As the dotcom boom slows, those setting up e-commerce sites must
look to make cost savings. Nick Booth considers the options
Legend has it that one Internet entrepreneur got his $5m in
venture capital before he had even finished the IT course he was
studying. However, those days are long gone and funding is a lot
thinner on the ground. Today, you are more likely to be working on
a small budget that has to last longer.
The challenge then is to identify where the money goes, which
activities bring the best returns and what are the most
cost-effective ways of doing things.
Marketing
Marketing makes a significant dent in the budgets of most new
e-businesses, whether they are in business-to-business (B2B) supply
chain management or selling to consumers. It takes a lot of
persuasion to get people to work in a totally new medium.
For a dotcom start-up, marketing frequently represents the
single biggest investment it will make. When the online electronics
store Jungle.com was launched, the majority of its budget was spent
on marketing - an estimated £20m. The site subsequently found that
it needed more bandwidth as the system ground to a halt, the irony
being that the ad campaign had attracted too many customers. In
retrospect, Jungle.com's managing director Steve Bennett
admits that some of this money would have been better spent on
buying more bandwidth.
The problem with some new Internet businesses is that they throw
so much money at marketing, to the detriment of other vital
processes such as development and testing, that they end up
attracting people to a site that is not ready.
It is a lot cheaper, and can be more effective, to use the Net
for marketing. The irony of marketing the new media by throwing
millions of pounds at the old media is not lost on Jeremy Crowe,
director of Dowcarter, an Internet marketing company. "It is odd
that companies don't take advantage of the medium of the Internet
when they try to promote an Internet company. It is more creative
and far cheaper. The other great advantage is that you can start
off slowly and build on that success. A traditional marketing
campaign is much less flexible," says Crowe.
Even B2B portals, which have fewer potential clients, still need
to spend to gain a critical mass of buyers and sellers before they
become a viable proposition. Again, there is a more effective and
cheaper way to do this using the Web.
Webmethods, a company that helps establish B2B trade, has set up
a portal, B2B.com, that acts as a hub for advertising a
service online. It provides the software tools that the client
sends out to customers and suppliers, which makes it easier to hook
up to the portal and get into the trading system. "It is a lot more
effective to get sales people to phone potential users and offer
them free software, than have to entice people with adverts,"
explains Jeremy McGee, Webmethods' marketing manager.
Integration
The biggest mistake most start-ups make is trying to integrate
their systems themselves, says McGee. "People waste too much money
on developing and personalising their systems. Then they compound
the problem with long, drawn-out integration processes. Integration
is now a question of using a package which has a control panel to
automate the integration of systems. Too many companies still
integrate systems by writing pages and pages of Java code."
Software
One of the biggest mistakes is investing heavily in software.
Developing your own code might well enable you to differentiate
your system from everyone else's, but the value of this is
questionable. In most cases it certainly doesn't justify the
expenditure, according to Greg Darmohray, head of Europe at
Webridge, a supplier of B2B e-commerce solutions.
"Developing bespoke, customised solutions is a big mistake,"
says Darmohray. "In a lot of cases companies simply can't afford
it. But for some reason they seem to think it's vital."
Darmohray cites a recent report by research company Gartner
Group, which found that a typical B2B site costs about £750,000 to
develop and takes at least six months to build. "You can't afford
either. The biggest cost and time factor in these sites - over 80%
- is custom coding of infrastructure such as authentication and
security. Pre-built e-business solutions can halve these costs and
cut time by two-thirds by using a building-block approach," he
says.
There are ample examples to back up Darmohray's belief that
custom code is a bad investment. The most risible failure in recent
times is that of online retail outfit Boo.com, which raised only
£250,000 from the sale of its technology when the company folded,
even though the kit was reputedly worth £26m.
Similarly, Netimperative.com, an online information
service, was recently sold for £126,000 despite a £650,000
investment only a year ago. Clearly, the value of the software
was not highly rated by the liquidators. The lesson is simple.
"Don't waste time or money building custom infrastructure - get
it out of the box," says Darmohray.
Staff
Staff, needless to say, are a rare and expensive resource. In
building a B2B system, the most important people to have onboard
are not those with high-premium Web design skills, but people with
industry knowledge. The latest buzzword in investment circles is
"domain knowledge", meaning industry knowledge and contacts. Even
with Internet companies, people costs can absorb up to 60% of
expenditure. The core skills are not technology but
business-related.
Even the most basic Web sites will need staff to have
operational and technical expertise in over 100 different
technologies. Have you got the time and money to find these?
"Key management will often find themselves spending precious
time dealing with the IT system when they really want and need to
focus on the sales and marketing," says Martin Gaskell, marketing
director of Madge.web.
