What Does the Future Hold for E-Commerce?

A friend recently asked me this question in an email to help him with a project for school.  I thought my reply was worthy of a blog post and will hopefully warrant some discussion in the comments

This is a really interesting question. I may be a bit biased considering that I own an e-commerce company, but I see a huge amount of growth ahead for e-commerce businesses.  In particular, I see the growth potential in e-commerce as very high relative to the growth in other online and offline businesses.

In fact, I think we’re already starting to see evidence of this now. The economy – particularly in the US – is struggling with jobless rates and foreclosures at all time highs, and major financial institutions and automotive manufacturers struggling to survive. Despite all of this, e-commerce sales this past holiday season dropped only 3% compared to last year.  I say “only” because many physical retailers saw drops in the 20% – 30% range (see Mike’s post and this Reuters article for specific numbers).  We’re a little unique because we’re only just entering our third year, but we grew approximately 120% last year!  I don’t think very many offline retailers experienced this type of growth.

When you factor out offline businesses and just compare e-commerce to other online business models, I think it looks even more promising.  Why?  Simply because I believe it’s the best way to make money online. While all of the social networks and ad companies struggle to find revenue models and become profitable, an e-commerce company has a relatively simple formula: buy a product for X and sell it for 2X. Scaling is relatively easy and a large part of the workforce in any region in the world can handle packing/shipping, customer service, inventory management, etc (which is why I give e-commerce the slight advantage over a service industry like web design, but it’s very close and can certainly be argued either way).

But when it comes to the “web 2.0” companies, I see the funding drying up and there’s definitely some potential for another internet bubble.  How it ever became customary to fund companies with no plan for monetization is beyond me. For every Facebook or MySpace (which are still having trouble being monetized by the way) there are thousands of sites that get seed money from Angels or VCs and never ever return a dime. According to Crunchbase, Twitter has raised a total of $20M in Series A and Series B Venture Captial.  And to the best of my knowledge (and Wikipedia’s), Twitter has never earned a penny of revenue!  Think about how absurd that is for a second.  Yes, users do have value, but only if there is a plan to utilize those users to bring in revenue…and obviously said revenue should exceed the expenses for programmers and servers and any other expense, or you have a problem.  For the most part, I don’t see the struggles to monetize social sites changing any time soon.  If Facebook can’t figure it out, I don’t give much hope to the rest of us.  Consumers don’t particularly like getting slammed with ads or having their demographic information sold to ad companies, nor have they really embraced pay-per-use subscription models for the most part (I’d actually argue that web 2.0 has conditioned everyone to expect everything on the web for free, which further hurts future businesses that do try to charge).

But pretty much everyone shops online. It has become accepted by the majority of the population as a perfectly normal way to buy things.  This is an immense advantage.   I don’t know of many e-commerce sites that have received large sums of outside VC or Angel funding, but that may change.  Or at least, they will have the opportunity for that to change (whether they want or need the money is another story).  I think that because of this, you’ll see a lot of the web’s innovation come from e-commerce companies, simply because they are the ones who can afford it. They have profits that they can re-invest. Developers from failed social networking companies will find homes within the e-commerce world and see opportunities to bring those social features to shopping. Used in conjunction with a profitable e-commerce site, all of a sudden the social web becomes super profitable.

Then there’s just the natural growth irrespective of the economy and the competition.  E-commerce is still a relatively new industry. Over time, as the technology gets better and the companies improve their business processes, people will become even more comfortable shopping for things like clothes and groceries that are currently still mostly purchased offline.

Now, I also think that along with this you’ll start to see some of the “old-school” e-commerce companies really struggle (again, my personal opinion is that this has already started).  The ones who have dominated B-list and C-list industries since 1999 will all of a sudden face new competition as the opportunities in e-commerce become clearer. Like in any competitive industry, if they aren’t willing to invest in staying on the cutting edge, they will fall behind and eventually go out of business.

In short, while the economy as a whole may be struggling, I think the e-commerce world is one of the places you’ll continue to see high growth and opportunity.

11 comments on What Does the Future Hold for E-Commerce?

  1. Anthony says:

    I definitely agree that in an economy like this, e-commerce isn’t a bad place to be. But I do question the merits of one concept: The statistics behind the statement “pretty much everyone shops online”, and how that measures up against the uncanny resilience thus far of ecommerce.

    My feeling is that not *everyone* shops online. I think, in terms of raw percentages, it’s mainly more tech-savvy and well-to-do people that tend to do the majority of online shopping. I mean, on a simple scale, if I look around at my family, friends and business acquaintances, it’s clear to see who the economy is affecting and who it is not. And as it happens, most of the people who the economy has not yet affected are the people who already had a higher propensity to shop online in the first place.

