Cost Control in Ecommerce Businesses
Stop Throwing All That Money Away in Your Ecommerce Business
Ecommerce has turned conventional business economics on its head. For instance, some ecommerce giants are operating as if they have no need to ever make any profits. That is what had prompted me to review a textbook on ecommerce economics. I firmly believe that someday ecommerce businesses are going to have to make a profit. The fact that they seem to be operating otherwise is curious, if not worrisome.
Why Do Ecommerce Businesses Throw Away Money?
Given that ecommerce businesses are growing on investor dollars, it is imperative that they remain on path for giving handsome returns to their investors. Of course, actual returns will accrue to the investors only when they sell their shares. More often than not, these investors actually bring in more capital in further rounds of funding. They have to believe that the business is doing well for them to have the confidence to reinvest.
So the real question becomes: in the absence of profits, how does an ecommerce business do well? And the only universally acceptable answer seems to be by growth in sales and customers. So ecommerce businesses are doing all they can to acquire customers, and grow the top line.
How Do Ecommerce Businesses Throw Away Money?
Since they need to ramp up sales in a very short period, ecommerce outfits throw away money in the following ways:
- The biggest culprit is the prohibitive cost of customer acquisition. Sometimes this gives the impression that they are paying $2 to buy $1 – clearly something that sounds crazy. Of course, they have some kind of a lifetime value of customer computation that seems to justify the high cost of customer acquisition.
- Following that, ecommerce businesses, at least the well-funded kind, spend money on hiring rock star top management. The idea is that these rock stars would have several valuable relationships in place that will help the ecommerce business grow rapidly. Additionally, investor confidence would be high if top management is made up of rock stars who can work as a team.
- Unlike conventional businesses, ecommerce businesses as well as other online ventures seem to spend a lot of money on experimenting with business areas, business formats, and lines of business. Since cherry-picking opportunities are few and far between, innovation and creativity have to drive growth, and innovation often requires experimentation. However, experiments are known to fail more often than not. As a result, failed experiments can be a significant overhead for ecommerce businesses.
Is All This Expenditure Wasteful?
Not at all, but it can be. There is actually a thin line between being a bold entrepreneur and being foolhardy. So the sagacity of such expenditure tends to get evaluated in hindsight, depending upon the outcomes it generates.
What Should One Do About It?
That is a tough question, but it needs to be answered.
I would say that no expenditure, experiment, or risk is irrational if you walk into it with your eyes open. For instance, if you take a huge risk that has a 1% chance of success, but upon success it would lead to a billion dollar outcome, assuming that risk as well as avoiding it can both be reasonable paths to tread.
What I am saying is that blowing up a hundred thousand dollars on one marketing tactic might seem like a great move if it pays off. But if it fails, you would look like you lacked common sense. Neither conclusion is valid, as the outcomes are influenced by a large matrix of inputs – the original expenditure being only one of them.
But Cost Control Is an Absolute Must
What you have read so far should not make you feel like it is ok to be impervious to costs. If the ecommerce industry experiences a shakeout of bloodbath proportions, as I think it will, the last guy standing will be the winner who takes all.
And the last guy standing will have controlled costs enough to have money to live another day.