November 30, 1998
When taking measure of e-commerce, don't forget about the costs
You've heard the hype: electronic commerce is going to usher in a new era of efficiency, leisure, and sky-high profits.
Like many myths, this one has truth at its core. E-commerce really should enable business to happen more efficiently, for companies as well as for individuals.
But the oversimplified promises of profitability that many e-commerce product vendors make overlook a few important facts.
Specifically, when counting the costs of e-commerce, the purchase prices for technologies and services aren't the only things that will affect your bottom line.
Sticker shock
To be sure, you don't want to underestimate how much it's going to cost just to buy the hardware, software, and services you'll need to build an e-commerce solution.
Even a rudimentary Web-based retail solution may cost several thousand dollars, if not tens of thousands. That's what it costs to buy, build, and host a basic corporate Web catalog from the likes of Intershop, iCat, or Microsoft.
Sure, there are cheaper solutions available, such as Yahoo Store and JumboMall. Many vendors even let you put small catalogs online for free. But for large corporations, these low-end solutions, with their lack of sophisticated reporting and data integration tools, are barely worth the time it takes to read about them. Unless you're a very small company, steer clear of the "budget" commerce solutions.
When you start adding integration to enterprise resource planning (ERP) and legacy data systems in your commerce package, the costs soar. Want to automate your purchasing and supply chain processes? Count on spending anywhere from tens of thousands to millions for solutions from Trilogy, Ariba, or Commerce One.
Make no mistake: large-scale e-commerce implementations are akin in scale and cost to ERP rollouts.
Meager margins?
But the purchase of technologies and services are not the only costs that e-commerce will inflict on companies' bottom lines. There's another, larger trend at work that executives ignore at their peril.
The increased efficiency that e-commerce provides should enable a company to realize a dramatic increase in its operating margins -- even, perhaps, while cutting prices. By spending less time and money processing paper requisition forms, faxed invoices, and phone orders, companies can shave significant amounts off their expense lines.
If some of that savings is rolled into product price cuts, the company may even see increased market share and rising revenues, pushing profits even higher.
But it's a temporary gain. Those competitors that aren't forced out of business by this tactic will adopt it themselves, if they haven't done so already.
In time, companies with comparable levels of automation will find themselves competing on price again -- by shaving their profit margins. And, with the efficiencies permitted by e-commerce, those margins might get pretty thin indeed.
The good news is that Internet-savvy companies may still be able to hang on to an unassailable advantage, by dint of early Internet market share, brand recognition, or technical smarts.
The bad news about this trend is that it's unavoidable. If you refuse to adopt e-commerce technologies, you'll face brutal competition from companies that do.
Dylan Tweney (dylan@infoworld.com)
has been covering the Internet since 1993. He
edits InfoWorld's intranet and Internet-commerce
product reviews.
Previous
columns by Dylan Tweney
Portal site for teens sheds some light onto possible future of Internet commerce
November 23, 1998
Catalog City site has potential to bring an end to a flood of paper.
November 16, 1998
Online retailers: You can't compete on customer service
November 9, 1998
Network necessities for next-generation I-commerce: It's more than just bandwidth
November 2, 1998
Every column since August, 1997
