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Revisionist Theories of Profitability On the Net






Baby steps work; big bangs simply explode and leave a field of debris.

Since we all seem to understand now that the "Big Bang" theory of Net profitability did not work…. that is, as David Freedman puts it in "Last Guys Finish First"in eCompany Now, hurling cash at like shaving-cream pies at a Three Stooges dinner party," then waiting for big wads of cash to rain out of a blue sky while dancing around like Gene Kelly splashing in money and gold coins has definitely been vaporized as a concept.

The only big bang was the sound of this delusion exploding in April 2000, as dot coms in search of a real business came plummeting down to earth with a hard thud.

Now, that Web pioneers are somewhat more restrained in their hopes and realistic in their approach, some new strategies are surfacing for making money and succeeding on the Web.

Strategy and Customer Acquisition Costs

"Economic value for a company is nothing more than the gap between price and cost, and it is reliably measured only by sustained profitability," notes Michael Porter in Strategy and the Internet in a recent Harvard Business Review article. Right away that definition would eliminate many web sites, which have since disintegrated on their own, since their goals were not based on profitability but on a theory of the Net, as gold mine territory, with victory going to the sites which made the biggest land grabs, whatever the cost.

As Candice Carpenter, iVillage founder, told Fortune Magazine in June 1999, explaining her companies acquisitions of other Net companies :"This is a land grab. You want to put your stakes in the most valuable property you can as fast as you can because it's not going to be there tomorrow." True, but not precisely for the reason Carpenter must have had in mind.

Jeff Bezos of also put stock in the land grab theory stating that customer acquisition costs would never be cheaper. Bezos offered books cheaper than competing bookstores and offered free or subsidized shipping. The net effect was that subsidized its ' purchases. Now is being pressed to get back to basics, and start showing a real profit.

Sustainable Competitive Advantage

To establish a sustainable competitive advantage, a strategy must be grounded in sustainable profitability. Terms like "mind share" don't really address that issue, and frequently don't translate into profits. Branding on the Net has proved to be expensive and not necessarily effective. For example, Copernicus, a marketing consulting firm, reports the median annual marketing expenditure for major e-commerce companies as of mid-200 as $88 million. According to Freedman in Last Guys Finish First, "Priceline achieved a .1 percent increase in awareness for each $ 1 million it spent." More typically, " eked out a .03 percent rise for each $1 million it poured into branding.' And that awareness did not translate into a desire to shop on the site, much less in sufficient numbers and at a prices necessary to insure profitability.

The Big Bangs Which Did Happen

What did blow up were several myths of Net biz at Net speed:


- First Mover Advantage
The accepted wisdom was the first company into a market would dominate it. The flaw in this thinking was that the Internet was not an exclusive massive infrastructure play where one company could effectively lock out competitors.

For most companies the advantage was in being able to watch the mistakes of the first movers, and learn from them.

- Branding
It turns out that instant branding doesn't work. Although you may generate some buzz, it doesn't necessarily translate into either transactions or profits. The reality is what it always has been: have a wonderful service or product that solves a customer's problem and, as they become aware of and comfortable with your company, you will be able to price and sell your product or service at such a level as to sustain profitability.

- Escape From Fixed Costs
Yes, the internet frees you from some fixed costs but saddles you with others. Maryanne Keller, of Priceline's auto services division says a Net business changes costs. " You don't have factories but the servers become your factories, You have a lot of high paid managers keeping the servers running."

-Net Will Cannibalize and Change Existing Ways of Doing Business

Author Michael Porter suggests that the Net is not so much transformational of business but complementary. The Net facilitates the exchange of information and processing transactions but "critical corporate assets - skilled personnel, proprietary product technology, efficient logistical systems- remain intact and they are often strong enough to preserve existing competitive advantages."

So the costs are there, they are just different costs.

Lessons Learned: The Value of Test Marketing

The lesson here is to approach new markets incrementally. The launch of a $60 million company shouldn't be the test, itself, but the end product of testing. Baby steps work; big bangs simply explode and leave a field of debris.

Finally, have a real business plan, one that sets out to make money by offering a better product or service at a price the customer considers a value and is therefore willing to pay enough for to sustain profitability for your company.

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