E-commerce, A No Nonsense Perspective For New Business

by Oliver Phillips

Published on this site: April 12th, 2005 - See more articles from this month...

Success is about making fewer mistakes - why you should read this Guide?

Whilst failure is one of the best ways we can learn, learning from others’ experience is far less painful - and that’s essentially the point of this guide! Learning from others makes achieving your own goal quicker and easier, plus lets face it, making unnecessary mistakes is just plain dumb!

Spend just 2 hours digesting the information in this guide and you could save years of trial and error. Which route do you think will put your e-commerce venture into profit fastest?

Whether you are thinking of starting a new Internet business, or you already run your own business and are interested in developing a website or perhaps an e-commerce operation; if you are considering developing a presence on the Internet then this guide is for you.

If it seems too good to be true, it just might not be.

Why e-business?

Since the early ‘90s the Internet has shaped the way we do business. At first it was peripheral nowadays it is central to business life. Technologies have advanced and access is more widespread, meaning businesses can do more things for more people. But the Internet is really just another communication channel, though unlike other communication channels it differs in that it can offer a uniquely interactive experience, serve multiple data formats, and provide information on-demand.

This said the Internet is still a communication channel and successful web applications usually leverage one or more of the following benefits.

Immediacy. With today’s data transmission rates communication can be almost instantaneous.

Frequency. The convenience of the Internet and particularly email, means that communication is likely to happen more often.

Cost efficiency. Migrating traditional communication to utilise internet echnologies can greatly reduce costs.

So how can your Business leverage the Internet and in particular the communication benefits? Below are just a few areas your Business should consider.

• Commerce - e-commerce has become synonamous with the Internet; from presenting product information, to marketing, to communication with Customers - costs are often very low.
  
  
• Business Awareness - Industry sector, latest news, product range or simple directions. The Internet is an ideal vehicle for delivering information about your Business to a wide audience at low cost.
  
  
• Image - Brand and Image are important assets to Business. The Internet can be used to promote an image and reinforce a brand
  - perception is all!
  
  
• Community - A web site can provide a superb focal point for people with similar interests, especially where visitors are encouraged to interact with your Business and each other.
  
  
• Support - Providing post sale support, or just dealing with frequently asked questions, a website can be used to provide a structured mechanism for providing help or information.
  
  
• Competition - In an age where businesses without a website are increasingly the exception, a professionally designed website may differentiate your Business from your competitors'.

Think of any web site you use, and you’ll see that the benefits users and the Business itself derive will mostly relate to communication and fall into one of the three categories previously mentioned; immediacy; frequency and cost efficiency.

Ten Golden Rules of e-business

1. Start re-skilling now. If you don’t have huge financial backing your idea will not get off the ground UNLESS you can do much of the work yourself.
   
   
2. You have more chance of making money if you can take just one step up the supply chain.
   
   
3. The real profit makers on the Internet match supply with demand, but do not sell anything!
   
   
4. You can’t just build a site and expect to start generating income any more.
   
   
5. There are few truly new ideas - most things have already been done. Exploit a niche, leverage breaking technology, or do the same thing but just better.
   
   
6. If you come across an idea that hasn’t been done, congratulations you could be on your way - but think long and hard about why no one else is already doing it.
   
   
7. Expect any competitive advantage you may establish to be short-lived. Where will your profit come from tomorrow? Be amazed at how little your e-business is worth.
   
   
8. Don’t buy an e-business “off the shelf”. At least one person does not want it – why not?
   
   
9. Establish a budget to build your site then add at least 30% more to build an adequate administration interface.

1. Start re-skilling now

Here’s an unwritten law of the Jungle; many businesses thrive off other start-up businesses. This is true whether your business is offline or online. Just getting your Business off the ground can seriously stress your cash-flow. e-business can be even more expensive as additionally you’ll need technical services like web hosting, graphics design, site design and database development, search engine optimisation, secure servers, bandwidth, data backup, credit card processing, disaster recovery and insurance to name a few; these are on top of your other overheads!

Technical services are always expensive, and true experts in technical areas are worth their weight in gold - but sometimes what is actually being done is not that complicated; understanding what is involved can help inform your decision about when to bring in an expert, but more importantly allow you to perform some of this work yourself.

