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The Golden Age of E-Commerce Profits

By Mark W. Vigoroso
Mar 19, 2002 4:11 PM PT

Driven by demanding investors and an unforgiving stock market, many e-commerce firms have clawed their way to profitability.

The Golden Age of E-Commerce Profits

In fact, with a growing roster of companies operating in the black, we may be perched on the cusp of an e-commerce "golden age," according to analysts.

"I would not be surprised to find that the majority of online retailers are profitable now, if you include multichannel retailers," Jupiter Media Metrix analyst Ken Cassar told the E-Commerce Times. "If you just focus on the pure-plays, we may be a year or two away from a profitable majority."

And as e-commerce applications continue to converge with traditional modes of business over that time period, they will have to satisfy rigid bottom-line metrics.

Survivors Ready?

These days, e-commerce companies have two choices: Make profits or make tracks. To reach profitability, e-businesses have returned to longstanding tenets of expense control and margin growth.

"The companies that have not [hit their financial stride] have gone away," analyst David Kathman told the E-Commerce Times. "The ones that are left are the ones that have [hit their stride]."

Some key players, such as (Nasdaq: AMZN), orchestrated heroic reorganizations to achieve profitability. The bellwether e-tailer ramped up customer service e-mail to reduce its call center burden and streamlined its logistics operations.

As a result, Amazon reported its first-ever profit in the fourth quarter of 2001.

"There needs to be extreme adherence to traditional retailing disciplines in merchandising management, order management and supply chain management," Meta Group senior program director Gene Alvarez told the E-Commerce Times.

"E-tailers should get their product as cheap as they can and [should] have the products that customers want when they want [them]."

Great Expectations

As a reward for their discipline, some smaller firms like Ebags and have joined the ranks of profitable companies.

Both outfits successfully estimated the size of their market -- luggage and jewelry, respectively -- and have scaled well as a result, Cassar said.

"More than anything else, the profitability of an online retailer [depends on] its ability to appropriately estimate the size of its natural market," he added.

"The second that an online retailer expands beyond the natural size of its market, its marketing and infrastructure spending become less efficient, eroding profitability."

Product Management

Some e-businesses with a long history of profitability owe their success to selecting Web-friendly markets in the first place.

E*Trade (NYSE: ET), Expedia (Nasdaq: EXPE) and EBay (Nasdaq: EBAY), for example, operate without the costly burden of physical inventories.

With similar acuity, 1800Contacts (Nasdaq: CTAC) and tapped into lucrative online markets for contact lenses and flowers, respectively.

Stunted Growth

Indeed, diverse paths to profitability have collectively ushered in what may be the dawn of an e-commerce golden age.

Along the way, however, product and technology investments have felt the brunt of cost-averse corporate strategies, according to analysts.

"Innovation has suffered as a result of the fiscal austerity that has brought with it profitability," Cassar noted.

Cruise Control

That said, given the constant evolution of technology and ever-present competition, profitability mandates will not halt strategic investments altogether, Meta Group's Alvarez noted. However, such mandates may cause investments to be spread over longer periods of time.

For its part, EBay is maintaining its plans for international expansion, new pricing formats and other product enhancements, even as it remains committed to profits.

"Incremental investments can be made while delivering improved sequential bottom-line profitability," the company said in its last earnings report.

Golden Touch

Balancing fiscal responsibility with healthy growth will bolster e-businesses over the long term.

Toward that end, prudent spending is even more important than top-line revenue, according to some analysts.

"Expense control, rather than revenue or margin growth, drives 90 percent of the positive movement toward profitability that we have seen," Cassar noted.

Still, e-tailers in particular need to exhaust every sales channel in order to remain profitable, analysts agreed.

"[E-tailers] should engage customers across multiple points of interaction during the stages of engagement, transaction and fulfillment," Alvarez said, "and allow customers to mix and match multiple channels."

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