For several years I ran my own online store. For several next years, in Divante, we have been carrying out projects based on success-fee models. When we started carrying out projects in the success-fee model, less than a half of them was profitable for us. Today, it’s much better. What is the most common cause of failure and how to deal with it? Today we will talk, briefly, about first two of them.
Too short of a horizon.
Almost half of Polish online shops have been operating for less than five years (according to Internet Standard report). These are very young companies, still establishing their position. Very often, these companies fight to survive month-to-month – without outside funding they can plan only one month ahead.
And, as Jeff Bezos once said:
If everything you do needs to work on a three-year time horizon, then you’re competing against a lot of people. But if you’re willing to invest on a seven-year time horizon, you’re now competing against a fraction of those people, because very few companies are willing to do that.
To realize its long-term strategic goals Amazon invests, above all, in client knowledge (investments in technology and taking over companies like Alexa.com) and in product knowledge (reviews, opinions – numerous investments). Last spectacular investment of this type was twitch.tv – most popular platform for streaming and following live gameplay transmissions.
Too restrained customer acquisition.
Acquiring new customers is usually not profitable in short term. I have witnessed many businesses fizzling out – businesses that had once grown on free SEO traffic and with owners expecting to make money on the first transaction. As a result, they have refused to use any paid traffic source, viewing them as unprofitable. Lack of inflow of new customers will kill any business.
Many studies show that acquiring new customer demands investment and only the following transactions allow to generate income. In 2013’s State of Retailing Online SeeWhy by Forrester, data for American market can be found. Acquiring new customer generates – on average – a negative profit margin of -5%. It’s the transactions in the already acquired database that generate the average margin of +14%. 19 percentage points difference comes from: bigger average purchase in the existing database and the costs of new customer acquisition.
Digital content will further intensify customers’ expectations towards sellers’ investments. After all, digital content is sold mainly in freemium, free to play and other models that lower the entry threshold to minimum.
Customer acquisition is an investment process, which should be planned and carried out. Only in a handful of industries, it is possible to make money on the first transaction with a new client. Acquiring customers too slowly will lead to the competition taking over the market.