Start re-skilling and outsource less, or your ground breaking e-business idea may never see the light of day!

2. You have more chance of making money if you can take just one step up the supply chain.

Mention e-commerce and you immediately think of retailing; businesses selling to consumers. But what are they selling and where are they sourcing it from? The answer, in the majority of cases, is from other businesses further up the supply chain.

Retailing really is the front line in e-commerce, hard fought and often a war of attrition. For many reasons if you can take just one step up the supply chain and into wholesale supply, the odds of succeeding move in your favour plus, you could always retail as well! This is why.

Your Customers are people just like you - would be entrepreneurs, people who want to do their own thing, run their own business and make a success of it. Unfortunately unlike you, they haven’t read this guide, so whilst they have enthusiasm, work hard, and have money to spend, they start at the bottom of the supply chain and opt to retail someone else’s (your) products. Ask yourself this; will you sell more with all these enthusiastic entrepreneurs promoting your products, or less? Though many may fail, if they succeed you succeed also, so make supporting these people the focus of your own e-business efforts. Excellent product, price, and customer service.

Retail customers expect the best product and service at lowest cost. In retail e-business supply often exceeds demand; if you’re retailing someone else’s products, chances are there are another 20 or maybe 100 retailers with the same dream and same products, all doing the same thing! Too many suppliers chasing too few sales, and Customers are free to choose! Quality product? Great service? These days these are pre-requisites, so what else will differentiate you from your competition?

3. The Real Profit takers on the Internet match supply with demand, but do not sell anything!

Think of the big e-businesses like Google, Ebay, and Overture.These companies are successful and worth millions, but they don’t sell any products! Instead they are service providers; they offer different services that have one thing in common – they connect people who want to sell with people who want to buy. Otherwise put they are market makers and if you are serious about your e-business you will very quickly end up paying companies like these for your own sales as these companies can give your products the exposure needed to sell them – but at a cost!

I’m not going to advocate you set up your own search engine, online auction site, classified ads site or even dating agency, as I think you’ll agree you couldn’t seriously expect to take market share off established big name brands like those above? But remember, in e-business, market makers are the real profit takers. If you spot an opportunity to be a market maker which hasn’t already been dominated by a big name, that could just be your ticket to e-business success.

4. You can’t just build a site and “expect” to start generating income any more.

There was a time, not too long ago, when you could build a simple e-commerce site using off the shelf software like Actinic Catalog or EROL, submit it to a few search engines for free, and if your products were reasonable and at attractive prices, you could expect people to find it and buy from it.

Sadly, those days are long gone, the Internet has matured; there are a thousand sites just like yours and the search engines are much more selective about the resources they index.

Whilst, your first challenge is getting indexed in the search engines, and make no mistake this will cost your business money, your second challenge is convincing your visitors they should buy from your web site and not another which is also just one click away. Your final and most often overlooked challenge is making enough profit to cover your customer acquisition costs.

On more than one occasion I have found the profit from a sale does not cover the cost of the advertising and marketing necessary to acquire that sale. This is not that significant if you can reasonably expect your Customer to purchase from you again as the cumulative profit from repeat sales may well cover the customer acquisition cost and see you into profit. However, if your products are niche, high value, or typically one off or impulse purchases, you only get one opportunity to make a profit from your Customer.

5. There are few truly new ideas for e-business - most things have already been done. Exploit a niche, leverage breaking technology, or do the same thing but just better.

As a technology matures, the opportunities to leverage that technology to create competitive advantage generally decrease. This happens for three reasons. The cost of the technology falls making it more accessible to the masses; as more people opt into the technology more ways to utilise the technology are found and the technology becomes more user friendly which drives further take up, until eventually the technology becomes commonplace - as does the knowledge required to utilise it. Indeed rather than it providing competitive advantage, you could be said to be at a competitive “disadvantage” if youdon’t use the technology.

By way of example, consider the telephone. These days nobody, at least in the western world, would claim a telephone gives their Business a competitive advantage though many would recognise that not having a telephone could well be detrimental to their Business. However think back to the days shortly after Alexander Graham Bell invented the first telephone - a Business with a telephone would certainly have had a competitive advantage over its competitors without.

