E-commerce still more cost than profit

Revenue acquired via Internet commerce sites are, in most cases, insubstantial and unable to cover the cost of doing business, according to Giga Information Group.

In 1997, the average income of Web sites that generated revenue was a little over US$100,000. Only one per cent brought in more than US$1 million, said Erica Rugullies, a senior industry analyst at Giga in Cambridge, Mass., during a recent electronic commerce presentation in Toronto.

She said there are a number of reasons why profitability is difficult to achieve. There is still a relatively small percentage of households that have Internet access, users are concerned about privacy and security, Internet shoppers lack trust in on-line merchants and customer acquisition is expensive.

“Until a critical mass of brand-name companies, and companies that sell brand-name products, jump into the fray and begin offering products and services on-line, Internet commerce will hover and will not enter mainstream.”

However, companies can use electronic commerce profitably by extending a number of business processes through the Internet, such as improving customer and trading partner relationships, Web-based order management, electronic bill presentment and payment, electronic software distribution and on-line marketing.

“With electronic commerce, you still have to design the look and feel of your marketing message, but the cost per incremental viewer is substantially lower. You are not mailing it out anymore.”

Despite this, companies have to be aware that this form of marketing will continue to be expensive for the next couple of years, Rugullies warned.

“The cost you are incurring is from increasing your bandwidth and system performance to handle a bigger load of traffic — and there is a new cost, which is in making your collateral interactive. It’s not enough to just plop the content up and hope that people will come and learn about your company. It’s got to be interactive, it has to be dynamic, it has to be kept up-to-date.”

The success rate of e-mail marketing campaigns is also much greater at 15 to 20 per cent vs. direct mail at half a per cent to two per cent, she said.

According to Steve Telleen, an area director in the e-commerce IT practices service at Giga’s Santa Clara, Calif. office, soon “almost anything and everything a company does is going to be touched by electronic business,” including customer service, supply chain management, recruiting, sales, purchasing, distribution, benefits management and EDI.

In many cases, the evolution of electronic commerce in the marketplace will cause many traditional business roles to shift or become redefined, he said.

“Communication chains are getting drawn all over the place because we can basically create communication links almost anywhere. What we’ve seen with some of our customers are systems where there is direct feedback coming from customers to the manufacturers.”

This action causes communication lines to blur from a simple supply chain, into a complex series of chains that interact well together.

“We are starting to get out of this supply chain model, much like biologists move from simple food chains into ecosystems,” Telleen said.

He said manufacturers who go outside their traditional chains of distribution and allow buyers to directly bid on merchandise on the Web found they could reduce the processing cycle time by 50 per cent and reduce processing cost by 30 per cent.

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