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Quality of Earnings

Ecommerce Earnings Are Shooting Up. But What Is the Quality of Those Earnings?

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It has become a ritual. Every Cyber Monday, ecommerce professionals, including yours truly, forecast a whopping jump in single-day ecommerce sales compared to the year before. Some, such as myself, shameless gloat about the accuracy of their Cyber Monday predictions. But how many of us are willing to pause the celebrations and focus on the quality, not quantity, of those earnings?

The Concept of Quality of Earnings
If two businesses make sales of a dollar each, it is not as if they are equally successful. There are many aspects to the quality of earnings, such as its predictability, sustenance, and, most notably its profitability. This seemingly commonsense business principle is being violated in almost every one of the millions of ecommerce transactions that take place every single week.

What Aspect of the Earnings of an Ecommerce Business Are of Low Quality?
There are two primary points that get me really worried about the quality of earnings of an ecommerce business:

1) Ecommerce Businesses Are Buying Revenues, Two Dollars to a Dollar!
With aggressive business models, ecommerce businesses are trying to acquire new customers and repeat customers at any cost. It is no exaggeration that many businesses are spending more than two dollars to buy a dollar worth of sales. And that is not because they are fools! It is because analysts today are largely focused only on the sales figures of ecommerce businesses, often to the complete exclusion of expense figures. Go figure!

2) Repeat Buyers Are Elusive
The only way you can rationalize the previous point is if customer loyalty is something you can depend upon. But that is not how ecommerce seems to be evolving. Unlike physical stores that have a high degree of stickiness among a section of their customers, online buyers find it too easy to rush across to another website. In fact there are specialist sites (e.g., price comparison sites, recommendation sites, review sites, and the like) that actually encourage you to shop smarter than you presently do.

How Do Ecommerce Businesses Improve the Quality of Their Earnings?
This is not an easy problem to solve. All the same, here are some recommendations that could help:
  • Create Unique Content
    If you are like most other ecommerce websites, you will have the same vendor-provided, unoriginal content. How will this encourage loyalty? If visitors could look forward to something original when they visit you, some of them would actually visit. And your persuasive sales copy would probably motivate some of the visitors to go ahead and make an immediate purchase.

  • Do Not Abandon Profit-Sense
    This should be obvious to most business people, but not to ecommerce professionals. In the insane race to enhance sales, do not banish profitability from your mind. Do not attempt to offer the lowest price on the 'net.

  • Differentiate Yourself
    This is easier said than done, but that does not mean it is impossible. Be it proprietary technology, a new path to purchase, or a unique navigation, all of these provide some differentiators. But that is not all. You can be unique in the way you market yourself. Maybe you can master social media. Maybe you can have a strong offline presence.
Your Accounting Books Will Be Very Unforgiving If Your Earnings Quality Does Not Improve
On the one hand, there are the ecommerce website-flipping entrepreneurs who are having a field day creating unprofitable ecommerce businesses that still manage to command exorbitant valuations. On the other, there is the immutable hand of economics that will sooner or later ensure that only the profitable survive. Will your ecommerce business be one of those that survive?

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