Businesses finally fail when liabilities exceed assets — if the company does not have sufficient cash to pay its bills and keep operating. While there are lots of reasons or ways a company can get to there, for ecommerce operations […]
Knowing these blunders are and how they could ruin an ecommerce company may help some entrepreneurs prevent them in 2015.
Too Far Discounting
Ecomom, a failed (and reborn) ecommerce startup aimed at providing environmentally friendly products for moms and children, is one of the saddest and most striking cases of an ecommerce business gone wrong.
Jody Sherman, the organization’s founder and first chief executive, finally took his life, and the firm collapsed in January 2013 despite having received about $12 million in investment financing.
While many factors contributed to the Ecomom failure — Business Insider described these in detail in an April 2013 post — one special problem might have been the business’s discounting policies. Ecomom decimated its margins with deep discounts and daily deals, losing money every time it made a sale.
Using services such as Groupon, Ecomom was providing lots of its clients 50-percent discounts. The business also made no attempt to limit these heavy discounts to new customers so that repeat shoppers were frequently buying items for under Ecomom’s cost.
Ecomom is a failed — and reborn, revealed here — ecommerce startup aimed at providing environmentally friendly products for moms and children.
Ecomom’s former controller, Phillip Prentiss, composed a”post mortem” for Ecomom at 2013. Prentiss described the company as having a negative 48-percent margin. The deeply discounted sales were killing it. Some big retailers can afford to give away items, if you will, to get new customers, making back money when those shoppers reunite and make subsequent purchases. This wasn’t happening for Ecomom. Even following orders were going for cheap.
Although discounts, even below-cost discounts, can temporarily boost cash flow and attract new clients, discounting too much or too frequently will destroy an ecommerce business. Find another way to compete.
Spending Too Much on Marketing
Marketing is the act of conveying the value of a good or service to clients with the objective of selling that product at a profit. Marketing can and should take many forms. For ecommerce companies, marketing is one of the most essential functions.
Marketing is also costly, and when unchecked, it can cripple a company. Too much money spent on marketing may have led to another famous ecommerce collapse, Boo.com.
Founded in 1998, Boo.com spent $135 million in investment funds in only 18 months, as it attempted to create a global brand and do for sport and fashion apparel what Amazon was doing for book selling in the 1990s.
Although Boo.com allegedly spent lavishly on several areas of its business, it was also known to have spent too much on marketing. This overspending probably took three forms.
First, Boo.com spent an amazing amount of money on an impressive piece of technology that enabled shoppers to put products on virtual versions, which would then show off the article of clothing. Shoppers could zoom in on the model and twist the item 360-degrees. The tech was almost mind blowing at the time (1999 and 2000), and it was in a way a marketing victory. But it allegedly cost more than $6 million to install and $500,000 a month to maintain.
Secondly, Boo.com spent on workers to manage marketing. Because the company was attempting to be a global manufacturer, it had folks that could understand and promote in several countries. Because of this, Boo.com hired hundreds of employees, all of whom needed to be paid.
Third, Boo.com spent in advertisements and public relations. Boo.com spent something like $25 million on advertising and public relations before it started, and though the company had obtained an impressive 350,000 subscriber email list before it began selling anything, it had created such a large barrier to achievement it had been, in a feeling, doomed to fail.
Boo.com was producing marketing that did, in fact, convey the value of the product to its customers and would have probably lead to sales. However, it was spending too much on advertising relative to its return on investment, and it only ran out of money to keep operating.
Ecommerce startups could be tempted to send a whole lot on pay-per-click advertising or on a search-engine-optimization pro or software tool. But it’s important to bear in mind that an investment in these areas has to be proportional to the expected return — i.e., the anticipated profit.
Strategic vs. Tactical Errors
The errors that Ecomom and Boo.com made were tactical errors as opposed to strategic mistakes.
Tactical mistakes are things like badly handling inventory, have a lousy site, or not understand the competitive environment. (Learn more about these errors in an earlier article,”8 Reason Why Ecommerce Businesses Fail.”)
Tactical mistakes can be repaired, fixed, or made up for. An individual can get investors, improve inventory management, build a better site, or gain a competitive edge.
In contrast, strategic mistakes are a problem with the business plan or with how that strategy has been implemented.
Ecomom wanted to attract new clients, so it provided discounts. But it failed to comprehend how too much ignoring was affecting its bottom line.
Boo.com wanted to do for clothes and apparel what Amazon was doing for books in 1999, but it tried to start big instead of grow large.
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