The Golden Age of E-Commerce Profits

Driven by demanding investors and an unforgivingstock market, many e-commerce firms have clawed their way toprofitability.

In fact, with a growing roster of companies operatingin the black, we may be perched on the cusp of ane-commerce “golden age,” according to analysts.

“I would not be surprised to find that the majority ofonline retailers are profitable now, if you includemultichannel retailers,” Jupiter Media Metrix analystKen Cassar told the E-Commerce Times. “If you justfocus on the pure-plays, we may be a year or two awayfrom a profitable majority.”

And as e-commerce applications continue to convergewith traditional modes of business over that time period,they will have to satisfy rigid bottom-line metrics.

Survivors Ready?

These days, e-commerce companies have two choices:Make profits or make tracks. To reach profitability,e-businesses have returned to longstanding tenets ofexpense control and margin growth.

“The companies that have not [hit their financial stride]have gone away,” Morningstar.com analyst David Kathmantold the E-Commerce Times. “The ones that are left arethe ones that have [hit their stride].”

Some key players, such as Amazon.com (Nasdaq: AMZN),orchestrated heroic reorganizations to achieveprofitability. The bellwether e-tailer ramped upcustomer service e-mail to reduce its call centerburden and streamlined its logistics operations.

As a result, Amazon reportedits first-ever profit in the fourth quarter of 2001.

“There needs to be extreme adherence to traditionalretailing disciplines in merchandising management,order management and supply chain management,” MetaGroup senior program director Gene Alvarez told theE-Commerce Times.

“E-tailers should get their productas cheap as they can and [should] have the products thatcustomers want when they want [them].”

Great Expectations

As a reward for their discipline, some smaller firmslike Ebags and Ice.com have joined theranks of profitable companies.

Both outfits successfully estimated the size of theirmarket — luggage and jewelry, respectively — and havescaled well as a result, Cassar said.

“More than anything else, the profitability of anonline retailer [depends on] its ability toappropriately estimate the size of its naturalmarket,” he added.

“The second that an onlineretailer expands beyond the natural size of itsmarket, its marketing and infrastructure spendingbecome less efficient, eroding profitability.”

Product Management

Some e-businesses with a long history ofprofitability owe their success to selectingWeb-friendly markets in the first place.

E*Trade (NYSE: ET), Expedia (Nasdaq: EXPE) and EBay(Nasdaq: EBAY), for example, operate without thecostly burden of physical inventories.

With similar acuity, 1800Contacts(Nasdaq: CTAC) and FTD.com tapped intolucrative online markets for contact lenses andflowers, respectively.

Stunted Growth

Indeed, diverse paths to profitability havecollectively ushered in what may be the dawn of ane-commerce golden age.

Along the way, however, product and technologyinvestments have felt the brunt of cost-aversecorporate strategies, according to analysts.

“Innovation has suffered as a result of the fiscalausterity that has brought with it profitability,”Cassar noted.

Cruise Control

That said, given the constant evolution of technologyand ever-present competition, profitability mandateswill not halt strategic investments altogether, Meta Group’s Alvarez noted. However, such mandates may cause investments to be spread over longer periods of time.

For its part, EBay is maintaining its plans forinternational expansion, new pricing formats andother product enhancements, even as it remains committedto profits.

“Incremental investments can be made while deliveringimproved sequential bottom-line profitability,” thecompany said in its last earnings report.

Golden Touch

Balancing fiscal responsibility with healthy growthwill bolster e-businesses over the long term.

Toward that end, prudent spending is even more important than top-line revenue, according to some analysts.

“Expense control, rather than revenue or margingrowth, drives 90 percent of the positive movementtoward profitability that we have seen,” Cassar noted.

Still, e-tailers in particular need to exhaust everysales channel in order to remain profitable, analystsagreed.

“[E-tailers] should engage customers across multiplepoints of interaction during the stages ofengagement, transaction and fulfillment,” Alvarez said, “and allow customers to mix and matchmultiple channels.”

1 Comment

  • There appear to be a number of factors contributing to the success of the current e-tailers.
    Firstly, consumer confidence in the reliability of service from our sector is growing. Key here is accurate delivery. In the early days too many promises were made and broken as the logistics industry failed to realise the value of this new boost to their business and made the same old ‘guarantees’ about delvery of goods. Thankfully, this weak link seems now to have been successfully strengthened, and delivery promises are almost always met.
    Secondly, e-tailers have become less obsessed with conquering the world, and those proving to be successful have been much more likely to undertake comparatively niche marketing activities. Some, like http://www.mgender.com, have gone a stage further and added good old-fashioned customer service to the online offer. eliminating, at a stroke one of the key barriers to online sales by offering a truly personal service.
    Perhaps, therefore, this is the start of a ‘Golden Age’ for profitable e-tailing suported by a golden age of personal customer service?

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