Running Lean and Mean To Survive in E-Business

Some analysts say that overspending and over-expansion, at the expense of monitoring cash flow and focusing on profitability, have doomed many e-tailers before they really ever began.

Can a company still avoid being shaken into oblivion? The E-Commerce Times has looked into the art of running "lean and mean" in the quest to survive on the Web. Here is our checklist, inspired in part by a soon-to-be-published report from The Yankee Group.

What we've found is that although the bottom line is important, cutting back across the board is not the way to reach profitability. The trick is to know where exactly to trim and where it is important to keep burning the cash.

Substantial Gross Margins

Companies such as Pets.com taught e-tailers a valuable lesson: operating on a negative gross margin is a recipe for disaster.

"Many of the failed e-tailers of 2000 established business plans that were intended to operate on negative gross margins for an extended period of time, a fundamentally flawed business strategy," Yankee online retail analyst Paul Ritter told the E-Commerce Times.

"Clearly, substantial gross margins are required by online retailers looking to achieve long-term viability with their Internet operations," Ritter said.

Customer Acquisition

According to Ritter, overspending on marketing and advertising expense have been primary forces behind the financial woes of many e-tailers during the past year.

The Yankee report predicts that e-tailers who spend in excess of US$20 to $40 for each paying customer , or 50 percent or more of revenues on sales and marketing , will have a difficult time surviving.

James Vogtle, e-commerce research director for the Boston Consulting Group, added that it is "essential" for dot-coms to generate repeat business.

High Conversion Rates

"Rarely do online retailers earn enough gross margin to cover acquisition costs with a customer's first purchase," Vogtle told the E-Commerce Times. "You have to have a customer come back in order for them to become a profitable customer."

Yankee estimated that the average conversion rate for online retailers is approximately 1 percent.

"Firms must do a good job of driving substantial traffic, while at the same time making it easy to find and to buy the products of interest," said Ritter. "However, even firms that have been achieving conversion rates of five times the industry average are not guaranteed a profitable business."

Value Proposition

Ritter noted that to generate sufficient customer loyalty , a company must have a potent value proposition.

"Firms selling online must offer Web customers a compelling and convincing reason to go online and to make a purchase on the merchant's site," Ritter said.

eMarketer business analyst Steve Butler said that it is not enough for a dot-com simply to position the Internet's unique qualities as the company's value proposition.

"Too much emphasis has been placed on the Internet as a transaction tool," Butler said. "Entertainment/content providers might do better than a lot of e-tailers that sell products on the Internet."

Customer Friendly

Another key to customer retention, according to analysts, is customer service -- from the site itself as well as the human beings operating it.

"Customers must be able to find the products and information they are looking for quickly and with a minimal amount of effort and clicks," Ritter said.

Added Ritter: "Online retailers who provide their customers with multiple points of customer support have the highest likelihood of success."

Effective Product Fulfillment

At the same time, outrageous fulfillment costs have created major cash flow headaches, especially for companies such as Amazon.com and Webvan, according to Yankee.

To deal with this problem, Yankee predicts that there will be a significant trend in online retailers outsourcing their fulfillment to third parties, who have already built the infrastructure and have established a core competency in this area. An efficient process for managing returns is also critical, the report said.