E-BUSINESS SPECIAL REPORT
Back in Black - Now What?

The dot-com landscape is littered with the wreckage of e-commerce companies that did not survive the Internet shakeout. The bright side of this bleak reality is that those e-businesses still standing are far more likely to be profitable than their deceased brethren were. The question now is: What lies ahead for these survivors?

E-businesses should not be content merely to have escaped the sea of red ink, according to Giga Information Group vice president and research leader Andrew Bartels; instead, they must generate momentum and look for ways to grow, even in this difficult economy. After all, only growing companies can attract venture capitalists and stockholders and increase the value of their stock price and employees' stock options.

"We've seen many companies that have achieved a position of success and then for one reason or another have slipped back," Bartels told the E-Commerce Times. For example, retail giant Kmart is now operating under Chapter 11 bankruptcy protection after a long run in the retail market.

Granted, this is a difficult environment for any business, let alone one that has only recently reached the promised land of profitability. There is less room to cut costs than there once was, because most companies already have streamlined their operations. "To achieve growing profits, they need to have growing revenues," Bartels said. "And the challenge is, where do they find those revenues?"

Free Shipping

One way Internet retailers are trying to increase revenue is by offering free shipping. Earlier this year, for example, Amazon.com (Nasdaq: AMZN) began its "Super Saver" shipping promotion, which currently allows customers to have free shipping on many orders of more than US$25. When the promotion was initially announced, the free shipping threshold was set at $99, but it was lowered in increments over a period of several months.

But as David Alschuler, senior vice president at Aberdeen Group, told the E-Commerce Times: "At the end of the day, it comes out of their margin one way or another." For example, the company may lose money if it pays for shipping, but the number of orders placed likely will rise, boosting the bottom line so long as the transaction as a whole is still at least slightly profitable.

Indeed, when companies like Amazon offer free shipping, they hope to make up for losses sustained in the transaction through a higher sales volume, which is achieved by promoting the free shipping offer, in what Alschuler characterized as "a traditional retail trade-off."

It's All About Margins

An e-tailer's margins, just like a real-world retailer's, are determined by how good a job the company does of predicting its inventory requirements. This is an area in which Amazon failed a few years ago when it entered the toy business and overstocked on inventory.

Subsequently, though, Amazon forged a pact with Toys "R" Us that calls for the toy retailer to handle inventory management, while Amazon performs fulfillment, Web site development and customer service. "This is a case where Amazon learned what it was best at, and steered away from what it had learned painfully it was not good at," Bartels said.

Amazon also used this model when it formed partnerships with several other retailers, including Borders, the Gap and Target. Just last month, the company opened an apparel store with several new partners. In fact, about a quarter of Amazon's sales currently are generated by third parties selling at the Amazon site. By focusing on what it knows and outsourcing what it does not to other companies, Amazon saves money and beefs up its bottom line.

Learning Experience

But not every newly profitable e-commerce concern is an Amazon. And small e-commerce companies generally cannot learn directly from the mistakes of their larger counterparts, which have had to invest heavily in branding and infrastructure. Small companies, by their very nature, are more niche-oriented, so they need not worry as much about getting their names out to a broad audience or supporting high transaction volumes.

This does not mean small e-businesses can learn nothing from the big fish. Like large companies, they must focus on their target markets and core strengths to succeed. "They have to figure out what their customers want and how to get it to them," Bartels said.

Small companies also need to sharpen their focus on customer service in order to survive. And, according to Bartels, "They need to keep their eyes open and test for the next growth opportunity." Perhaps the playbook for newly profitable dot-coms should be called "Swimming Like Sharks." Its number one tenet? Just keep moving.