Trends in E-Commerce:
Freeze-Frame December 1999
Web Commerce Today, Issue 29, December 15, 1999
Like peering from a speeding vehicle at the countryside rushing by outside, e-commerce scenery is constantly changing. Here's my attempt to stop the car for a brief moment at the close of 1999 to examine some important trends. I don't make any claims that these are the only trends -- they're not. Or that you aren't already aware of them -- you can't have helped but seen their influence. But I see them as important signs of the times as we plan our e-commerce strategies for the new year. I recognize and apologize in advance for the obvious emphasis on retail e-commerce in this list. Perhaps some of my readers will contribute an "E-Mail to the Editor" noting other trends you observe from your corner of the Web.
So, pause with me for a moment. We'll try to freeze-frame the Internet, step back, and look at the whole picture, and some lessons that emerge.
1. E-Commerce Becomes Mainstream
The first obvious trend is that e-commerce has become a mainstream sales channel, both in retail and B2B.
While Christmas 1998 was a wake-up call indicating that large numbers of consumers would purchase via the Internet, a year later, nearly every major retail business is doing some e-commerce, and revenues for Christmas 1999 are projected to be triple or quadruple that of a year a go. Retail e-commerce is still only a tiny fraction of the total retail picture, but it is growing rapidly. I expect that eventually 15% to 20% of retail will be conducted via e-commerce, but that's years away.
On the business to business front, we're seeing a number of innovative integrations of Web-enabled traditional businesses. OfficeDepot.com, for example, provides shipping from its local stores, as well as the kind of local customer service that builds loyalty. Online procurement provides great cost and time savings for both vendors and purchasing agents, and has grown very quickly to a large slice of total purchases. B2B has, and will continue to have, the lion's share of total dollar transactions over the Web. Lesson: Your business can't afford to ignore e-commerce -- but you already knew that. :-)
2. Set-Up is Not the Issue, a Sound Business Plan Is
For many e-commerce newbies, setting up an online store is the main hurdle. New software and many excellent e-commerce hosting services make store set-up much easier than it was a year or two ago. The real issue these days is the quality of the business plan. Shaky projections based on ad revenue or yet unproven conversion rates may look good on paper, but fail in real life. Today there a great many players, and it will be very easy for your business to get lost in the shuffle. Lesson: Spend time constructing a relatively conservative business plan based on a clear Unique Selling Proposition.
3. War of Pure-Play vs. Brick-and-Mortar Businesses
We're witnessing the war between so-called "pure-play" or Web-only businesses, and the established Brick-and-Mortar businesses that are developing an e-commerce presence, the so-called "Click-and-Mortar" businesses. You only need look as far as your television to see eToys (pure play) battling Toys R Us and KBKids (established), and Amazon.com (pure play) vs. Barnes and Noble and Borders (established). The Web-only business may have an initial first-mover advantage, and since they can design their entire business around what is essentially a mail order type distribution system. Established retail chains have existing systems built around supplying local stores. Brick-and-mortar retailers essentially need to reinvent their business, since shipping, distribution, and customer service require completely different models and systems than store retail. Catalogers who move quickly have the biggest advantage, since they have many of these systems already built. Who will ultimately win? Don't count out brick-and-mortar players who get on the Web. Their brand name goes a long way to establishing trust. Though they may have to give up some Web marketshare to the fast-on-their-feet Web-only retailers, eventually the click-and-mortar stores should do quite well.
Lesson: Now is the time to expand your business on the Web. I subscribe to Amazon.com's philosophy that it's much less expensive to build marketshare now when the Web is young, than it will be in a few years hence when the big players are well established on the Web (but, neither have I purchased any Amazon.com shares).
4. Major Retail Sectors Are Being Staked Out
Closely related is the observation that the major retail and B2B sectors are being staked out, either by pure-play start-ups or traditional industry leaders. Here are some examples in retail sectors: books, CDs, computers, software, toys, sporting goods, groceries. Some sectors already have dominant leaders, others are still fighting it out. Eventually there'll be one dominant retailer, two or three runners up, and many sites that get little or no traffic. Lesson: Don't plan on covering an entire sector unless you have the muscle and fortitude to struggle for domination.
5. Vertical Portals Multiply
We're seeing lots of vertical portal sites appear, sites that are trying to be the gateway to their own industry -- or, for the more ambitious ones, the gateway to the entire Web. These portals typically have search engines, free e-mail, chat groups, and either their own stores, or alliances with other online stores. Analysts believe that each industry will end up with only one major player, but we'll see a lot of jockeying for position over the next few years. Lesson: Don't be quick to declare a winner here, and don't enter this game unless you have something unique to offer, or your industry doesn't have an adequate portal site at present.
6. Plethora of Venture Capital Funded Start-Ups
It used to be that new retailers began locally, expanded regionally, and then went national. Now many businesses try to begin on the Web as full-blown national businesses. It's a zoo out there. I'm concerned about the plethora of venture capital funded start-ups that are popping up everywhere, as I mentioned recently in "Scary Start-Up Machine" (http://www.wilsonweb.com/wct3/scary-start-ups.htm). These 60- and 90-day wonders are often staffed by college grads crammed into tiny offices, visions of IPO fortunes dancing in the heads. Though venture capitalists fund some of these for $5 to $10 million each, projections are that only one out of thirty may succeed. I believe the landscape will change rapidly, when many of these fail, or are acquired by larger competitors. Lesson: Let your crystal ball sees past these ephemeral businesses to the longer term.
