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E-Commerce and Accounting

13 Dec 2017Essay Samples

An examination of e-commerce businesses, both pure play and company-based sites, focusing on the mistakes made by failed companies and methods to avoid similar mistakes in the future. Ameritrade, Travelocity, and Rowe.com are highlighted. An examination of e-commerce businesses, both pure play and companybased sites, focusing on the mistakes made by failed companies and methods to avoid similar mistakes in the future. Ameritrade, Travelocity, and Rowe.com are highlighted.

The last eight years has seen a period of record growth for the United States economy. One of the primary engines driving this growth has been the rise in prominence of information technologies (IT). IT has increased productivity, revolutionized the manner in which business is done, and created a range of new businesses and business opportunities. Although the IT revolution has taken many forms, the most prominent and publicized of these has been the growth and expansion of the Internet.

Although the Internet has been in existence for more than twenty years, the creation in the early nineties of hyper-text markup language (html), and its primary platform (the world wide wide) gave it form and structure. Now those with limited computer knowledge could gain access to information and communicate with other users with relative ease. The Web was intuitive, logical and relatively easy to program.

The business world, somewhat skittish about Internet businesses till then, immediately saw the value of the Web; and, in a few short years, the Internet -- once the almost exclusive purview of academics and computer hobbyists -- was awash with advertisements and businesses. By the late nineties, venture capitalists were pouring millions of dollars into Internet businesses, with their primary focus being in the e-commerce/etailer sector. These new businesses received massive press attention, and drove euphoric growth in the stock market. Millionaires and billionaires were made overnight and for a time it seemed as though there was no end in sight.

However, in the last year, e-commerce has suffered massive setbacks. In 2000, more than 130 internet companies folded, with the vast majority of these being e-tailers -- almost all of which were "pure play" (i.e. internet only) companies (Upton, 2000). This led to record drops in the NASDAQ, and caused many analysts to believe that internet boom might not only bust, but bring the entire U.S. economy down along with it. Despite these doomsayer's proclamations, many of the factors which made e-tail businesses attractive a year ago remain in place today; and many of the problems which caused internet companies to fail were the result of poor business planning, rather than any inherent flaw in the concept of internet-based businesses. The Internet still remains a viable "place" for doing business, but entrepreneurs of the future need to make drastic changes in mission critical areas of businesses planning.

The litany of mistakes these companies made has been discussed endlessly, but they bear repeating. Not only because 3 the show future e-commerce companies what not to do, but they also aid in creating a framework for future successes in these sectors. It should be noted that most of these mistakes, though falling into mission and business plan areas, have a strong fiscal component suggesting accounting and auditing errors. It seems as though simple accounting models were ignored.

First, and most importantly, all new industries pass through a similar process. The creation of new industries creates initial excitement, but the vast majority of companies that attempt to capitalize on this excitement fail. The automobile industry, for instance, followed this pattern (Upton, 2000). Although this fact is true, it has too quickly become "common wisdom" and seems at times to replace a more reasoned analysis of the nature of many e-based business failures. Yes, this is how new industries develop, but it does not excuse failure. The Internet has a virtually infinite capacity for growth, and the success stories of today are quite likely to become the failures of tomorrow.

Second, companies spent far too much money on marketing. Marketing is a vital component in any successful business plan, but it must be carefully constructed. Marketing alone, even clever marketing, cannot guarantee success. Recent history suggest that television marketing of e-tailers may have little or no effect on sales. The Internet has always been a community of self-starters. Users tend to find what they are looking for on their own, and strongly weigh word of mouth. Amazon.com, for example, had already created quite a buzz on the Internet long before it chose to conduct any television or print advertising. Some ventures do use marketing models like this. A good example is a motion picture. It will spend large money on marketing in a short period of time. However, movies have a limited period of time to make their profits. E-com businesses don't suffer from these problems, or, at least, they should not. Such marketing ideas are risky at best and the result of them is not ultimately surprising.

