What is a PEST analysis?

Definition: A PEST analysis is a four-point review of potential problems for a business, covering the Political, Economic, Social and Technological areas. Understanding what problems might arise, now or in the future, can help a company circumvent them and avoid a potentially crippling issue. Reviews of this type should be done on a regular basis (both by new and existing businesses), since the specific problems in each area can change over time.

1. Political Analysis

The political analysis asks questions such as:

• How much are we expected to pay in taxes?
• What labor laws will affect our workers? (This includes not just the office, but safety regulations for the warehouse, overtime pay during high-volume periods, etc.)
• Are there any laws that would prevent our products from being sold in certain regions? (Individual countries often have regulations to help promote their internal industry - and this is heavily affected by international trade agreements)

The answers to these questions are decided by the government (and, indirectly, by public opinion), so businesses need to understand both what effects current political policies will have on the store and what policy shifts are likely in the short, mid and long terms.

2. Economic Analysis

The next part of the PEST analysis focuses on economic factors. Many businesses focus on issues like inflation, minimum wage, and exchange rates (if selling items overseas), since these tend to have the most immediate impact on their bottom line. However, it's also important to consider the following:

• What is the cost of acquiring capital? (i.e. How much of a return is needed to convince investors to fund a given project?)
• What is the company's current financial position? (Not just in absolute value, but whether it's trending to more or less secure.)
• What will the company do if there's an economic downturn? (Most notably, would it have the cash to continue operating long enough to get through the average downturn, and if not, can anything be done to change that?)

3. Social Analysis

The third part of the analysis covers social factors, including questions like:

• How fast is the population growing? (Larger populations mean more potential customers, as well as different priorities for shopping habits)
• How conscious are people about their health? (This is especially relevant for products that could impact health, such as dieting and exercise aids.)
• How are people thinking about their careers, and how might that affect sales?

Effective social analysis allows online stores to cater their entire business to the current state of society — which, at the moment, has a profound emphasis on value and companies that do good in the world instead of being purely focused on profit. Millennials in particular did not enjoy the Great Recession, and companies selling to them need to take their social views into account when developing a business strategy.

4. Technological Analysis

Finally, online companies need to consider the technological aspects of their operation. This means asking questions like:

• What technology can run the store most effectively?
• How can the experience of users be improved?
• What will customers expect from the store in the future?

Effective technological analysis also allows the company to plan a way to scale its growth, ensure cost-effective production levels and understand when major shifts in technology are likely to occur.