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E-commerce, a no nonsense business perspective (Part 2)
Copyright 2005 Oliver Phillips. May be freely reproduced "as-is" for private or commercial use.
In Part 1 of this guide, we focused on the potential applications of e-commerce and explained in detail the first 5 of my "Ten Golden Rules of e-business" In Part 2 we recap on the rules, and explain in detail rules 6 to 10. The other document in this series is also avialable at goarticles.com
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?
8.Be amazed at how little your e-business is worth.
9.Don’t buy an e-business “off the shelf”. At least one person does not want it – why not?
10.Establish a budget to build your site then add at least 30% more to build an adequate administration interface.
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, if the 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.
About the Author
Oliver Phillips runs the web development company eantics Ltd and as a qualified Accountant, has built intranet financial systems for an FTSE quoted UK PLC. His e-commerce operations have twice reached the finals of the UK e-commerce Awards; his Company’s latest venture, ‘PFS France’ has just launched.
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