    What I’m getting at is – we just may not be seeing a hit in the ecommerce world yet because the ecommerce world hasn’t fully expanded to the class of people whose shopping has severely decreased in the last few months. The good news is that means, no matter what, ecommerce is on a growth path – for now. The bad news is that it will most likely grow slowly. Because the people that have yet to enter the online world are most likely the same people that aren’t even buying things in the real world right now.

  2. Dave says:

    I agree as well, e-commerce can only grow bigger. The audience is just wayy too big, and your customer base becomes everywhere. It’s a huge opportunity especially for manufacturers as well.

    I believe that it will get much bigger when the software and ease of use gets better. There are open source applications out there, and they are definitely getting better (aka Magento Commerce)…but they’re not quite there just yet.

    The ability for a joe schmoe to just jump on the net and sell products will only reinforce ecommerce growth.

    Yes, that also means there will be a bunch of shitty e-stores out there, but in the overall scheme of things it helps pump up the overall volume, and grow the ones that are good.

  3. Adam McFarland says:

    @Anthony – most of the people who use the internet do shop online, and most of the people in our country have internet access. According to this study by Neilson “More than 85 percent of the world’s online population has used the Internet to make a purchase”. Also according to Neilson, 72.5% of the US population uses the internet. 85% of those 72.5% is 61.6% of the population. It might not be everyone, but it’s quite a bit more than half.

    @Dave – I actually hadn’t heard of Magento. That is a pretty sick open source e-commerce platform. If we were starting totally from scratch I’d really have to consider using it.

  4. Dave says:

    I haven’t tried the latest version, but I had tried it at one point and it was EXTREMELY server intensive. Hosts were complaining, it was slow, etc. This was a 1.x production build, not too long ago.

    If they can fix that, I’d look back into using it again.

  5. nethy says:

    Hi Adam,

    The future of ecommerce is a tough one. Ecommerce may be turned on it’s head a few times over the next few years. Each turn brings considerable risk. There is the risk of industry-wide restructure that you just don’t have in the cafe business.

    – Paying –
    The user experience of paying online is not right. From dealing with credit card companies to checking out on online shops. CCs are an imperfect solution, an oligopolistic market that can get away with things like chargebacks. If CCs have their grip broken, I don’t know what will follow. On this front, I think most changes will either benefit large retailers or benefit small ones. They are unlikely to be neutral.

    – Discovery –
    Shopping online is very deliberate. ‘Casual’ online shopping is rare. That explains a lot of what we see happening. Big virtual goods (eg insurance, tickets), travel products (flights, hotels) & such have moved online very fast. These require the research accross several providers & people are very price sensitive. Online was always going to rule the roost.

    Physical goods didn’t get quite as big. Ecommerce has a tiny slice these. What is it that people buy online? Deliberate purchases: laptops, textbooks, work clothes, tools, sports equipment. When it comes to new shoes, something to read, something to hold the shelves together, a cool hat… main street still rules, definitely for groceries & fashion- the biggies.

    – solutions –
    I’m not sure what it will take for online shops to get to a place where you can really use them to “discover.” Whatever solves this might turn the industry on its head. Might be a lot of casualties. This isn’t Magenta V2 type solution I’m talking about. Have a look at this & see what I mean: http://zoomii.com/#at=1.5,94773,38713 . Several potential equilibriums could really disallow small competitors from competing (who can beat Amazon on product discussions?).

    – What If –
    A few years ago Google launched Froogle (now Google Shopping) followed by Google Checkout. So far, they do pull products into the search results sometimes & some people might use Google shopping. It’s nothing exciting. But what if? What if they had actually nailed shopping like they nailed search. What if they had succeeded in making their shopping engine the real ecommerce UI while using retailers as not much more then a back-end. Now I’m sure retailers would pipe up & mention their specials & bundling & savings on shipping if XYZ, customer service, customer loyalty ….. I know. those things require your site. I’m just playing what if.
    If they had figured it out (they may still) then the retailers making up their pipes would eventually change. The skills required to run an e commerce store are not the ones needed to run a Google back end. So that upheaval would be a purge as well.

    – Upside –
    On the upside, there is still a lot of growth to go. A lot of room. Most big retailers are very clumsy online. Most online only retailers are young & not yet entrenched. Some areas seem ripe for picking. My personal pick is any wholesale market where single buyers spend $1k – $100k a year. Too small to be all handshakes & golf. Big enough to give you a decent budget for customer acquisition. I would not hesitate to get in.

  6. Adam McFarland says:

    Nethy –

    Awesome reply as usual.

    As far as payment goes, I agree with you here. We’ve had a ton of chargeback issues (I will post about it/them once the “big one” is resolved”). It’s amazing how a customer can just call and start a chargeback even if we’ve delivered the goods! We’re even starting to get blackmailed by customers threatening chargebacks (working with our lawyer on a solution to this one too).