Get someone else to do it - but make sure you retain control of
your systems and keep staff skilled so that they can understand the
architecture and service levels required to support their business.
Transactions are a particularly tricky operation to manage and
these can be outsourced to a company such as Madgeweb.
Practically every aspect of IT can be provided by a host
company, such as MRS. Transactions, hosting, Web creation and
updates, even storage is being catered for by service providers. As
has been pointed out previously in E-Business Review, hosting may
not always prove cheaper, but it does not require a massive
up-front investment and is considerably quicker. And it gives you
the flexibility to change.
Say you want to house your server on your business premises,
installing a 64Kbyte leased line from a typical service provider
has a minimum cost of about £4,000. Add to that the monthly running
costs, the cost of installing air conditioning and an uninterrupted
power supply, plus the cost of employing a full-time engineer to
look after your server and you are looking at spending at least
£25,000.
With hosting companies such as MRI and Redbus Interhouse, the
cost of hosting a server and connecting it to a burstable 64Kbyte
line (ie, one that can easily expand up to 10Mbytes) can be as low
as £3,800.
The biggest danger in outsourcing is in managing the contract.
"One of the biggest pitfalls is tying yourself into a lengthy
contract," says Kevin Neal, managing director of Redbus Interhouse.
"Business moves so fast that new services emerge daily. You won't
be able to take advantage if you're tied up in a long
contract."
The moral is to only outsource to a supplier that can offer
monthly renewable contracts. Forrester Research has predicted that
the co-location market will grow tenfold by the end of 2003 to
$10bn (£6.25bn) worldwide, so there should be plenty of choice.
Content
Given that a Web business is largely about content, you would
not expect this to be an area that lends itself to cost cutting.
But there is scope to get content cheaply without compromising the
integrity of your site.
Moreover.com, is an online news and
information aggregation service. It does not provide content,
but only links to content, directing other users there, it
supplies the benefit of fresh, up-to date content at a fraction
of the cost. "The Web is only a Web because of links.
Maintaining links to relevant content is time-consuming and
expensive," says David Galbraith, chief architect and co-founder
of the site.
Tax-havens
There are considerable tax advantages in locating in tax havens,
such as Bermuda, the Cayman Islands or Guernsey. However, the
common misconception is that this makes you exempt from the UK's
trading laws - the EC's e-commerce directive says users are
protected by their national laws. The EC's distance selling
directive applies here too.
Still, if an e-business is set up offshore, trading through a
computer server sited offshore, it is possible for the business to
take advantage of the tax regime in that offshore jurisdiction.
Many of these countries are currently introducing legislation to
ensure that e-businesses are able to take advantage of their
favourable tax regimes.
Bermuda has been the first to establish e-commerce regulations,
with the adoption of the Electronic Transactions Code Act and the
newly established Standard of Electronic Transactions. And it is
probably the nicest location for holding the obligatory company
meeting that proves you are a bona fide offshore company.
honda's viral marketing campaign
Internet marketing company Dowcarter conducted a "viral
marketing campaign" for one of its clients, Honda. Unlike a
traditional media campaign the costs were modest (£150, 000) but
the response evoked was five million hits on the company's Web
site.
Viral marketing may sound a little ominous but is, in this case,
the use of humour to create word-of-mouth interest in a product.
Dowcarter produced a series of 10 "movies", short film sequences
that could be e-mailed as attachments to individuals. Each cost
£10,000 to produce and, on Crowe's admission, only two of them
really captured the public's imagination. But this was enough.
Many of us will be familiar with the film clip of a Honda
pulling up at traffic lights and being confronted by a pair of
Squeegee merchants. As the driver's window winds down, suddenly a
gush of water flies from inside the car and drenches the dreaded
windscreen washing traffic pests. This happy story of the
motorist's revenge was followed by the name of a Web site,
www.hondajoymachine.com. This short sequence
of film was responsible for generating the majority of the five
million hits on the Honda site.
Having created the site for £50,000, Honda set about publicising
it using its own staff. Five hundred individuals at Honda Motor
Europe, Honda UK, the Leith Agency and Dowcarter e-mailed this film
clip and the link to the Web site to personal contacts. They
presumably liked the clip and e-mailed it on to their own friends.
The campaign snowballed from there.
The success of an Internet campaign is not only cheaper, it is
easier to monitor. The site was only promoted by the movies, and
the growth in demand on the site was more manageable as word
spread. Much more qualitative analysis is available for this sort
of exercise and it is more likely to be accurate. Server statistics
show that the average time spent looking at the site was six
minutes, whereas there is no accurate way of guessing the
attentiveness of a consumer watching a normal advert.