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Key drivers of value for eCommerce businesses

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Business valuations
By
David Loi
David Loi
Director
June 8, 2021
5
minute read

How to value an eCommerce business

eCommerce businesses have been around in Australia for the past two decades, but have particularly gained momentum throughout 2020 due to the onset of the global pandemic. Australia has traditionally lagged the rest of the world in online consumer penetration, which has also resulted in a shallow market of businesses and consequently, limited understanding by investors on how to value these businesses.

Valuing an eCommerce business relies on a keen understanding of the industry and the trends that affect the market as a whole. Nash Advisory has this expertise, and can help you find the best result, whether you are buying or selling. Get in touch with us today to learn more.

Since the pandemic, digitally native businesses have stepped into the spotlight. As consumers were forced to stay home during key lockdown periods in Australia, consumers rapidly shifted their behaviour and began conducting the majority of their activity online.

This has resulted in significant price increases for eCommerce businesses that were already listed on the ASX, and subsequently, a flurry of digitally native businesses rushing towards initial public offering (IPO) on the ASX, such as Adore Beauty, Cettire and Booktopia.

January 2020 to date price performance (eCommerce stocks - ASX)
Graph: January 2020 to date price performance (eCommerce stocks - ASX)

Types of eCommerce businesses

eCommerce businesses typically come in three forms:

  1. Retailers
  2. Direct to Consumer (DTC)
  3. Marketplaces

Retailers are the most common form, whereby, the business typically retails the product of other brands with limited brand ownership (in-house brands) of their own. These traditionally command a lower earnings margin, and are at their core, focused on capturing the customer through service, value-add or accessibility (dependent on the businesses strategy of curated or broad product range). An eCommerce retailer may also just be the online channel of an existing brick and mortar store network.

Direct to Consumer (DTC) gained popularity in the US during the early 2010s whereby, digital companies were providing single-brand, single-channel products to consumers via digital means. Examples include Casper mattresses, Glossier, Warby Parker, Daniel Wellington, Gym Shark and Hello Fresh. DTCs control their own brand destiny however, this comes at the risk of obsolescence and therefore need to continually innovate their offering to maintain relevance to existing and new consumers.


Marketplaces are the most valuable type of eCommerce business (by multiple range) and the rarest given the “chicken and egg” challenge of acquiring buyers and sellers on the platform. As the name suggests, these are platforms which invite sellers of product and corresponding buyers of product to create a flywheel effect/economy. Domestic examples include Redbubble and MyDeal.

How to value an eCommerce business

seller preparing online retail shop order

Online businesses are typically valued on a future state based on present state indicators. Primary indicators include:

  • Market size and capacity for online penetration for the sector
  • Customer profiles including growth, retention, maturity, average order value, average order frequency and customer acquisition cost
  • Profit margins at Gross (product and cost of doing business) and EBITDA margin
  • For marketplaces, the “take rate” or “commission” the sellers are willing to pay for the platform; and
  • More recently, the ability to maintain the growth trajectory in a post-COVID environment

For the above reasons, the profitability comes at a later stage. As a result, investors are comfortable with short-term lack of profitability and use active customer growth as a leading indicator of revenue with the expectation of profits to follow.

Due to the varied stage and maturity of eCommerce business, there is no one-size-fits-all approach to valuations. A combination of the indicators discussed above, revenue and earnings multiples and growth metrics are combined to assess value.

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