Starting to sell goods online? Difficult to make money!

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The obvious advantage of selling goods online is that you do not need to pay rent for a brick-and-mortar store with expensive (and sometimes moody) sales staff.

But in reality, even the biggest stand alone e-commerce companies hardly make money. Amazon is thé expert, since 15 years specialized in selling third party brands over the internet, a ruthless, aggressive, visionary, creative, well funded, efficient, very well managed company. Zalando in Europe and Lazada in Thailand are both clones of Amazon and also market leader in their region. Most of these companies selling 3rd party brands currently make a loss. (Third party brands are well-known consumer brands which belong to other companies).

Their business model is based on the gamble that over time they will establish a loyal customer base of repeat visitors and an unique & superior level of technology.

In addition the fact that some of your biggest competitors do not care about break even,

Why is it so difficult to make money by selling goods online?

Pressure on prices and margins

Consumers shop on internet for mainly 3 reasons: convenience, to read information & reviews and to compare prices. Internet shoppers are often bargain hunters, so if you will need to offer the lowest price to sell volume. Price comparison websites may force you to compete with tens of competitors who sell exactly the same product.

To illustrate how tough internet business can be if you sell third party brands, we have searched for an LED TV on the Dutch price comparing site Beslist.nl. They offer 270 different models. After selecting 1 model, you get a list with the prices from 43 web stores offering the exact same TV, with the cheapest offer on top.

Branded E-commerce is the most open marketplace ever, where everyone is killing each other prices in order to gain market share.

Internet marketing is the new location cost

There are countless online stores operating today, selling everything from T-shirts to machinery, so don’t expect to see meaningful traffic without spending money and time on marketing. And you’ll need a lot of traffic, as conversion rates of 2-3% are the norm.

To obtain a boost in traffic and sales, pay-per-click advertising will often help. Another effective marketing tool is “re-targeting ad banners“, which show shoppers banners ads of products they looked at earlier but did not order yet. Experts generally estimate that your e-commerce marketing budget should be around 15% of sales: the US online advertising market is 40 billion US dollar this year, the e-commerce market is estimated at 260 billion dollar.

On top of the cost to attract the customer to the site, many web stores include additional marketing actions as part of the actual sale, such as “Free shipping on your first order” or gift cards for the next sale. These can eat another 10-30% of the margin.

Many other costs press on margins

CUSTOMERS DO NOT PAY CASH
Web stores pay financial transaction fees to receive the customers payment in their bank account, these “payment gateway services” charge between 2 and 5% based on volume to small e-tailors.

PROCUREMENT, STOCK & LOGISTICS
Logistics costs include storing, picking, packing, capital cost to hold inventory, and receiving & restocking returned items. For e-commerce start-ups these costs often will be higher than expected. Zalando for instance, which sells fashion goods in Europe, and offers free shipping & returns before payment, claims that in some categories 50% of the sold goods are returned.

YOUR STORE ACTUALLY NEEDS SALES STAFF
Your company should be available by phone and email to handle returns and refunds or answer questions about ordering online. Popular web stores have Live Chat, which besides of being a great tool to finalize a sale, can provide insights on how the site design, product selection & description, check out process,… are impacting your business.

Booking.com for instance, the world’s largest hotel booking site has more than 1000 employees in it’s Customer Relations Department.

TRADITIONAL COSTS
An e-commerce company will have all management issues and costs of any other trading company for procurement, capital expenditure, inventory, HR, accounting,…

The main challenge is to beat the traditional retailers

Existing retailers are not sitting still and waiting for new e-merchants to take a part of their business. Actually they are in the driving seat to take the market online, as they have purchasing experience & buying power, they have stock, they have stores which can serve as delivery or pick up platforms. Some of them are reluctant as they fear their internet sales will cannibalise their in-store sales or because they observe that price wars now make it a non profitable business.

Let’s go back to the Amazon, they are losing money for the reasons mentioned above.

Amazon loses money and is reacting by

  • shifting away from trading(still 60% of turnover) to offering an e-commerce platform where suppliers can sell their branded products direct to consumers. Suppliers pay fixed fees, advertisements fees and sales commissions.
  • in order to speed up deliveries and reducing costs, Amazon is setting up many regional warehouses and to deliver faster and to offer customers the option to pick up goods at a physical location. It’s often more convenient as customers aren’t at home during office hours.

So why existing retailers are in the driving seat now?

Let’s compare Amazon to Walmart, the largest retailer in the US and the world.

  • Walmart’s turnover was 445 billion US dollar in 2012 or 7 times larger than Amazon
  • Online sales are not Walmart’s priority, but it has already become the 4th largest e-commerce player in the US.
  • It has the largest purchasing power in the world and one of the best sourcing operations for private label products. This private label business is a huge source of Walmart’s income(35% of turnover and 55% of profit). Amazon(or any other start-up technology company) doesn’t have the purchasing background to become big in private label business soon. And shifting from trading to being a platform reduces their ability to acquire the needed experience and infrastructure.
  • Walmart has 4100 stores within 5 miles of 2/3 of the population of the US, which makes it easy to provide customers the option to pick up goods at a nearby store after work. Walmart already offers same day delivery in some locations.
  • Because of Walmart’s unique size, suppliers need Walmart to sell volume. But Amazon may have problems to keep brands and suppliers on board, as its new business model of being a platform between brands and consumers can be copied, improved, discounted,…  Group buying sites such as Groupon.com and flash-sales companies such as Fab.com for instance have skyrocketed but are falling fast as successful internet business can easily be copied.
  • The main strength of Amazon is that is has engineered a lot of know-how about e-commerce, but existing retail giants often has much deeper pockets than tech start-ups. Amazon made 274 million dollar in 2013 on a turnover of 74 billion dollar, Walmart made 26 billion dollar operating income in the same year. If Walmart pushes a button, it has plenty of budget to acquire all technology it needs via consultants.

Conclusions

There are at least  2 winners in the e-commerce market. Consumers who get goods at very cheap prices because old and new players are selling with a loss in order to gain market share. The second winner is Google, which made a profit of 11 billion US dollar(20% on turnover) in 2012.

Existing retailers with experience in a certain sector and with an mature infrastructure are at this time in the best position to benefit from the rising demand to purchase goods online.

In future we expect that also brands, price comparison sites, and communities will have a strong position in the e-commerce market.

Brands will chose any platform which provides affordable and attractive marketing and delivers their goods cheap and fast to the consumers. To go back to the TV market, Panasonic even cuts any middleman in the US by selling TVs direct from factory to consumers via internet.

Price comparison sites of hotels, car rental, air tickets, electronics,…  are one of the main engines of internet business, as online shoppers are often looking for the best prices.

Existing platforms such as Amazon already faces opposition from communities, platforms which are specialized in “content marketing”, building a community around a certain product, Sneakerpedia.com and Kute Club in Thailand(followed by more than 1 million people on Fabecook) are a good example.

And for start-ups companies it would be wise not to go after the majors, but to search for a niche, to start with private label and build own brands, to concentrate on quality management and execution of deliveries. These traditional qualities will make a company stand out and survive any time in any market. Be patient and invest step by step, Thailand’s main marketplace Tarad.com reports that only 1% of the stores achieve more than 1 million bath of turnover per year.

Read here our article on opportunities for e-commerce in Thailand.

For more assistance, find here a link to the internet marketing consultants in Thailand.