If the saying is true that one person’s junk is another’s gold, then there should be plenty of wealth to go around for e-businesses these days. After all, the junkyard of bad e-commerce ideas has been piling up steadily for several years.
Unless today’s e-commerce companies can transform the failures of companies like Furniture.com or E-stamp.com into valuable lessons and profitable business models, then such misguided efforts will go down in history as just a few more poor business models for online retail.
“It’s not enough to merely have the lowest price or the slickest site,” Yankee Group’s Paul Ritter told the E-Commerce Times. “Many e-businesses built their business models looking to be the leader in one or two areas, such as maybe the lowest price or quickest checkout, and those are all important, but it’s a balancing of many, many factors simultaneously that makes the difference.”
For example, after struggling with the sale of Internet postage, E-Stamp Corporation announced that it would exit the Internet-based postage industry to focus on shipping and logistics, only later to turn to an e-learning business model. E-Stamp was later purchased by Stamps.com, which is still in the Web postage business after making several rounds of job cuts and gaining a new CEO in August.
As for Furniture.com, it closed its virtual doors as did other e-tailers that had a hard time trying to sell couches via the Internet.
Some of the factors that have to be considered when weighing the value of an e-commerce business model are delivery and convenience, which were vastly underrated or oversimplified in some of the Net’s most infamous e-commerce duds. What may appear to be convenient at first glance, may turn out to be much more complicated when actually implemented by consumers.
“It’s an erroneous assumption that everything is more convenient to do things on the Internet,” David Schehr, Research Director with GartnerG2, told the E-Commerce Times.
In the case of the Internet postage companies, Schehr said, consumers often had to use a certain kind of printer, that did not provide an advantage over a postage meter which can be loaded remotely. “It sounds convenient but turns out to be very cumbersome,” he commented.
Time of Essence
What is convenient to sell on the Net are products that are not time sensitive, said Schehr, who also pointed to pharmaceuticals being sold over the Net as generally another bad idea.
“Who you can use (for your prescriptions) is defined by your medical plan,” Schehr said. “And generally you either need (your medications) every day because you have a chronic condition, or, if you have an acute condition. For example, you need antibiotics for a fever within a 36 to 48 hour window. You’re dealing with very high time sensitivity.”
The second mistake made by many e-commerce busts was failing to realize that a product or service sold via the Net must be convenient not only for the consumer, but also for the business selling it.
In the case of Internet grocers, for example, the cost of providing convenience, which entailed building a distribution, storage, and refrigeration infrastructure plus an order fulfillment and door-to-door delivery system, turned out to be too expensive and cumbersome.
“Convenience works both ways,” Jupiter Media Metrix analyst Rob Leathern told The E-Commerce Times. “If it’s convenient for the consumer but not cost effective for the online merchants, it’s not going to work.”
Underlying these false assumptions is that many e-tailers overestimated the value of their current customers while misjudging how much additional money would have to be spent to get a continuous stream of new customers.
“Companies can learn from prior folded e-businesses that it takes far more money and time than most people think to build a core customer base that leads to profitability,” Ritter said. “Many companies pursued a skewed model where the customer acquisition costs were three to four times the average value of what that customer was to them even on a gross sales basis.”
These models were based on the assumption that new customers will become loyal customers after several years and eventually convert into a steady stream of recurring profits. According to Ritter, this is a tough feat to sustain given the need by investors to see immediate profits — especially in tough economic times.
So what recourse do e-tailers now have after seeing what types of business models and false expectations lead to a permanent residence in the junkheap? Leathern said it’s time for e-tailers to ride the backs of the bigger, established brand names.
“There’s a tremendous amount of potential there for attractive brands that consumers already have relationships with,” Leathern said. “As they communicate to their consumers the online brand as a way to do business, other companies can piggy back on that — but it’s important to be real partners rather than just a link on someone’s site.”
Furthermore, just because everyone can see that a business exists online does not mean the company should try to deliver goods and services to a wide demographic.
“Building up slowly and bootstrapping are the ways to go rather than seeing (the online space) as an enormous market thats yours to lose if you don’t move very quickly,” Leathern said. “Your infrastructure needs to be in place already or you need to deliver only to very small localized markets to begin with.”