Third, in attempt to gain market share, most companies set price points which were far too low. In the first quarter of 2000, e-tailer per order losses, before marketing, overhead and site development costs ranged form $2 to $12 (Vargas, 2000). The effort required to reach a break-even point is even more daunting. A study by Mckinsey-Salomon Smith Barney (2000) noted that a pure play toy retailer that could generate an $11 perorder contribution would need to generate $1 billion in revenues simply to meet fixed costs of $120-140 million for warehouse, site, marketing and overhead (Vargas, 2000). However, generating a per order contribution of $11 is considered a somewhat daunting task, given high fulfillment costs. While the fixed costs suggest represent the minimal requirements for this type of business.

Fourth, too much time and money was devoted to pure play companies. Joanna Barsh of Mckinsey and Company notes, "To be successful, online retailers need to exploit other marketing channels simultaneously, such as in-store and catalog sales, as well as private labels" (Vargas, 2000). This underlies the key problem with pure play companies. Customers have no experience with them, and, thus, no loyality. In addition to all its other problems (e.g. site development, procurement, execution, fulfillment), a pure play company must create and develop a brand. Understandably most consumers view new brands with some degree of skepticism; when this is combined with a pre-existing skepticism about e-commerce businesses, it is surprising that any pure play companies have survived. It must be remembered that less than five years ago, many business experts suggest that etail business would not could not succeed.

Fifth, selecting products or services in which customers are already well survived by brick-and-mortar players. The web is a wonderful technology, but it cannot match many real world experiences. Buying a book online is fine if you know what you are looking for, but even the best online book site cannot recreate the experience of wandering through a good book store. Online purchasing of groceries may be fine for staples and processed foods, but produce selection is an extremely individuated experience which is impossible to match online.

It should be noted that much of the e-commerce business world felt that this new technology allowed them to break certain hard and fast rules. Given the nature of communication allowed by the Web, e-commerce companies imagined that branding held the key to success; and since sites were almost immediately accessible to users that customer loyalty could develop rather rapidly. They saw the value of e-tailers as their ubiquity and convenience; and many felt plain branding was the best way to go (e.g. pets.com, toys.com, buy.com, etc.). However, the relative limited success of such companies suggests otherwise. In fact, the more successful companies chose more imaginative branding (e.g. amazon.com, ebay, napster, etc.). The logic behind their initial idea, but it followed no clear model.

Their eyes set on the "big score", most of these companies seemed blind to not only the inherent problems in their business plans, but the basic values in any web-based business. Rather than following the mail order model, the business they most closely resemble, they sought to create instant business winners. In contrast, most mail order companies built their businesses slowly, over long periods of time. It is interesting to note that in the last year, some of the most successful e-tailers have come from the mail order companies. Mail order companies already had the systems set up to deliver products to consumers, and due to their long histories and experience they understood the value of customer service.

In joint studies by Bains and Company and Mainspring (2000) it was found that customer service can have a substantial impact on the success of web-based businesses. The survey found that a 20% increase in customer satisfaction leads to a 5% increase in customer loyalty, and a 20% increase in profits. This study clearly suggest that customer satisfaction plays a significant role in the success of any web-based venture (Business Wire, 2000a).

The study also offered some key pieces of advice to help etailers grow and succeed. First, customers must be carefully segmented. Many customers will not ultimately be profitable, and therefore care must be taken to only market to the successful segments.

Second, companies should not be afraid to incorporate internet-based technologies to aid in customer service. Direct access to employees is not the only way to create customer satisfaction. If it is easier to provide such information through some easy online-interface, companies should not be adverse to use them.

Third, employ new ideas. Companies which have pre-existing business models which have a proven track-record of success in the real world, sometimes fear changing these concepts when moving into a web-based venture. A board level customer service executive may be one way to avoid costly mistakes.

Finally, companies must not be afraid to outsource. They need to identify core- and non-core-activities, and outsource those in the latter group. Microsoft outsourcing customer correspondence. Clearly, this is a core activity, and this decision may explain some of the problems Microsoft has regarding customer perceptions (Business Wire, 2000a).

