Just because you can

Some of these websites that failed in 2000 were very creative indeed in the use of the technology, but they really did not have much hope of success as the question of who would want to use them and what advantage there would be in it for the user was not at all clear.

Take for example the case of Heavenly-Door.com – a website set up to supply funeral services. After five months and $26 million they closed the business. Now the question is and presumably always was, who in the state of bereavement would want to go to a website to arrange a funeral. Just reflect on the last funeral you went to and you will remember that a funeral is an intensely personal event, which cannot be arranged over a telephone line. The funeral is all to do with the overt expression of sympathy of people and thus just cannot be simulated on a computer.

On the other hand, not only does the website need to offer something which is truly needed and wanted, but there has to be a reasonable profit margin in it for the e-Business.

Urbanfetch.co.uk illustrated this problem perfectly. Here was an attempt to give the consumer a really fantastic deal by ignoring the realities of transport costs. But most companies just can’t magic away the carriage cost and they have to levy a delivery charge. The delivery charge levied is sometimes not that large, with the vendor partly subsidising this cost out of the profits of the sale. But someone has to pay for the carriage of the goods. Transport is a key element in the economic equation and unless it is properly integrated into the cost model the business will not survive. So Urbanfetch.co.uk lasted about nine months before having to close its doors.

The list of e-Business failures is now very long and there is no doubt that it will continue to lengthen until web entrepreneurs begin to understand the issue of the business model and start to take it seriously. In the year 2000 most web entrepreneurs simply estimated the market size and then said to themselves and their suppliers of funds, that they can easily get 10% or 5% or 1% of that market. This calculation produced an enormous potential sales figure. They seldom did enough in-depth analysis to understand how to obtain this business and what the cost of obtaining it would be. This analysis is essential to underpin any serious business model. But this is seldom done.

In fact a professionally produced business model needs to address two main issues. These are that a successful website needs to have a compelling and preferably unique reason why people want to come to the site to buy or engage in the activity it is offering *and* also the website needs to be able to charge a fee which will cover the business’s costs and make a profit for its investors. If these two questions cannot be confidently answered then perhaps the e-Business will not be a success.	The fact that the technological capability is there does not mean that anyone wants the service or product being offered. And the fact that you can do it certainly doesn’t mean that there is any money in doing it!
In trying to answer the first part of this demanding question it is essential that the would-be web entrepreneurs takes advice from potential users of the website. It’s not good enough for the would-be web entrepreneurs to simply imagine the reaction of potential clients. This was one of the issues that brought Boo.Com down.
With regards the second part of the business model there is no point in proceeding with a business for which there is not an adequate number of paying clients. And these paying clients need to be reachable at not too great a cost. e-Stamp.com gave up and closed their doors because although there was a good market for postage stamps in the USA, it was costing them about $600 to get a client to sign up and this was just prohibitive. Again this is a difficult question to which to find a satisfactory answer.
It is perhaps the excitement of being able to do new and interesting things with the technology that deflects their attention from the business realities with which they must come to terms if they are to become a success.	A very interesting example of another business case that was not thought out fully is that of Priceline.com. Being a web equivalent of a travel bucket shop which has its doors open 24/7/365 undoubtedly has merit and it is quite probable that with enough throughput or volume of sales a good business can be made of that proposition. However, it is easy to copy this business model, especially if you are one of the airlines being represented by Priceline.com. Thus this was an intrinsically vulnerable model.
Another problem surfaced with the notion of reverse auctioning. Here the traveller states how much he or she will pay for the flight and the website tries to find a carrier that will be prepared to offer passage at that price. Such travellers normally offer quite a low price. Of course this deeply discounted approach leaves little margin for the airline, not to mention the intermediary and it doesn’t suit all that many people to make their travel arrangements this way. But when Priceline.com tried to extend the notion of reverse auctioning to groceries and gasoline the model came under intense strain. Anyone with any knowledge of the retail grocery business knows that making e-retailing work is very difficult. The fulfilment cost is the spanner in the works. So if it is so difficult to make this work when the groceries are being sold at the normal price, how can a deeply discounted reverse auctioning strategy work for this industry sector? When Jay Walker, the then CEO of Priceline.com said that he intended to re-engineer the DNA of business, he was indeed aiming high, and many sincerely wished him great success. However, it appears that he really had misunderstood the nature of the problems he was addressing. On top of these challenges, a group of the airlines that Priceline.com had been representing started their own discounted website. The vulnerability of the Priceline.com business model was proven beyond any doubt and it began to crumble. What is really fascinating about Priceline.com is that at its height of popularity the stock market valued the company’s market capitalisation at more than the combined value of all the American registered airlines flying at that time. Today Priceline.com is worth about 1% of its former value. Priceline.com’s business model could not stand up to reality. There is of course nothing new about creating a business model to ensure that the business idea will ‘fly’. It is as old as the idea of business itself. But, for some reason it seems to be overlooked or forgotten when would-be web entrepreneurs begin to set up their operation.
The bottom line reality is that it is difficult to make a success of an e-Business. Specifically e-Business is complex, e-Business is not inexpensive, e-Business requires a collection of resources and skills or competencies. However e-Business, if implemented correctly, can provide a very good return and the challenge for this year is to avoid some of the types of investment we have seen before and to aim more accurately and consistently at opportunities that can produce good value to users and a suitable return to investors.
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Professor 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. Dan is contactable on dan.remenyi@mcil.co.uk