Econosystems - Economic, Information Brokerage and Business Writing

Article 07/16/01

Profitability Prevails On The 'Net
by Dawn Rivers Baker

According to recently released research, most of the for-profit sites that were left after the dot-com bubble burst are actually making money.

June 11, 2001 -- In spite of scarifying headlines about stock market gyrations and dot-bombs, more than half of all for-profit websites are already profitable, according to recently released research by ActivMedia Research. Their study, entitled E-Survivors: Winning E-Commerce Strategies for 2001, paints an encouraging portrait of the state of e-commerce websites half way through the year.

According to this study, executives at fifty-four percent of the websites that are wholly or partially profit-seeking report that they are currently profitable. Another twenty-eight percent report that they expect to reach profitability by the end of this calendar year.

The study also found that websites typically arrive at profitability after two years online, but the time involved varies depending on the strategy employed by the business. A strategy dubbed "Growth Through Positive Cash Flow", in which the business maintains margins even at the expense of rapid growth seems to be the quickest route to positive cash flow and profitability. Meanwhile, the strategy which ActivMedia calls "Aggressive Promotion", in which the business is willing to sacrifice positive cash flow in order to get the word out and grow as fast as possible actually increases the amount of time it takes to make a profit.

If this seems like the basest of common-sense findings, it is. Veterans of the retail marketplace view such findings as validation of what they have been saying for quite some time. Business is business, no matter how much you enhance it with technology. "What's astonishing is that it is newsworthy when somebody makes a statement on the rational workings of the market economy," says James Tenser of VSN Strategies, "because it represents a counter-projection of the last few years of hype to say the fundamentals haven't changed."

And it is something that many of the smaller e-businesses have known for quite some time. Among the members of various online communities of women-owned home-based businesses, for example, there has been much rueful headshaking. It has been pretty strange to watch the VC funded dot-com world go through so many contortions to discover that "you have to sell something to make a buck," as WomanNet Network's Melody Wigdahl recently put it.

Another study by Bain & Company, published in the book Profit From the Core: Growth Strategies in an Era of Turbulence, by Bain's Chris Zook, drives that point home. This research found that only ten percent of "pure" publicly funded Internet companies were strong core businesses that achieved sustained, profitable growth over a three-year period. One business axiom that many youthful "new economy" enthusiasts tried to toss away was that growth should not come at the expense of stability. Stability, according to this group, was for wimps.

But, as usually happens, reality intervened.

"The Internet data magnifies the need for companies to prove the existence of a profitable core before getting trapped in a sea of profit-less prosperity," Zook said according to an article in Internet.com's CyberAtlas. "It is remarkable that so many Internet companies piled layer upon layer of growth initiatives on their core business before it had been stabilized or profitable."

Much of which reduces to this: all the things we knew about business and economics that had been gleaned over the past few thousand years still apply. "Traditional businesses of all sizes have been internally changed by the tools and techniques that technology has made available," Tenser observes, "but the core business realities haven't changed."

For the most part, the privately funded woman-owned home-based business segment of the e-commerce market remained largely untouched by most of the hype. By operating outside the Wall Street arena, those small online operators lacked the resources needed to participate in the excesses that eventually burst the dot-com bubble. But there are other bits of the e-commerce mythology that have remained and continue to get in the way.

Perhaps the most prevalent of these myths is the belief that the Internet was supposed to turn small business people into supermen, able to deal with every aspect of the operations of our businesses alone. Running an Internet business was supposed to mean you could do it without an infrastructure, without inventory, without any of the trappings of "traditional" businesses that made for more overhead costs. Many of us believe that we ought to be able to do everything ourselves.

For the record, it is often possible for the owner of a small business operation to do everything - as long as that business owner is willing to stay small. But, as many of us have already found out the hard way, there are a finite number of hours in the day and one person can only do so much. It doesn't take much growth before the average small business operator needs some kind of help with order fulfillment or administration or some other aspect of the business.

Of course, cash flow situations must be taken into consideration. There will be limits to the amount of outsourcing you can do, depending on your current levels of revenue. But the more time the business owner can free up by outsourcing such tasks as advertising and marketing, website maintenance, manufacturing and packaging, and so on, the more time that leaves him or her for other things like product development and growth strategies.

Ultimately, the latest research seems to show that, in business, the more things change the more they stay the same - even on the Internet.

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