So, here’s our quick-and-dirty reference guide for how to keep your eyes wide open when reviewing monthly reports.
Unspecified and/or Inconsistent Definitions
One of the challenges investors face when analyzing monthly reports is the lack of standardized definitions for metrics. Each company may have its own nuanced way of calculating ecommerce metrics, which can lead to confusion and data misinterpretation. Revenue is a good example. Some companies prefer to look at revenue net of taxes and returns; others include taxes but not returns; some include shipping while others don’t; and on it goes.
Tadpull Tip: Investors need to ensure a clear and consistent definition is used across the portfolio or, at the very least, at the brand level. This consistency is vital for accurate data interpretation and effective performance evaluation. We love to see when the definition is included in the report itself - there is no better way to level set.
Metrics “Source of Truth”
The quickest way we’ve seen monthly reports go sideways is when data is pulled into the report from different systems. If an ecommerce manager pulls revenue data from Google Analytics, but the PE Operations Group typically sources numbers from NetSuite, they will see a significant discrepancy and immediately distrust all of the data that’s being presented.
The other downside of not having a consistent source of truth is that ecommerce teams spend hours trying to track down the source of the discrepancy and reconcile the report, often with little to show for their time and energy.
Tadpull Tip: The solution is straightforward: Agree on the data source for key metrics, or at the very least ask PortCos to cite the source system on each slide or tab so the data source isn’t in question. It’s also helpful to specify the date range for the data being pulled so it can easily be replicated if there are questions about the accuracy or requires further investigation.
Data quality is another critical factor to consider when examining monthly reports. Based on the due-diligence process, PE firms likely have a good sense of what they are dealing with for each PortCo, however before trusting the data it's beneficial to go through a thorough validation process.
Depending on the company and its combination of distribution channels (direct-to-consumer, wholesale, retail, third-party marketplaces, etc.) it's important to analyze and report on these sales channels separately. This enables the team to evaluate the performance of each channel so the results are meaningful and actionable.
For example, customer lifetime value is a gold-standard measure of success in ecommerce, but when it's aggregated across all of the sales channels it loses meaning and, worse yet, can be misleading - especially if it is used to guide the cost of acquisition.
For example, if an ecommerce company serves both direct-to-consumer and wholesale customers through the same platform, there may be accounts that order in quantities of 500 or more (wholesalers) mixed in with orders that include only a few items (consumers). So, if the lifetime value is $750, it likely doesn’t represent wholesale accounts or individual customers accurately and therefore shouldn’t be used to guide how much to spend to acquire a new customer.
Tadpull Tip: Whether during due diligence or soon after acquisition, we encourage investors to dig into the data to vet, validate and clean. The operations group, or a data-science centered firm such as Tadpull, can help ensure the data is strategically organized, categorized, and can be segmented in meaningful ways. Looking at data architecture gives you heaps of information prior to purchase and a solid framework for understanding future data.
Vanity metrics, or inflated numbers, can be deceptive indicators of performance. Return on Ad Spend (ROAS) is one of the worst offenders. Not all brands clearly delineate between acquisition and retention campaigns, but it is a critical distinction. When a customer is familiar with a brand and has previously purchased, he/she will convert at a higher rate than someone who has never shopped at that brand before. Without this context in the report, ROAS can paint a much rosier picture than what’s happening in reality.
Tadpull Tip: Asking for a breakdown of how much budget was allocated to branded versus unbranded paid ad campaigns will help you better gauge whether the numbers are inflated. However, if investors fixate on a high ROAS, it can incentivize the PortCo to invest more in branded campaigns to show better performance. It's important to understand these nuances and allocate budget based on the overall revenue goals.
When reviewing the report, ask for a context about the campaign – was the goal to acquire new customers or retain existing customers? Retargeting campaigns should not be compared to acquisition campaigns because they convert at a much higher rate.
The attribution conundrum poses a significant challenge for investors analyzing monthly reports. Attribution refers to how credit is assigned to touch points along the customer journey. However, obtaining precise attribution data is elusive, as there is no perfect dataset that captures all user impressions and interactions across various channels and devices. Furthermore, the limitations imposed by paid media platforms such as Facebook and Google, especially after the iOS update in 2021, add to the complexity of accurate attribution. Investors should be aware of these limitations and understand the approximations involved in attribution analysis.
Tadpull Tip: The most important thing to remember when it comes to attribution is that it just needs to enable your ecommerce team to make better decisions about where to invest marketing dollars. It is good for directional guidance. By collecting, storing and activating first- and zero-party data sets, ecommerce businesses can insulate themselves from unexpected changes in the paid media landscape. We equip our clients with the ability to track onsite events that can be linked to a specific customer. This not only allows you to segment customers based on common attributes (and thereby deliver personalized experiences to customers) but it also allows for more accurate attribution based on interactions onsite compared to the limited windows provided by Google Analytics, Meta Ads, and other third-party pixels.
Examine Amazon Data
To Amazon or Not to Amazon? That is a common question we often hear investors wrestle with. While Amazon can provide excellent exposure and potentially strong sales, brands that exclusively sell through the platform tend to struggle to build their own loyal customer base and establish brand equity. Not to mention, when selling through a third-party marketplace, all of that rich customer data and purchase behavior is owned by the platform, so it’s hard to effectively cross-sell other items because you lack the customer’s previous-purchase data.
Investigating the product catalog, cross-selling or upselling opportunities, and the overall dependence on Amazon is crucial to understanding the long-term viability of such brands. In short, any brand that is exclusively sold on Amazon warrants further investigation.
Tadpull Tip: Depending on whether the brand is new to selling on Amazon or if they already have an established Amazon practice, thoughtful consideration for margin, product selection, and customer data should be front and center in any discussions.
When analyzing monthly reports from ecommerce portfolio companies, private-equity investors must remain vigilant and address potential pitfalls. Using consistent metric definitions, resolving data-quality issues, scrutinizing inflated numbers, understanding attribution challenges, and evaluating Amazon's impact are key areas upon which to focus. By navigating these challenges effectively, investors can make informed decisions and unlock the full potential of their ecommerce investments.