e-Commerce: Don’t Go Buying Cannons

More of the retail business world is convinced each day that it’s imperative to participate in e-commerce no matter how much it costs. Businesses new to direct response selling have the comparatively easy job of establishing a Web site and letting the world know it’s there.

However, established businesses that already sell in other ways have been talked into a much harder task – one that requires costly, sophisticated systems to integrate business planning with sales information and back-end process. Ultimately, what began as fairly simple data collection and analysis, now requires data warehousing for its integration and interpretation.

While retail sellers adjust to this new world, the majority of profit-makers are systems providers, consultants and other experts. For the next decade, there will be a plenitude of systems suppliers – many of them ready and able to do it better, cheaper and faster than the brand names.

In serving the immense universe of unsophisticated end users, a lot of money will be made by suppliers and also will be lost by many end users who won’t know what to do with all their information. However, in the words of a dear friend and my first boss in advertising, “We shall proceed, regardless.”

Retailing the Old Way

Once upon a time, say before 1996, direct marketing was about doing one of three things with products and services:

• Make buying easier. Selling to people who couldn’t as easily purchase in other ways.

• More selling. Selling more to the people who were already your customers.

• Discovery selling. Selling to people who didn’t know they wanted what you had until you convinced them.

No matter which of those three you pursued, your overriding goal was an immediate or foreseeable profit. However, for much of retailing since ’96, e-commerce has changed all this. Rather than profit through electronic selling, its goal is to limit loss.

Retailers with traditional direct marketing operations find e-sales substituting for print coupon, direct mail and telemarketing with little – if any – total sales increase. They have added an expensive and complicated way of selling without an appreciable increase in overall sales. And though most are not yet aware of it, their new system will demand continual state-of-the-art upgrading that will devour much of what might otherwise become profits.

New Retailing Universe

The e-commerce retailing universe is made up of three types of enterprises. One is profitable now and will continue to be, one may be profitable, and one, despite its current stock market value, probably can not be profitable in the long run.

Profitable e-commerce service. Service industries that do not involve ownership of physical merchandise have flourished in e-commerce profitability. For instance, charging to send flowers one does not own, selling tickets at scalper’s prices or handling investment at a fee – though without traditional responsibility for advice – is the closest we’ve come to free golden eggs. (I suspect one could do a book on this subject alone and probably start a whole business organization, if it does not already exist.)

Profits through single-source e-selling. An additional category of profitable sites consists of what might be called “accidental” Web retailers that do not compete through other forms of advertising. Here are three such examples used by our daughter, Lisa.

A few months ago, Lisa visited a site devoted to oriental rugs. Not finding what she wanted, she did nothing further. About a week later, she received an e-message from a dealer in Pakistan asking if she could be specific about her needs. She could. After sending her description, he “showed” her a number of rugs online, then sent the one she thought she’d like on a “buy if you want to keep it” basis. She examined it at the customs office, liked it and sent a check. A week later, she received a very nice thank you note.

This was a perfect example of someone being smart enough to use the unique Internet ability to follow up on a cookie. Though thousands of miles away, he was the only one who did, made it easy to order and got a $1500 sale.

Much simpler was her ordering of Maple Syrup and fresh – never frozen – geese. Local e-sites, found by routine search-engine clicking, supplied each. Both were long-existing businesses whose only advertising, other than word of mouth, is now on the Web. Thousands of such businesses are successful because they offer wanted products whose price is not a critical factor. Their e-sites are search-engine friendly, tell a simple story, have practically no advertising overhead and require comparatively little advertising expertise.

Likely profitable e-commerce retailing. A different type of retail category is likely (they’re hoping) to show e-commerce profits in the near future. These are branded retailers with a local, regional, national or even international following.

They can establish a site, advertise it as part of their regular promotion program and let the world find them through search engines locating their names or, if it exists, their specific products or services. (i.e., I wonder if Walgreens or Harrods of London has a site. And who handles really stylish sunglasses?) The temptation to be resisted (at all cost) is to overspend on site awareness. Let the competition do that and go bankrupt.

A problem with data plenitude. While data integration among inhouse, telephone and mail sales is fairly common, it becomes more difficult and expensive with each layer. When e-commerce is added to the other three, it adds more than a layer – it’s a whole new dimension.

So much customer information suddenly becomes available that data collection is transformed into data warehousing. Since practically no one can resist the urge to collect the data when doing it seems so easy, its handling soon requires outsourcing or a huge investment in staff sophistication and new hardware/software while total business hardly changes.

Nevertheless, many (I suspect most) brand retailers find themselves involved in e-commerce for one of two reasons:

• Fear of being left out of the market of the future.

• A non store-front retailing e-competitor – such as e-toys or Amazon – poses a long-term threat they can not totally ignore.

I would urge the profitable retailers to get on the Web with an interesting and helpful site, but not to be frightened into non-profitability by competition that cannot continue in its present form.

Least likely profitable e-commerce retailing. E-only retailing, which sells the same product as its competitors, competes on giving the lowest price – when any customer can click to find the actual lowest – is an invitation for disaster. The only thing that has kept many of them alive is the incredible income derived from their IPOs – now used to cover their losses in businesses many of them don’t understand.

The smarter ones, like Amazon and Brittanica, are telling us that they will make us rich by becoming an advertising/e-promotions medium. I wish their investors luck, but I don’t believe it. (Though I am kicking myself for knowing so much about the book business that I didn’t buy Amazon at $20 and sell at $200.)

Two major areas that have proven immensely profitable from the beginning of e-only commerce are pornography and the e-world itself. From what I have read in the trade journals, some types of insurance and certain e-pharmacies also can now be added.

Last February, while in England, I saw an article in the London Times that said the then-current research showed 90 percent of England’s e-viewing was pornography. Even if that’s only half true, in the United States, excluding the porno sites’ share, 1999 e-commerce handled less than 10 percent of all retailing.

About 85 percent of that retail e-business was still devoted to the Net itself – hardware, software, how-to, etc. That leaves 1 percent (15 percent of 10 percent) for the rest. Honest!

My suggestion to the major retailers is to cool it. Don’t fight a price war with people who don’t care if they lose billions, as long as they end up with a few million still in their pocket. You, the ones with the bricks-and-mortar overhead, will end up bankrupt too, but without the multimillion consolation prize.

Brainstorm what you can do that they can’t such as promoting same-day delivery and, incidentally, that you provide the local taxes that pay for the fire departments and give lots of local teens and adults a chance to earn some money while also training them for jobs with a meaningful future. You do that, don’t you? Well, what else do you do?

Optimistic projections foresee a 20 percent e-share for the retailing of the future. But only a small portion of that will go to e-only merchants. The majority will be just another way of serving customers- expensive, but probably unavoidable. So, don’t go buying cannons for a fight that’s mostly psychological warfare. Take an objective look at what the Internet can and cannot do in serving your customers; then determine how you can make what you do best even better. n

When America’s great philosopher John Dewey told us we were responsible for the foreseeable consequences of our actions, he was talking about ethics, not e-commerce. But when we consider that we are playing with billions, if not trillions, of other people’s money, let’s not totally ignore the consequences to them in the rush to get our share. Mine, too!

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