    Discovery is something I haven’t ever really touched upon. There still isn’t a “pandora for shopping” that recommends products you’d like, at least that I know of…beyond what Amazon does of course.

    Lastly, your ideal market is exactly where we try to be. That $1k+/year buyer is so loyal and so susceptible to newsletters and specials (presumably because they always have money to spend) that they’re worth the extra work in acquiring and “coddling” when they have issues.

  7. Anthony says:

    Adam,

    Agreed a ton of people *have* used the internet to buy. But I don’t consider that to be a telling stat.

    I think what it comes down to is *frequency*. I know at one point or another, it has made sense for nearly every internet user to make an online purchase. But there’s a huge difference between John Doe buying a present on QVC.com for his mother on rare occasion, vs. John Doe actively using a variety of ecommerce sites as a matter of habit. From a consumer standpoint, it’s two different mindsets, and from a business standpoint, it’s two very different revenue streams & marketing strategies.

    Once again, if you can find more detailed stats, I’d be interested. But based on my subjective experience (which I realize is limited to my scope/biases), it seems as though people with higher incomes are much more active and frequent ecommerce shoppers, while people in lower brackets are the ones who use rare, scenario-based buying. For ecommerce to truly grow and become a viable competitor to offline commerce, everyday users need to look at ecommerce as an everyday solution, not a medium you use a couple times a year.

    And that’s why, to me, it doesn’t matter who *has* used it. It matters what *types* of people are using it, and to what *degree of frequency*.

  8. nethy says:

    I’d be interested to hear about your charge-back stories. I’ve heard some shockers. Including your customer blackmail.

    I’ve even heard of police virtually hanging up on any fraud related calls as soon as you mention e-commerce.

  9. nethy says:

    Anthony, If you need stats/market research on ecommerce I suggest having a look at this site: http://www.emarketer.com. The trend in ecommerce is a very definid upward slope including all medium term projections in most markets.

    I wouldn’t fret too much over how many people shop online & how much in absolute terms. There are much fewer online retailers too. Trends are generally more suggestive of business climate. Everyone drives. Everyone drives cars. The market is massive. I still wouldn’t want to be a manufacturer.

  10. Adam McFarland says:

    Nethy,

    I’m biting my tongue not posting about some of our chargebacks. I have 2 or 3 posts that I cannot wait to write. Everyone wins when it comes to chargebacks – the banks, the customers, the theifs – EXCEPT the retailer, who get’s totally fucked (pardon my language, but it’s insane that the structure is the way it is). We lose 100% of the time, even when we present evidence that is indisputable (such as a signature by the customer showing that the order was delivered). International orders are even scarier, and the one we got badly screwed on was to Singapore. I’ll get more into it once it’s resolved and we’ve put something in place with our lawyer to handle the “blackmail” cases in the US (yea, there’s more than one).

    Adam

  11. nethy says:

    I’ll read it when it comes.

    Always surprised that this gets so little press. I guess retailers feel like it’s dirty laundry that they don’t want to air. Lawyers, cops & thieves. But I agree that it’s incredible how the system has evolved. In many cases this system has been keeping e-commerce from being truly disruptive. If you have to write-off 5%, it’s hard to be a discounter.

    Many e-tailers just won’t ship outside their own countries (even though they have very little recourse locally anyway). Won’t ship no matter what. Not ‘won’t accept credit card X.’ Not please pay by ‘Y completely fool-proof method where you guarantee not to take your money away.’

    The worrying thing is that no party with any power loses. If a customer gets shoddy products, doesn’t receive an order or has his CC stolen what happens?

    -The customers-
    The customer gets his money back. Most people that I’ve heard experience this process remark on the excellent customer service & the confidence they now have. It’s great they feel secure buying online. But where’s the incentive to avoid shoddy retailers or protect their details? Consumers are definitely in ‘moral hazard’ territory.

    -The CC Companies-
    All it costs them is customer service. They charge the merchants for an insurance policy they provide their customers. Customers walk away with a big smile & confidence in the CC companies. They then go & spend more on CCs because they have ‘purchase insurance.’ Why would they want to make credit cards secure. No wonder they come up with useless, customer-pandering security schemes like in-home pin code machines or photo-cards that don’t address that the underlying problems.

    – Banks –
    Don’t really give a rats ass. They make money on anything that moves. Charge = bank fee, Charge back = bank fee. It’s really almost a cost-plus scenario & there is no reason for them to care.

    – Big (e)retailers-
    Honestly, I don’t know where they stand. I wouldn’t be surprised if Amazon & the like actually have something worked out with Visa or Mastercard. Chargebacks probably cost them something. But on the other hand, it makes it hard to get an get online shop up & going when you’re afraid to ship a big order.

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