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Maximising value in an e-commerce business

By Eshani Bhatt,

How private equity firms can use the digital flywheel to drive success

The bricks and mortar retail sector has been dealt a blow by Covid, with non-essential shops repeatedly forced to close their doors as viral surges have swept the globe. The corresponding boost to demand for e-commerce, meanwhile, has been staggering. January – traditionally a restrained month in the UK, as consumers recover from the excesses of Christmas shopping – saw a 74 percent year-on-year increase, according to IMRG Capgemini Online Retail Results which was a record-breaking growth in sales. Those numbers have been mirrored around the world; US online spending spiked by a massive 77 percent in May 2020, just weeks after the country went into lockdown.

Not only have confinement orders severely curtailed footfall, forcing an online migration, but as consumers have spent more time searching the internet, awareness of varied digital models has grown. This has motivated businesses to pivot to capture demand, creating a broader e-commerce ecosystem. Indeed, the pandemic has expanded the categories embracing the digital sphere. For example, online grocery shopping has proliferated with cautious consumers keen to mitigate the health risks of trips to the supermarket.

We have also seen new consumer segments emerge. In particular, older audiences who as non-digital natives have traditionally favoured bricks and mortar, were compelled to accept e-commerce due to shielding considerations. Finally, there has been a marked increase in awareness of other digital models, ranging from parcel collection services (which negate a trip to the post office) to home delivery dining kits, which have emerged as a substitute for the eating out restaurant experience. These changes in consumer behaviour may be unlikely to revert when restrictions are finally eased, increasing the incentive for businesses to succeed in the e-commerce space and to capture a growing size of the prize.

Those that do succeed, meanwhile, will be highly coveted. E-commerce as a sector has largely fared well during the Covid period, alongside other digital models that have made our locked-down lives possible. Unsurprisingly then, e-commerce is also dominating private equity deal flow, with valuations sometimes eyewatering. It is vital, therefore, that firms are able to both rigorously assess the strength of an underlying digital business model during the diligence process and to maximise value creation, once a deal has been done.

January – traditionally a restrained month in the UK, as consumers recover from the excesses of Christmas shopping – saw a 74 percent year-on-year increaseAdd block

January – traditionally a restrained month in the UK, as consumers recover from the excesses of Christmas shopping – saw a 74 percent year-on-year increase

Using the flywheel to analyse an e-commerce business

For a private equity firm considering an e-commerce business, the digital flywheel is a crucial analytical tool. Building upon the ubiquitous marketing funnel, the digital flywheel provides a framework for considering the interconnectedness of e-commerce success. While the funnel focuses predominantly on customer acquisition, the flywheel captures the digital spin-off effects of business levers to build momentum across brand awareness, acquisition, conversion and retention. It is, therefore, a model that from our experience is better suited to the complexities of the digital world.

In an increasingly sophisticated digital sector, with the use of chatbots, personalisation, augmented reality experiences, user-generated content, programmatic advertising increasingly common, it is helpful to go back to basics and for private equity firms to instead systematically consider three core elements of the flywheel. First to be considered are the acquisition levers, those channels that drive traffic to an e-commerce website. Once on-site, private equity can consider the customer nurture levers, which are focused on conversion rate and retention. Finally, there are the digital enablers - the team itself and tooling used by an e-commerce business - which are fundamental for supporting success.

Acquisition levers

Driving traffic to an e-commerce website is, of course, fundamental to revenue contribution. However, this is not a pure volume play; there are also considerations around the quality of that traffic and the associated cost. There are decisions to be made around the balance of organic and paid channel sources. We use the word organic, rather than free, here, deliberately, as there is a resource and time cost to building up organic channels, that is frequently overlooked.

It is also worth distinguishing between channels that you can actively influence. For example, driving traffic through paid search effectively means turning on a tap once marketing spend is directed behind the channel. Other acquisition levers, conversely, are dependent on external factors. For example, direct traffic volumes (consumers actively searching for a website or brand) are reliant on an associated brand building strategy to stimulate pre-existing level of awareness.

