upfront: Virtual Business, Real Concerns

While it’s become quite passé to hold Amazon.com up as the poster child for success in the virtual world of e-business, I’ve come to see the online book seller as the embodiment of all that is right – and wrong – with e-business today.

All pioneers have detractors, but that should in no way diminish the impact these people have in their field of expertise. Amazon.com’s situation is an interesting one: while the company has revolutionized the way people purchase books, some studies claim Amazon.com is actually losing money.

IceGroup, an e-commerce consulting firm, published a report indicating Amazon.com has to generate $1 billion in annual sales to break even and that, according to the bookseller’s Q2/98 financial results, one of the "main barriers to profitability" has been the company’s high operating margins and cost per transaction. The report goes further, saying Amazon.com’s "new-millenium" business model does not make repeat business profitable for the company, as repeat customers to the site do not tend to purchase as much as those blown away by their first visit.

While the validity of the IceGroup’s study has been called into question, Amazon.com’s potential uphill battle begs the question: do virtual companies have to work as hard or be as savvy as traditional businesses? Of course they do!

Now, in addition to overcoming the fear customers have about ordering online, the virtual business market is seeing that getting people in the virtual door is only the beginning. The virtual business is not immune to the pressures of repeat sales and profit margins. E-businesses can’t rely on "virtual" customers.

For example, despite the running start Amazon.com has had in the business of online book selling, Barnes & Noble is hot on the trail, with some studies claiming the veteran bookseller has a higher profit margin than its upstart competitor, 28 percent to 25 percent, respectively.

Regardless of Amazon.com’s fate, the company will always be significant for pioneering a new level of confidence in online buying and selling.

This all reminds me of something my cross-country coach once told me in high school: you can’t slow down just because you’ve beaten everyone else to the top of that first hill.