work; big bangs simply explode and leave a field of debris.
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 Whatever.com 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 Amazon.com 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 Amazon.com subsidized its ' purchases.
Now Amazon.com 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, "Buy.com 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
For most companies the advantage was in being able to watch the mistakes
of the first movers, and learn from them.
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
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
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.