Private equity investors must be aware that there is no one right answer to these questions. Traffic profile will vary significantly by sector. For example, B2B service providers are likely to be far less focused on paid channels. Traffic profile will also vary by stage of business. Companies are likely to be more reliant on paid marketing in the early growth phase or when expanding into new territories. Critically, however, traffic profiles also vary widely from business to business within the same market or sector. What matters is not necessarily the channel mix used, but rather that the traffic strategy delivers meets business need by delivering the required amount of traffic, profitably. This requires effective measurement. The traffic mix should be considered holistically and attributed appropriately, in a cross-channel manner, so that the customer economic metrics can be fully understood and to ensure that customer acquisition is profitable.

Customer nurture levers

Once you have successfully driven traffic to a website, steps must then be taken to improve the quality of the customer experience and increase conversion rates, maximising the value from customer acquisition levers and its associated marketing spend. On-site customer levers may include conversion rate optimisation tools, personalisation, UX and customer service, all of which are ultimately geared to making the e-commerce experience as seamless and user-friendly as possible. Chatbots, for example, can be used to answer customer queries and encourage transaction.

Beyond a positive UX customer journey, however, customer levers must also be used to drive retention. This may include effective customer segmentation, together with needs-based personas and rigorous A/B testing to amplify impacts. A robust CRM system is also essential. Analysing customer data can unlock a wealth of insights. Reviewing a database of customer transactions, detailing country, date of first purchase, channel of acquisition, subsequent spend and, of course, a unique ID, can be used to analyse key metrics such as customer drop-off and LTV, to measure the impact of marketing activity on retention.

Customer levers may require a longer-term focus than acquisition levers, which for some channels, like paid search, can be pulled almost instantaneously. Customer nurture initiatives may also involve more upfront cost. A strategic roadmap prioritising tactics based on investment versus expected impact is therefore essential. Private equity firms should be aware that these customer levers have the power to deliver a meaningful uplift in margins, for example increasing conversion rates by just a couple of percentage points can result in significant revenue gain.


Enablers ensure that the right team, tooling and technology are in place to allow a business to maximise across the digital flywheel. The team is a key focus of any digital assessment, as it is that team that is responsible for driving a culture of innovation, data-driven process and customer-centricity that is fundamental to success. Tooling is imperative for effective scaling. As the business grows, tooling can drive operational efficiencies and insight. Analytics should also be a key area of focus. As businesses become more sophisticated, an analytics mindset can be an important differentiator. From attribution to life-time-value, there are a range of ways in which analytics can leverage e-commerce efficiencies as an organisation grows

It is critical, however, that any investment in tooling or analytics is preceded by a thorough business case review. A needs-based assessment should be conducted, as well as a consideration of the payback – not necessarily only in terms of direct revenue, but in terms of team efficiencies. And, as with all these things, that decision making must be contextualised, taking into account what is appropriate for a given company at a given stage.

Private equity firms should be careful not to side-line these enablers, however, which are just as fundamental as other elements of the flywheel but are too often overlooked. A business’ digital culture is the bedrock of its success. Are its teams agile? Is innovation democratised? What is its approach to data? Is technology being leveraged to run internal processes efficiently? Is there a test and learn ethos? This is about far more than just hiring top talent, investing in expensive tooling or setting up a flashy attribution model. Strong digital enablers will be at the very core of any successful e-commerce business.

A question of priorities

It is clear, then, that there are a number of levers a private equity firm can influence across the digital flywheel in order to drive e-commerce success and efficiencies. The question becomes one of prioritisation. When formulating a 100-day plan, investors must consider which components of the flywheel can drive the most value. Uncovering what has worked, historically, and what the businesses aspirations are, is therefore crucial.

The answers will invariably be different. There is no one-size-fits-all when it comes to formulating a strategy for e-commerce success. However, understanding business need, growth plans and strategic direction, will help identify where maximum opportunity lies in the digital flywheel.

Palladium is a digital and technology due diligence provider and digital transformation partner to Private Equity firms and their portfolios across Europe and the US. Palladium was named by Real Deals as 2020 Specialist Advisor of the Year at The Private Equity Awards.

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