E-Commerce Opportunity
Take a deep breadth. Do you smell that? That
smell my friend, is the smell of opportunity. Today the Internet offers
more opportunity than any other time in our history, including the
Industrial Revolution. Why do I think so? Consider:
The
Internet now enables virtually anybody to start a new business with
virtually no overhead costs. For example, suppose you and I had wanted
to launch a new magazine business back in 1990 - "The Trout
Fisherman". We would have developed and written our first issue
and printed 50,000 copies for a cost of $90,000. Then we needed to
somehow distribute that magazine. Our options are to use the U. S. Mail,
or set up a fleet of couriers to deliver our magazines. Or maybe we
needed to develop a distribution channel into stores across America.
Whatever method we used to distribute our magazine, it would have been
costly - probably 50 cents per magazine at best. But wait, we're not
making any money. We need subscribers. We invest $100,000 to launch a
marketing campaign aimed at attracting paying readers. Unfortunately,
there is little demand for our efforts, and our business never takes
off. We lose a quarter of a million dollars in just a few months time,
not to mention a lot of lost work.
Now
fast forward to today. You and I could develop and write our first issue
of "The Trout Fisherman" and post it to a web site in a
matter of days. Our web site cost would probably be just $10 per month.
We submit our web site to the some of the popular search engines and
people around the world start finding our web site. They find that it is
well written, and full of good content. They bookmark our web site and
keep coming back. Within a few months, we have an impressive list of
readers. OK, ok. We haven't made any money off our web site - but we
haven't lost any either. This is the key point. Now we shift gears and
start selling fishing gear on line. Our web orders are automatically
forwarded to another company who handles fulfillment, and we pocket a
small profit on each sale. We start selling maps to well stocked fishing
holes on line - the reader submits their credit card and the map is
e-mailed to them. T-shirt and cap sales bearing our logo start moving as
well. Fulfillment is carried out by another company. Fishing companies
start paying us to advertise on our web site. Based on our recognition,
fishing companies pay us to speak at their conferences for a fee. We
receive endorsement contracts and our empire continues to grow.
In this
case we can see several clear differences between the process of
launching a new magazine in 1990 and launching one today. To recap:
1. Today, launching a web magazine has virtually no
financial risk.
2. With a web magazine, there are no printing costs, and no
distribution costs.
3. A web magazine is instantly accessible to millions of people around
the world.
4. Today the web makes automatic order receipt and forwarding to
fulfillment companies a real possibility.
This my friends is what I call opportunity...unprecedented
opportunity!
Still
not convinced? Maybe you think that a magazine might have a good chance,
but that other companies who do business via the web are doomed. After
all, print media is ideally suited for the web. Well, you are a skeptic
and I appreciate that. Let me attempt to sway you further over to my
point of view. Let's take you to the complete opposite side of the
spectrum. Let's assume for example that you are launching a new grocery
store. Consider these two examples:
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The
process of launching a typical retail grocery store is rather
expensive. It typically starts with the purchase or lease of prime
commercial real estate property. Here in the suburbs of Atlanta, the
typical grocery store sits on roughly 12 acres of land costing
$300,000 per acre or $3.6 million. Leasing that same real estate runs
approximately $8.00 to $12.00 per square foot for stores which
typically run from 60,000 to 85,000 square feet which translates to
$480,000 to $1,020,000 per year in lease fees. These rates reflect
favorable pricing afforded to grocery stores which are considered to
be an anchor for most shopping centers. From here, the grocery store
expends fees for a paved parking lot, cash registers, customer
shopping carts, attractive flooring, fancy lighting, decorations, etc.
The costs are staggering and the overhead associated with the typical
grocery store today must be recaptured through higher product prices.
The grocery store then serves the immediate community which is usually
a couple of miles or so.
-
By
comparison, today a company could erect a cinder block building in a
industrial park setting located 15 miles outside of town. We will call
it Billy Bob's Grocery Store". The building may have a
dirt road and unpaved parking. The building provides concrete floors
and ordinary lighting. There are no decorations and cash registers are
basic. The cost of such a facility here in Atlanta presently runs
about $90,000 to $120,000 a year. A web site could then be established
listing all of the products. Users need only log on, and click a check
mark next to the items they wish to purchase. In a matter of minutes,
the order is entered, and within a time period specified by the
customer - a pizza hut type delivery person shows up to deliver the
groceries. In this case, there is an extra $10 delivery fee; however,
because Billy Bob's Grocery store has dramatically lower overhead
costs, their prices are dramatically lower as well, and you save $24
compared to the retail store down the road.
In
comparing these two models, there are some important differences to note
as follows:
1.
Billy Bob's overhead is much smaller, other things being equal, Billy
Bob's prices can be much lower.
2. Billy Bob's can serve a larger market covering a 15 to 20 mile
radius, instead of the 2 mile radius covered by many traditional
retail grocery stores.
3. Billy Bob's customers save time. Five minutes on the web versus 1
hour in the store is a major time savings. The customer also saves
gasoline, does not risk having a head on collision, does not risk
being mugged in the parking lot, and does not succumb to impulse
buying when they walk down the candy aisle. (Grocery stores have
all kinds of tricks designed to make you buy more products, or more
expensive products. For example, the more expensive, higher profit
items are at eye level. Workers pass out free samples of food for you
to taste. These techniques obviously work, because they keep doing
them.)
4. Maybe you wouldn't purchase 100% of your groceries from a web
store, but maybe you would have dog food, canned drinks, soups and
canned foods, and common staple goods delivered by Billy Bob. You
might still visit you local grocery store for broccoli and meat so
that you can pick it out yourself. In this case, Billy Bob's allows
you to save money on the items you purchase there, and it reduces your
shopping time in the retail store.
At this
point, you are probably thinking "Carlton, if this is such a great
idea, then why have other online grocery stores such as WebVan
and Peapod lost money and gone out of business?" Do not
worry, I have the answer for you. Peapod embraced the web model only to
the extent that customers could place orders over the web. However, they
did not embrace the most important part of the model, which is to avoid
the high cost of overhead. Here in Atlanta, Peapod contracted with
Brunos - the most expensive grocery store chain in Atlanta to
fulfill their web orders. As a result, their prices were actually higher
than the local grocery store and the added delivery fee inflated those
prices higher still. Instead of saving money and time, Peapod only
allowed you to save time. I am sorry, but web shoppers like myself have
come to expect lower prices via the Internet. Webvan's troubles were
related to growing too fast, technical problems, and a botched merger
with Homer Grocer. Webvan's CEO Robert Swan claimed that the Webvan
model could have worked, however the company simply ran out of start up
capital. (They started with $1.2 billion).
Conclusion
I
believe that the the Internet offers the greatest opportunity our world
has every seen for both big companies and common people to launch new
businesses. The cost of establishing a web store is extremely small and
due to the power of the web, goods and services are instantly available
to millions of prospective consumers. These factors are the foundation
which will fuel wide spread web commerce for years to come. As high
speed internet access becomes more prevalent, web businesses will
experience greater successes.
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