In August 2012, VentureBeat’s Rebecca Grant reported a $240 million valuation for Nasty Gal, the “eBay shop turned ecommerce success story” helmed by founder Sophia Amoruso.
In November 2016, the retailer declared bankruptcy before being snatched up for just $20 million by British company boohoo.com.
So what went wrong? And, even more importantly, what can lessons can you apply to your own ecommerce store to avoid a similar fate? I’ve put together four to get you started:
#1. Pay attention to cash flow
On the surface, sales at Nasty Gal appeared strong, with Forbes estimating retail sales at the privately-held company in excess of $300 million in 2015.
The company’s bankruptcy documents tell a different story, however, claiming sales of just $77 million that year – down from $100 million in 2012 and $85 million in 2014.
Falling sales were compounded by Nasty Gal’s over-investment in marketing and advertising. Ari Bloom, chief executive of Avametric, as interviewed by Shan Li of The Los Angeles Times, explains:
“You end up spending money via marketing online like banner ads [or paying] influencers. If you spend $50 on marketing to get a customer to buy something and they only buy once from you, you are probably not making money.”
Li goes on to describe Nasty Gal’s team as “young,” and as focusing too heavily “on the creative side instead of the business side,” suggesting that the company’s efforts to build a cool brand came at the expense of becoming a profitable one.
- Make sure your cost to acquire a customer isn’t more than the lifetime value of that customer
- Focus on actions that move the needle on business KPIs, rather than those that suggest the creation of a desirable image
#2. Plug your leaky bucket
Bloom’s quote above suggests another problem at Nasty Gal – that customers weren’t returning for repeat purchases (at least, not enough to keep the company afloat).
Analysts suggest many reasons for this “leaky bucket,” ranging from product quality, to the brand’s narrow target demographics, to competition from retailers offering a wider variety of products.
But the reasons behind Nasty Gal’s customer churn aren’t important. At the end of the day, the bigger issue is that they weren’t resolved and, thus, contributed to the company’s bankruptcy.
- Measure repeat purchases to establish a baseline; then, take actions designed to improve upon it.
- If you aren’t able to increase repeat purchases, make sure your business model – including other expenses and overhead costs – can survive on your single-purchase revenue.
#3. Don’t over-invest in infrastructure and overhead
Nasty Gal’s bankruptcy represents an extreme example of what can happen when you over-invest in infrastructure – which, in Nasty Gal’s case, involved everything from two brick-and-mortar stores, to a 500,000 square foot distribution center in Kentucky, to visually-stunning headquarters in downtown Los Angeles.
Opening a 50,000+ square foot office may be the last thing on your mind as a small ecommerce seller. But that doesn’t mean that it isn’t possible to over-invest, even when the stakes are lower.
Are you paying for online tools or services that are redundant or unnecessary? Are you on the hook for office space you don’t need? Are you holding more in inventory than is really necessary, if you were to look at alternate fulfillment models like dropshipping?
The more liquid your company can remain, the greater your flexibility will be should you hit hard times ahead.
- Pay close attention to your infrastructure and overhead expenses. Ask yourself regularly if you can justify where every dollar is going.
- Stay as flexible as possible. This will give you the ability to weather future stores successfully.
#4. Avoid unnecessary legal struggles
Julie Zerbo, founder of The Fashion Law, as interviewed by Valeriya Safronova for The New York Times, suggests the many legal challenges Nasty Gal faced, from allegations of copyright infringement to wrongful termination suits from former employees, played a significant role in its eventual bankruptcy.
Zerbo’s simple conclusion: “Suing and getting sued requires a ton of resources.”
The suggestion that you avoid unnecessary legal struggles is an obvious one. But despite understanding the risk that exists, too few ecommerce owners take the necessary, proactive steps to protect themselves.
For example, have you:
- Put systems of review in place to ensure the products you sell don’t violate others’ trademarks or copyrights?
- Worked with a lawyer to identify areas of exposure that could leave you vulnerable to legal action?
- Built hiring and management systems that are fully compliant with HR law?
Good legal advice isn’t cheap. But as the case of Nasty Gal’s bankruptcy demonstrates, making avoidable legal stumbles can take your entire business down.
- Seek legal help before problems arise. In this instance, an ounce of prevention really is worth a pound of cure.
- You can be held liable, legally, whether or not you were aware that you were doing wrong. “I didn’t know” isn’t a good enough excuse to get you out of legal penalties that could cost you your business.
Nasty Gal’s bankruptcy may not seem immediately relevant to your ecommerce store if you aren’t a multinational retailer with nine-figure sales.
However, the core lessons – based on the factors that ultimately led the company to bankruptcy – are ones that any company can learn from.
No matter who you are, or how big you are, you’ll benefit from watching your profit margins, focusing on earning repeat business, watching your spend and working proactively to avoid legal action.