So how do you get ahead in e-business? How do you create competitive advantage; I believe there are actually only three ways you can.

Exploit a niche. Supplying specialist products or servicing a specialist market is one way to get ahead. If you have rare skills or knowledge you may well be able to use this to create an e-business niche, whereby only someone with the same skills or knowledge could compete with you. The more specialist the knowledge on which you build your e-business the more difficult it becomes for competition to enter the market and copy you. Simple economics dictates that in a marketplace with few suppliers, prices and therefore margins remain higher for longer. Of course this assumes demand exceeds supply and herein is a potential sting in the tail; in a specialist market place your Customers are specialists also. You will invariably have fewer prospects to market to - knowing who these prospects are is crucial, as many generalist marketing techniques will not work for you and could prove very expensive.

Leverage breaking technology. Despite what was said earlier in this section it is still possible to create technological competitive advantage. You need to be an early adopter, someone who embraces the technology as soon as it launches. You should expect to offset some of the advantage you create, with the high cost of using a new technology early on in it’s life-cycle, and you should also accept that not everything you try will yield gains for your Business so much of your investment may be wasted.

Do the same thing but just better. On the face of it a rather obvious statement, but you’ll be amazed how many people are running online auction websites, classified ads websites, or little search engines! When evaluating an e-business opportunity check out what the existing players are doing and ask yourself, “Can I do it better than these guys?” If your answer is no, then you might want to look elsewhere for your e-business opportunity! Could you buy an off the shelf auction website and take on the might of ebay? Will your classified Car Ads website give Autotrader anything to worry about? Might we all be searching the web via your new search website instead of Google in a few months time?

Improvement opportunities should all focus on customer experience – like the ease with which they can use the website and the service level they get via the website. Don’t waste your time on anything else. For example, you might have a flair for graphic design, and think you could produce a better logo than the ebay logo for your own auction website. Perhaps you could, but this is unlikely to improve customer experience.

Keep the maxim of “doing it better” in mind at all times and you may well spot improvement opportunities in market sectors with no dominant players. Keep an open mind and you’ll be surprised how often you notice things that could be better. Perhaps your e-business could address these shortcomings and gain competitive advantage.

6. If you come across an idea that hasn’t been done, congratulations you could be on your way - but think long and hard about why no one else is already doing it.

If you do come up with a new e-business idea, then you could indeed be on your way to making your fortune. But before you jump in with both feet and start investing money in the project first consider the idea very carefully. If we accept that so many things have already been done in e-business, why hasn’t your idea? You may well have spotted an opportunity that everyone else has missed, or the idea may be one that others have already considered - but rejected.

Think about why someone might have already discarded your idea? Why might they have decided it was not viable? Thinking about your project in this way will help you be more objective – It’s all too easy to be blinded by your excitement and enthusiasm and miss potential flaws in the idea which later prove costly.

If you’ve objectively critiqued the idea and can’t find any serious flaws then you might just have a winner.

7. Expect any competitive advantage you may establish to be short-lived. Where will your profit come from tomorrow?

E-business has few, if any, barriers to entry. The technology is mature, technical skills and knowledge are widely available and your website is your business; you could be a large quoted plc but your competitor could run a similar operation from their bedroom and the Customers you are both competing for can probably not differentiate between you!

Assume that whatever you have done, your existing competitors can do. Also bank on new competition you didn’t expect. You decide to move into a new niche you’ve spotted and there might be 5, 10 or 15 other businesses about to join you. You’ve found a new product to import that you can’t get in the UK, blink just once, and someone else is selling it also!

The “e” in e-business does not stand for easy. e-business is anything but this, despite perception. Your marketplace evolves at a frightening rate, product life cycles seem unfeasibly short, competition grows exponentially, all of who can emulate you and in many cases do it better than you! You will have to go the extra mile just to stand still!

If you take nothing else from this guide at least remember this; if you do manage to establish a competitive advantage your business planning should assume that it will be gone tomorrow.

