach business sustainability. The latter, in fact, does not come necessarily with bootstrapping. On the contrary, the business will never be sustainable unless it is bootstrapped.
Tricky. For this reason, I first want to set a clear definition of bootstrapping e-commerce.
Bootstrapping e-commerce: the meaning
Bootstrapping e-commerce means that the monthly operating cashflow is positive. Hence, the cash flowing in from sales is greater than the cash flowing out for the daily operations (operating cash-out).
Into the operating cash out we can consider pay-outs concerning the goods/services you produce/re-sell (including inbound and outbound logistics), marketing & communication, technology to sustain operations (e.g. website hosting, ERP) and people involved in the previous activities.
More generally speaking, when you bootstrap the business, cash-in from sales covers the pay-out of costs directly involved to generate such sales. Therefore, the business can be considered healthy.
If the monthly operating cashflow is not positive, what happens is that you or your investors are putting money into the business to sustain daily operations. And, as you may imagine, it is not normal to put money into a business to allow it to run normal operations.
Once your e-commerce bootstrapped, hence generating a positive monthly cashflow from daily operations, it’s not time to party yet. Such cashflow helps to cover other pay-outs not considered so far, like the people working in administration and ordinary investments, for example, to keep the website updated.
When the monthly operating cashflow can also bear all the other pay-outs not considered belonging to operations, you are driving a sustainable business since it does not need any external source of financing (e.g. investors, banks) to run steadily.
If your business is bootstrapped but not sustainable yet, you have two ways. One is to reduce the costs not directly involved in the operations. The other is to consider the best way to finance your business while focusing on finding the hack to make it fully sustainable.
Entrepreneur’s rule to bootstrap e-commerce
The entrepreneur’s rule for bootstrapping e-commerce, or better, to understand whether a business is bootstrappable / going to bootstrap in the near future is very easy.
Just ask yourself: is the Customer Lifetime Value covering the Customer Marketing Cost, considering to run the business with external warehouse and logistics? If it is, then the business can be bootstrapped.
The Customer Lifetime Value is the value provided to you by the Customer during his life, while the Customer Marketing Cost is a metric representing the marketing effort to acquire a new customer and push him upwards to repeatedly purchase.
You can read more about the Customer Marketing Cost in a dedicated article. Also, you can discover in the article about e-commerce supply chain the reasons why running on external warehouse and logistics is not the best choice, but still making this assumption allows you to think of your business in a simpler way.
Bonus tips to bootstrapping e-commerce by design
Few more things to help you design your e-commerce for bootstrapping.
First, if are designing an e-commerce business and can’t understand how it could bootstrap, try to consider the impact of economies of scale in driving unit profits growth.
Second, when asking yourself if the Customer Lifetime Value covers the Customer Marketing Cost, the answer can’t reflect precisely what will happen in the real world. So, make it more meaningful by adding a resilience estimation.
Third, you can use a shortcut to design for bootstrapping: evaluate the CAC payback period instead of the Customer Lifetime Value coverage of the Customer Marketing Cost.