E-business: let's at least look to make a profit

Dan Remenyi slams business models where profit is an optional extra

Dan Remenyi slams business models where profit is an optional extra

Business is not only sustained by profits: it has no raison d’etre if it doesn’t make a profit. So business plans or models that take the focus away from profit and place it elsewhere are generally unusual, although not unknown.

E-business is riddled with business plans or models which have at least postponed profit until tomorrow.

It was probably the concept of learning curve costing that started the idea that businesses could rationally be run without aiming to make a profit. The basic idea of learning curve costing was that the cost of manufacturing and distribution in the early years of a product is higher than that a few years later.

So if you sell your product at a price based on your average cost over a five-year period you can undercut your competitor now. Although your business would lose money in the early years, you would be adequately recompensed in the later years to make up these losses and the overall situation will make the required return.

This was one of the novel ideas of the late 1970s. The next step in the development of the idea of profit in the future began in the 1980s with the notion of globalisation. With this came the idea that big, far-flung markets needed to be developed over some time before they would be profitable.

These ideas are some of the building blocks which underpin the new business models that are being used in e-commerce and e-business. Unfortunately some of these business models are not actually viable, or are very questionable.

A clear example of questionable business logic is expressed by Jonathan Attwood, a co-owner of Webswappers.co.uk, when talking about his business in the Independent newspaper. “At present,” Attwood says, “we are purposely not making any money. It’s about getting scale to start with, and we have about 20,000 swaps on the site. Revenues are important but many dotcoms are sacrificing their long-term business simply to say they have got revenues in the short term.”

If this is a business model, it is intrinsically suspect. It begs several important questions:

  • Why purposely not make money if you can?

  • What does a need for scale mean when the company already has 20,000 swaps?

  • How does long-term business in a swapping organisation get sacrificed because of short-term revenues?

    Loss making

    There is never anything intrinsically positive about conducting a transaction at a loss. A loss erodes the capital base of the enterprise. It is effectively giving a part of the business away and thus the business is weaker as a result of the loss. It is true that there are sometimes start-up costs which have to be met before the business begins to get moving, but this is not what Attwood appears to be talking about.

    There is also room for loss-leaders in business but that’s probably a different thing to the mentality behind the expression you are purposely not making any money. A loss-leader is designed to entice the purchaser into making a quick subsequent transaction that will make a profit.

    The second aspect of Attwood’s vision for Webswappers is also interesting. He says, “Swapping is such a great idea and focused on the community trading spirit of the Internet, which is what the Net was intended for.”

    It is not at all clear what the expression the community trading spirit of the Internet actually means. One could argue at length about the meaning of the word community without facing the problems of what a trading spirit might mean. But if there is a community trading spirit then the purpose of any e-business needs to be the conversion of this community trading spirit into profit and cash streams. Anything else is simply not business.

    The final point on which the vision for Webswappers seems to be questionable is its reach. Attwood says, “We see ourselves as a European site but we need to maintain our local effectiveness too. People might want to swap houses across the continent but people are unlikely to travel more than 30 miles to pick up a pram.”

    But swapping is intrinsically a local business based in neighbourhoods or towns. The number of people who will travel 30 miles to pick up a pram are few and far between. And, of course, swapping houses does occur. But I wonder how often, even across Europe.

    Furthermore, Attwood seems to have put a lot of store in the fact that Nicholas Negroponte has liked the idea of Webswappers and has invested in it. I wonder if Attwood knows that Sir Isaac Newton - perhaps the smartest man of the millennium - invested in the South Seas Company and thus lost his shirt - a matter of some £20,000 in 1720? Perhaps intellectual achievement and financial nouse do not go naturally hand-in-hand.

    To succeed, business has always needed to put profit-making high on its agenda. If there was a period during the start-up when initial costs were incurred before the revenue streams started in earnest, then this was considered an unfortunate burden and the management of the enterprise tried to minimise this. It has never been an issue to boast about. E-business is no different and the only way to make a success of it is to go for profitability as soon as possible. The issue of the community trading spirit and the distance over which swapping will occur are indeed fascinating. It will be interesting to see if Attwood is right.

    Dan Remenyi is an e-business consultant and author of several books on the subject of how to improve organisational performance through the most effective employment of IT. His latest book is called The Effective Measurement and Management of IT Costs and Benefits.

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