Smart cookies - a useful dose of realit-e - E-commerce has been all about the sexy stuff - revenue growth, network effects, weightless business models. Now cost is back on the agenda

Smart cookies - a useful dose of realit-e - E-commerce has been all about the sexy stuff - revenue growth, network effects, weightless business models. Now cost is back on the agenda - Has there really been a climate change?

by ANDREW WILEMAN
Last Updated: 31 Aug 2010

Has there really been a climate change?

Dramatic. This year I have been out twice to present to West Coast venture capitalists to raise dollars 25 million for an eCRM software business. One of the best aspects of our story is that we have a far lower cost base than our competitors - so our burn rate is much lower (at similar revenues) in the early months, we break even much faster and we're much more profitable in later years.

On the first trip, in late March, most VCs' eyes glazed over when we got on to the cost story. They wanted to hear about trillion-dollar market spaces and customer acquisition rates. They wanted Terminator 3 meets Pretty Woman. Talking about cost seemed to bring in a nasty smell of reality.

Only one out of six was positive - he liked the story, did due diligence and sent a term sheet.

Insert the tech stock crash in April and fast-forward to the second trip, in mid-May. Of five VCs, four wanted in on the deal. They all loved the cost story. 'This business isn't just about market size and revenue,' they all told us, 'it's about low-cost competition.'

We're over-subscribed, at a healthy valuation.

Any other zeitgeist milestones? What about Europe, for instance?

You have to mention the boo word. Boo is looking pretty iconic for the annals of turn-of-the-century internet insanity. Even those of us who remember the champagne-and-limo glory days of Saatchi in the 1980s (hi, Tim), or the loadsamoney City traders after Big Bang, have been impressed by the boo team's spending habits. Burning through pounds 100 million in about 18 months in a start-up e-tail business is quite a feat, even if you're trying to fight off Swedish depression and SAD.

What it says about the mentality and involvement of the investors (and we are talking serious, credible money here) is even more startling.

Is it the same old cost, or a new kind of e-cost?

For providers of hardware and physical infrastructure, the new economy certainly isn't weightless - the telcos and cable and mobile operators still have to build and maintain their networks and equipment, and Intel still has to build multi-billion-dollar factories. But for many e-commerce, software and e-services businesses, the old economy costs of physical production and distribution aren't very significant on the P&L. Many of these businesses thought this made them innately low-cost - but that ain't necessarily so. Their cost base may be different, but it can be as big and hard to manage as those old-economy costs.

What is the new e-cost base in e-commerce?

Three key buckets: sales and marketing, customer service and technical product development.

Sales and marketing costs can be astronomical, as dot.coms and software shops fight for brand leadership and first-mover advantage. Priceline.com puts half its operating spend into consumer marketing. Enterprise software companies spend up to 40% of every revenue dollar just on the direct costs of their field sales force (salary, commissions and T&E).

Despite the hopes and business plans of many dot.coms, customer service doesn't go away in an e-commerce environment - if anything, it becomes a bigger burden, as customers expect instant, personalised, 24x7 response, via any combination of in-person calls, phone, e-mail and chat. Amazon now has hundreds of phone service reps. Dot.coms opening an e-mail alias for customer contact are drowning in millions of unanticipated e-mails.

And e-tailers selling physical product are dealing with the nightmare of reliable home delivery to two-income households in big-city gridlock.

Remember when you could put up an e-commerce site or develop the next Lotus 1-2-3 for a few thousand dollars? Now it's common to spend in the tens of millions on technical product development - and this is not a one-time cost (as it was in Year 0 of the business plan spreadsheet), but an annual spend, for upgrades, re-versioning, new functionality and so on.

A business I work with in Boston has just commissioned a design upgrade of site look-and-feel. Cost: dollars 2 million, and that's just the graphics team, not the programmers. Scient and other new e-commerce consultancies look for tabs of dollars 5million to dollars 25 million for an e-commerce strategy and implementation project.

Can't we get back to market spaces and network effects? This cost stuff is looking like hard work?

Fair point. Pass the champagne while I order the limo. What's the agenda for next week's budget review in Mustique?

Andrew Wileman is a strategy and organisation consultant;

e-mail: wilemanae@aol.com

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