E-Commerce Business: A Location Primer

E-commerce sales continue to grow at an outstanding rate.  In 2013 e-commerce grew by 13% in the US and is expected to continue to outpace growth in traditional retail.  However, running an e-commerce site successfully can be a difficult proposition.  Perhaps one of the first questions an entrepreneur needs to answer when starting e-commerce is how and where he will sell – his location in marketing parlance.  This primer attempts to answer that question.

There are basically 3 major ways to sell online:

1) Electronic Marketplaces

In electronic marketplaces, the entrepreneur lists his products on a 3rd party website.  Well known examples include eBay, etsy and the Amazon Marketplace.  Electronic Marketplaces generally generate revenue by charging stores a listing fee and/or a final sale fee.  Listings generally expire, forcing sellers to relist constantly.

Pros:

  • Extremely fast to set-up
  • You can test the waters for many different types of products for very low cost
  • The larger marketplaces already have a customer-base, decreasing need to market to attract purchasers

Cons:

  • Extremely difficult to build a brand
  • Customers are incentivized by the electronic markets to visit other sites
  • Often, price is the only method to compete on, forcing low margins
  • Entrepreneurs are at the mercy of changes to the Terms of Service of the markets

2) Software-as-a-Service (SaaS) Shopping Carts

SaaS Carts are a middle-ground where sellers can get the full functionality of a hosted online store; but require much less in-house IT knowledge. Many of these carts provide drop and drag professionally designed themes, fully integrated payment gateways and slick marketing and cross-selling features.    Yahoo! Merchant  is probably the best example of this type of software.

Pros:

  • Easy to brand website and business
  • Customer database is yours to analyse & market
  • Decent pricing, often starting as low as $15 a month

Cons

  • No control over hosting or gateway,  so service wide lockouts can affect your site
  • Regular monthly cost which can rise significantly as volume increases
  • Entrepreneur’s are ‘locked’ into the updates of the service chosen
  • No existing visitors like an e-marketplace, so customers must be developed internally

3) Hosted Shopping Carts

Hosted shopping carts run on the entrepreneurs own web server, and as such are completely owned and managed by the entrepreneur.  In such an environment, the entrepreneur manages the design and code issues directly.  For those who don’t have the background in IT, a good developer is invaluable.  A site like Fortress Geek is hosted on Magento, an open source hosted shopping cart.

Pros

  • Highest amount of flexibility for design and branding
  • The easiest to scale as the business grows
  • Can be the cheapest method at scale

Cons

  • Can be very expensive
  • Requires the entrepreneur to understand basic code and/or managing 3rd party developers
  • Bugs, security flaws and exploits all must be dealt with in-house
  • Costs can come in waves (developer fees) which can be harder to budget

 

Unfair Playing Field

I wrote a post on Starlit Citadel’s business blog. Yeah, yeah I should write more article here too. I will…

Anyway, the discussion was with relation to how some of the major e-commerce businesses out there can run losses for a much longer period than we can, and as such structure their company in such a way that they can / will make those losses.

I mean, when a public company is losing 80% of their revenue to COGs and Fulfilment, even minor variations in things like IT, Marketing and the like can seriously affect the profitability of the business.

I’m not sure I’d call it unfair per se – it is the field we entered and created in many ways, but it’s still a playing field that is heavily weighted in their favour.  So the trick for a small business is to learn to not compete directly against them.

Whether it’s entering a business sector that they have no interest in or perhaps taking advantage of a geographic benefit, you need to be able to compete on things other than free shipping and price.

What’s your answer to the Amazon’s & ThinkGeek’s of the world?