In practice this means you take worst case as the norm; you scale down your income projections and beef up your cost lines. You consider strategies for coping, exit and, if possible growth, all in the context of perfect competition. You make finding and researching new opportunities, part of your core business. Where will your profit come from tomorrow?

Overly cynical and far too negative - I hope so. These traits are far more likely to keep your Business alive than apathy and complacency.

8. Be amazed at how little your e-business is worth.

Traditional businesses are valued using traditional methods. Despite reasonable profits, your Business is still only worth what someone is prepared to pay for it. Though the same valuation techniques should be used to value the e-business as a traditional business, two factors tend to over-ride however favourable a valuation is returned.

First why should someone buy your e-business when as we’ve already discussed, there are few barriers to entry in e-commerce. It could be as easy and beneficial to copy your e-business model and become your competitor; steal your market share rather than buy it?

The second factor relates to longevity; traditional valuation approaches will use current earnings and an expectation of future earnings to value your e-business. How long term are your cash flows? Given low barriers to entry and more un-controllable factors such as search engine ranking, how long can the profits realistically remain at their current level? The answer is no one knows for sure, but if you subscribe to the notion that competitive advantage is totally unsustainable in e-business a good answer would be “not very long at all”.

Considering these two factors will help you appreciate that whatever your Business may be valued at using traditional valuation methods – you may find it difficult to achieve anything like the valuation price when you try to sell it.

9. Don’t buy an e-business “off the shelf”. At least one person does not want it – why not?

It’s very tempting to believe that buying an off the shelf e-business is the quick route into e-commerce. After all, ifthe website development has been done, that’s the expensive part taken care of, so all you need to do is run the business to start to make money - right?

My view is a little different. If something is for sale then at least one other person does not want it? Obviously there are lots of genuine reasons why an e-commerce operation might be for sale such as retirement, new business interests, lack of time etc, but equally these reasons can be given to simply disguise the fact that the e-business is not performing or is unsustainable in the long term.

Also consider if the development of the website was indeed the most expensive part of the Business taken care of? For many years a concept known as open source has existed in the programming world. This means that code may be used as is, modified, and redistributed (subject to few constraints). This concept also exists on the Internet, and many developers have built powerful applications that can be yours to use and modify for free! For example, you could decide to buy an auction website, that looks similar to ebays hugely successful site, assuming the development must have cost thousands - but you would be wrong. The auction application is actually available as open source and is called Every Auction. One final point before we move on. Fancy web applications without users are totally pointless. Buying an off the shelf application, even one that has actually cost money to develop, is of little use if there is no incumbent user base. The majority of these applications have not been implemented in production, are not in the search engines, have no user base and there is no awareness of the application. Even where the e-business application does not already exist or there are no dominant players, marketing and building the user base yourself will undoubtedly become the most expensive part of your e-business operation.

10. Establish a budget to build your site then add at least 30% more to build an adequate administration interface.

This is possibly the most crucial part of your e-business, and almost always overlooked. An effective back office could mean the difference between your business survival or failure, and without doubt it will reduce your operating costs, as well as make your business manageable.

Building an online shop to take an order is easy, but where do you go from there. Unless you pay attention to your back office administration functions you will find your Customers contacting you by phone and/or email to ascertain anything from if the product is in stock, to if their payment was received and processed, to when they might expect delivery. Remember customer contact is an overhead in any business, and this sort of contact adds no value in e-business.

If your back office functions are not robust you might also miss opportunities to obtain repeat sales from your Customers; are you maintaining a mailing list to keep your customers informed about new products?

Finally your back office systems could assist with the financial management of your e-business, from producing sales receipts, to sales reports, your e-commerce site should be providing you with business information about transactions that are made through it.

Copyright 2005 Oliver Phillips. May be freely reproduced "as-is" for private or commercial use.

Oliver Phillips runs the web development company eantics Ltd (http://www.eantics.co.uk/) and as a qualified Accountant, has also built intranet financial systems for an FTSE quoted UK PLC. His e-commerce operations have twice reached the finals of the UK DTI sponsored e-commerce Awards, and eantics has just launched the french property website, PFS France (http://www.propertyforsalefrance.co.uk/)