7. Acquisitions and Consolidations Accelerate
In their quest for national dominance, we're seeing many larger sites gulp down smaller sites in the mad rush to grow. Yahoo! swallows GeoCities, eGroups swallows ONElist, etc. Some business plans include growth by acquisition, other companies have begun with the intention of being acquired. Lesson: Expect a shrinking number of main players, and look for the unfilled niches as this occurs.
8. Auctions Become Small Business Channel
Auctions have become a tremendous draw on the Net. Recently eBay's monthly traffic topped Amazon.com's. Though Amazon, Yahoo!, and others have set up auctions, most sellers move to the leader to get the widest viewing for their products. There is room for vertical auction sites, but probably only one per industry will survive. In the meantime, many small businesses have discovered that eBay, for example, allows them to reach a national market at a low fixed cost, since they only pay when a purchase is made, except for a low insertion fee. Retailers are using auctions to get rid of stock overruns, factories dispose of seconds, one-of-a-kind items, etc. I read of an antique store that closed its brick-and-mortar outlet, and now sell exclusively through eBay. Lesson: Auctions offer a great channel for many brand new e-businesses. Lesson: Experiment to see how auctions can provide a channel -- perhaps a prime channel -- for your company.
9. Affiliate Programs Begin to Saturate Key Webmasters
While affiliate programs offer retailers a tremendous potential for low, controlled-cost advertising, the number of affiliate programs that any single website wants to handle is limited, at least to programs for the same kind of product. And a great majority of the sites that carry affiliate programs are amateur sites that generate little or no traffic. Now we see an intense competition between affiliate merchants to gain and retain key affiliates. Lesson: Expect to offer higher affiliate fees and perks to gain loyalty.
10. Some Industries Still Resist Internet Distribution Pain
Many manufacturers have spent years carefully developing a reliable supply chain of distributors and dealers. But the temptation for manufacturers to sell online directly is increasing, and threatens to injure the supply chains. Companies are approaching the challenge in a variety of ways, but few can ignore it any longer without losing to the competition. Lesson: This one won't go away. (We'll be discussing approaches in an upcoming issue.)
11. Offline Ads Become Commonplace
Since surveys indicate that more than 100 million Americans are Internet users, and certainly the more affluent portion of the population, e-businesses are now using traditional mass market advertising venues, such as television, billboards, magazines, and newspapers. 25% to 30% of SuperBowl 2000 ad revenue is from dot.coms, up from just two companies for SuperBowl 1999. Part of the advertising boom comes from cash-rich new dot.coms, flush with IPO or venture capital money. But it presumes, and I think, correctly, that offline advertising is effective and the average Internet user is now comfortable shopping online. Lesson: consider offline advertising approaches.
12. Online Ad Media Advantage Shifts to E-Mail
Banner ads are dropping in both price and effectiveness. While banner ad rate card prices remain in the $35 CPM range, the actual price at which banner ads deals are made is doubtless much lower for most sites, since there's a big surplus of ad inventory for general audience demographics. I don't see the death of banner ads at all, but more realistic pricing on its way. Rich media hasn't found wide acceptance yet, but will grow as DSL and cable modems increase consumer bandwidth. Studies show e-mail newsletter ads and opt-in e-mail lists offer a better advertising value, with house e-mail lists showing the best return of all. Lesson: Develop your own house e-mail list from your site traffic and customers, and look for more cost-effective advertising methods.
13. Fulfillment and Customer Service Differentiate Businesses
Christmas 1998 produced a customer backlash against online stores that had poor customer service and return policies. I expect to see a similar problem for Christmas 1999. Customers may not return to stores that provide no easy ways to get more information, unsatisfactory e-mail responses, return goods policies, information about in stock or back ordered status, etc. Many services are now available for merchants in the way of live chat, call centers, e-mail routing systems, etc. Lesson: The key to success is not getting the customer, but keeping the customer, and that requires excellence in customer service.
14. Shipping Costs and Prices Discourage Customers
Ernst & Young found 51% customers discouraged with shipping costs, and BizRate and NPD learned that 24% ditch shopping carts when learning of the shipping charges. I dropped the idea of purchasing a $14.95 gift for my wife when I learned that shipping would be $7.95. Lesson: Successful stores will offer low cost shipping options.
15. European E-Commerce Matures
Finally, I see European e-commerce growing by leaps and bounds. At this point it isn't much behind the United States, though the number and percentage of online shoppers is substantially lower than in the US. Lesson: If you don't expand vigorously into the European e-commerce market immediately, you won't have any first-mover advantage at all.
These are the trends we're dealing with. Now like a lumberman making your way across a river of floating logs, keep your balance and look out carefully for your next step. Ready or not, the freeze-frame is over, and the full-speed ahead live action show begins ... NOW!
