In 2024, It's Not AI That Reigns — It's Profit!

Written in June 2024, during the post-COVID market correction period.

📝 Editor's note (2026): In 2026, AI is truly the dominant topic in e-commerce — but the business fundamentals in this article still hold.

In 2024, It's Not AI That Reigns — It's Profit!

What? AI isn't the most important thing we should all be talking about to have a successful business? Hmm, not quite. Don't get me wrong. I use AI every day — it makes my life easier and increases the efficiency of my work. However, you need to get back to business basics if you want your e-shop to still be here in the years to come.

This isn't hot news. Nor is it a new angle you've never heard before.

The market was unhealthily obsessed with growth at any cost, driven by absurdly cheap money. It seems we've sobered up a bit after the post-COVID market correction. Now is the right time to understand what the heck was going on.

Growth at any cost

Even before the COVID pandemic, we were watching a growth-at-any-cost mentality settle into corporate minds for various reasons:

Easy access to cheap capital from investors thanks to globally low interest rates

Distorted "zero-sum game" thinking influenced by VC and the "Move Fast and Break Things" approach from Silicon Valley

Black swan successes painted by the media as the rule rather than the exception

Fortunately, we live in a time when boring and consistent business models are becoming sexy again (read: truly successful).

The dark side of unlimited growth

I don't want to be too critical of "successful" businesses that haven't yet reached profitability. Especially because under very specific circumstances it can make sense to sacrifice profitability in order to rapidly acquire new customers and markets.

We all understand when a business offers us a great deal on our first purchase and sacrifices its short-term profitability to win us as loyal customers. That's a perfectly valid tactic.

But would you want to own these e-shops?

Deliveroo : one of the most popular British online delivery companies. Between 2017 and 2023 they accumulated a total net loss of nearly CZK 41 billion. Notably, the annual loss in 2023 was reduced from approximately CZK 10.5 billion to CZK 1.6 billion. Without significant investor backing, Deliveroo could easily face bankruptcy. And who knows when they'll turn a profit?

Everlane : an American DTC clothing retailer that has been trying to be profitable since its founding in 2011, even after a CZK 4 billion investment. I don't want to be a killjoy, but I'd rather own a profitable business that doesn't need to depend on external capital to survive and just hope to get lucky.

Rohlik Group : it was only from 2023 that the founder started making PR waves about how they were about to reach profitability in certain markets and hoped to be profitable as a group by the end of that year. Sounds great, but is it really that amazing to be in business for 10 years with more than CZK 400 billion in total net losses? (btw, the losses are probably much larger, but I got tired of going through all their public documents up to 2022 just for one of the s.r.o. entities they have). When will this company reach profitability? (will it ever?)

Then there are the horror stories of companies that couldn't go on and had to restructure, such as Mamut, Kulina, Zoot, and Dedoles. Although some of these brands are now on a good path to sustainable growth, they suffered major complications and had to go through insolvency. And as an owner or founder, you really don't want that...

Common sense is back!

I hope it's now clear that we need to return to basics and apply common sense to our business strategies. We should all go back to thinking about the fundamental aspects of our e-commerce businesses:

Gross margin : Measures the difference between sales and cost of goods sold (COGS). The minimum should be around 40%. This number can vary by industry. In the fashion industry it can be higher due to branded items and high markups, while in the food industry it tends to be lower due to higher competition and smaller margins. To properly evaluate gross margin, track average values in your industry and align with them. A high gross margin allows you to reinvest in business growth, marketing, and improving the customer experience.

Net profit margin : Represents the percentage of revenues that remains as profit after deducting all costs. While I could argue for an ideal range of 10% - 20%, at this point — at least break even. If you consistently achieve 5-10% profit, I'm satisfied.

Customer acquisition cost (CAC) and customer lifetime value (CLTV or LTV): You need to balance the cost of acquiring a new customer against the total expected revenue from that customer over their entire relationship with the business. CAC should be at least lower than CLTV, but ideally CLTV should be at least 3 times higher than CAC. In other words, the cost of acquiring a customer should be lower than the money they'll bring to the company across all their purchases. Ideally, their lifetime value should be at least 3x higher than the cost of acquiring them.

Inventory turnover: The rate at which inventory is sold and replaced. Higher turnover rates indicate efficient inventory management. Recommended range: 5 - 10 times per year, though this can vary considerably by industry and product type.

Operating costs: rent, utilities, salaries, etc. Keeping operating costs below 30-40% of revenue is a common goal, but depends on the business model and scale.

Cash flow: Your cash flow should cover all operating costs, debt repayments, and allow for reinvestment in the business. Aim for positive free cash flow and ideally 5-10% of your total revenues, taking into account the growth phase, debt level, and investment needs. This ensures the necessary liquidity to manage operations, invest in growth, and reduce financial risks.

Total liabilities to assets ratio : According to economics textbooks (i.e., common sense), it should be below 50%. Of course, it always depends on the specific business. Be cautious if the debt-to-assets ratio approaches 1:1 or even exceeds it, as many companies can have a ratio of 2:1. A higher ratio may indicate greater financial risk, so it's important to monitor and manage this metric according to the specifics of your industry.

The Rule of 40 as the golden standard of financial management

The "Rule of 40" is a simplified metric often used in the technology and SaaS industry to evaluate a company's health by balancing growth and profitability. Although more common in technology, it can be adapted for e-commerce businesses. The basic idea is that the sum of your revenue growth rate and profit margin should be 40% or higher.

Revenue growth rate + profit margin ≥ 40% . It's that simple.

This rule helps companies avoid the common dilemma between heavy investment in growth and maintaining profitability, supporting sustainable business practices. It's adaptable, allowing startups and growing businesses to focus on high growth rates even if their profit margins are lower, as long as the combined metric reaches or exceeds 40%. Established businesses can prioritize maintaining high profit margins with consistent growth.

Following the Rule of 40 ensures long-term viability by preventing the sacrifice of long-term success for short-term gains. It balances growth and profitability to avoid cash flow problems and stagnation. Additionally, this metric is attractive to investors, as it demonstrates a company's ability to manage both growth and profitability, making it a low-risk investment. While the Rule of 40 is a valuable target for most e-commerce businesses, not achieving it isn't the end of the world. Use it as a goal to guide your growth and profitability strategies.

Benefits

Balance: Ensures that neither growth nor profitability is neglected.

Simplicity: Easy to calculate and helps with a quick assessment of business health.

Flexibility: Adapts to different stages of business and market conditions.

Long-term viability: Supports sustainable business practices.

Investor appeal: An attractive metric for potential investors.

It's not rocket science 💪

You can do it too. I love seeing more and more of our clients and partners achieving positive results without the fear of immediately going bankrupt the moment their investors stop burning money.

I'm hopeful and optimistic about the future of our e-commerce bubble. We're learning from other traditional businesses, both in the offline and online world. This is bringing us to the wisdom of common sense, which will allow us to much better filter the wheat from the chaff and bet on businesses with solid operational and financial foundations.

Am I being too pessimistic? Or is common sense back in fashion?

How do you ensure your e-shop is financially healthy?