Let’s face it; investors have concerns with “traditional” e-commerce these days and that’s mainly because of its complexity to reach profitability while scaling. There are two main reasons to this:
1. Prices are going down
“Traditional” e-commerce websites tend to sell similar products; items from well-known brands which enjoy traction in the offline world. All these websites then compete with each other and can only differentiate themselves by offering more services (free delivery, friendly return policies, refunds) or a lower price for the same product.
2. … While marketing costs are increasing!
At the same time, these e-tailers that sell identical products are also struggling to acquire traffic. How can they get more visitors to their websites? By optimizing their indexation in search engines… but as all e-commerce sites work on their SEO, it becomes more and more difficult to be ranked first on Google! They can also buy keywords in order to acquire paid traffic. But again, as all e-businesses start buying the same keywords (well-known brand names), CPCs keep on increasing, leading to online marketing wars… that impoverish everyone, except Google!
Thus, e-commerce sites suffer from both decreasing revenues and higher variable costs… That’s math, profitability can only be challenged.
Given this situation, various e-commerce models have emerged, with the goal to escape from the two previous rules:
1. Models focusing on exclusive products
To avoid direct competition, a few online retailers had the idea to sell “exclusive” products that are not easily found on the internet. Some of them select products from less known suppliers, others offer custom-made products (i.e. customized by the end-user himself), while a few e-tailers launched their own label and now sell products that are internally designed. These three new models are great to avoid direct competition but they are far from being perfect: how to attract natural or paid traffic on less popular products (i.e. not often searched)? How to ensure that users are creative enough to be able to customize products? How to create a brand without spending excessive marketing costs?
2. Models based on new ways to acquire traffic
In order to acquire traffic without relying on traditional SEO / SEM, some e-commerce players have been trying alternative acquisition channels such as newsletters or celebrities (like BeachMint). Unfortunately, these channels have often been unsufficient to scale businesses.
3. Models based on repeat business
Some pure players tried to amortize online marketing costs by focusing on repeat business and therefore by increasing Customer Life Time Value, i.e. the total amount spent by each acquired user. That’s how subscription e-commerce started (Birchbox Model). But selling monthly boxes is probably not that profitable as many companies such as Shoedazzle/JustFab left their subscription model or decided to open their website to non-subscribers.
While investors have their eyes set on contribution margins, most of these new e-commerce models are failing to reach profitability…
Should we conclude that e-commerce is dead?
The online share of total retail sales has not finished its growth yet. People are still looking for new destination or inspirational sites. So I tend to be positive about the future of e-commerce. Moreover, some recent sites have been extremely successful at establishing new models: Vestiaire Collective efficiently uses virality to acquire the vast majority of its traffic for free, Sézane uses the concept of full-price flash sales (scarcity of inventory) to attract people on its site during new collections, and AdoreMe combines the fast fashion business model (reducing the time cycles from production to consumption) with mass customization.
But an efficient business model doesn’t prevent from other innovation needs. Indeed, e-commerce involves so many areas (marketing and communication, logistics, purchasing, inventory, customer service, etc …), that it is becoming essential to innovate in each of them. Just think of Amazon: it has not only been the first e-commerce player to launch an internal marketplace (business model revolution), but also the first one to launch the One-Day delivery service (logistics revolution). And this approach has proved to be a great success!