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NET CLINIC: Back to basics

NET CLINIC: Back to basics

It was almost a year ago, when I was still editor of this esteemed publication that I first wrote about the impact buy.com would have on the local market when it finally arrived in Australia.

At that time, the hype around buy.com was still very much about its unique e-tail business model, which was based on the revenue it made from advertising and not on the margin it made from each sale.

The impact, I suggested at the time, was that we were heading towards a zero-margin environment and that a reseller's only road to prosperity would be through services.

I'll happily stand by my services mantra, but almost a year down the track we're nowhere near that zero-margin environment I envisaged, despite the entry of buy.com into Australia.

In fact, buy.com has noticeably backed away from its "zero-margin" business model. At the time I wrote that editorial, buy.com was plastered with advertisements. Now, there is a single small, square advertisement in the right hand corner.

In Australia, there isn't a single advertisement. Indeed buy.com has publicly declared it is not following the advertising-driven model in this country.

There has, however, been a lot of discussion about buy.com selling at a loss.

The reality is, though, that buy.com is selling at a pretty healthy margin on the vast majority of its products. Let's compare it to E-Store.

You can get a PalmVx for $699 at Buy.com or you can pay $645 for it at E-Store.

You can get a Kodak DC215 digital camera (yes, that same one I mentioned in a previous column that I paid nearly $700 for less than six months ago!) for only $429 at E-Store, or if you'd prefer to pay $454 you can buy it from Buy.com.

Note, too the camera was a front-page item on buy.com, but was buried on E-Store. For all its marketing fluff about super cheap prices, in reality Buy.com chose to sell at a loss on a couple of products to attract attention but is actually selling at a rather healthy margin on the rest of its stock.

Judging by those prices, it must be selling at least at 20 per cent mark-up.

A couple of things have happened since I wrote that editorial which mean, at least for the time being, the zero- margin model is not viable. Firstly, banner advertising has hardly proved itself a profitable revenue generator. More importantly, however, the Internet bubble has burst.

That set back a lot of businesses, my own included. I was about to set out raising capital for my e-commerce business when Nasdaq crashed. Not only is it now harder to raise money, but you have to give substantially more of your business away to get it.

Still, I view the crash as a positive. What the market now demands is profits.

It means you can't come in, backed by great wads of venture capital money, gatecrash a market, and simply burn money to buy a leadership position. Or, at least you can't do it for very long.

It means, thank goodness, that we're back to basics, that we're all in business to make a profit. For any business that has been built on a sound profit-making rationale, that has to be a relief.

In fact, I take my hat off to companies like E-Store, who resisted the temptation to go after additional capital to fund expensive advertising campaigns and expansion plans. Instead, they have grown quickly, but not too quickly and as a result of sensible expenditure are not only in a market-leading position, but are also running profitably.

Mind you, it wasn't too long ago that that was the way all businesses at least attempted to operate . . .

Philip Sim is CEO of e-commerce upstart enthdegree. He can be contacted at philipsim@aol.com


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