In addition, entrepreneurs must be careful to select businesses which generate the type of customer profiles fixed costs demand. For instance, online grocery stores generate an average of $9 per order in gross income. Typical customers place orders 30 times per year. Given these conditions, a typical online grocery store customer has a net present value of $909 over a four year period. Other industries generate much lower NPRs. This is largely due to problems of order frequency. Pure play toy and apparel sites general NPRs of only $9; while specialty and department store sites, generate NPRs of $384 and $283, respectively (Vargas, 2000).

Given that many e-commerce concepts cannot create high degrees of repeat business, e-tailers need to increase order size. Mckinsey & Co. suggest a minimum order size of $50, a limited amount of discounting, and the selection of products with margins no higher than 35% (Vargas, 2000). One of the ways to create such conditions would be for e-tailers to move into high ticket items, such as jewelry, durable goods, real estate and financial services.

Three companies which appear to have the type of business models which suggest the possibility of success are: Ameritrade, Travelocity, and Rowe.

Ameritrade is an online discount broker, offering very low per trade costs. There are numerous reasons why this business makes sense. First, for private investors who prefer discount to full-service brokers, online trading is actually easier and more convenient than previous options. In the past investors were forced to call their brokerage house on the phone, and given the staffing needs of such companies per trade costs were higher. Second, most private investors are already online. They regularly check their stocks through various free and pay websites. They use the web to research and talk about the markets. Third, the company takes advantage of already existing telecommunications infrastructures. When you called the discount broker your agent would often use software similar to the type Ameritrade makes directly available to its customers.

These concepts seem to be paying off. In November 2000, Ameritrade reported the opening of 40,000 new accounts, representing a 29% increase over the number of accounts opened at the same time the previous year. While quarterly numbers seem just as rosy, with a 56% increase in new accounts over the same period in the previous year. In addition, the company reported an average daily trade volume of 101,000 trades, this represents a 59% increase over the previous year (Business Wire, 2000b).

Like the financial markets, the travel industry has a long history of utilizing internet communications. Even before the web, online services like Compuserve and Prodigy offered a variety of travel services, and travel agents themselves communicated with airlines and other travel providers through a variety of network services. Like Ameritrade, Travelocity takes advantage this pre-existing infrastructure. In addition, travel planning had a variety of the same problems. In order to get good prices, potential travelers usually needed to go through a travel agent. This can be time consuming, and not always fulfilling. Travelocity has combined this basic concept with elegant efficient design to create the most popular travel site on the Web.

A recent survey ranked Travelocity as the most visit online travel site, and the most used site to buy travel online, and the favorite site of those who buy travel online. Thirty-six percent of online travelers have visited Travelocity in the last year; their closest competitor ranks only 21%. While, of those who buy travel online, Travelocity is the favorite site of 28%, their closest competitor scored only 12% (PRNNewswire, 2000).

Rowe.com also understands the value of building on existing telecommunications structures. Rowe creates and manages webbased solutions for knowledge-based clients, such as newspapers, magazines, journals and books. They service academic institutions and fortune 500 companies. As a business-to-business resource, Rowe has identified the key opportunity sector often missed by entrepreneurs seeking ventures on the Web. Rather than seeking to offering a service with a real-world counterpart, Rowe offers a service that is web exclusive. Furthermore, they are utilizing the advantages of web-based services, such as increased speed and ease of doing business. The company recently announce that they are expanding their business through a strategic partnership with Order Fusion, and will be using their Orders of Magnitude procurement system to link their customers to a variety of e-procurement systems (PRNNewswire, 2001).

These three companies demonstrate the types of business models which at least have a good chance of success on the Web. They provide services superior to their real-world counterparts. They belong to industries already heavily involved in telecommunications. And they take advantage of pre-existing digital infrastructures.

One cannot forget that the Internet is simply a communications technology. By itself, it creates nothing; it does nothing. It merely offers a new method for the transmission and manipulation of information. We as a society, perhaps a species, love novelty. If its new it must be better. But an examination of e-commerce failures demonstrates that some of the most basic ideas of accounting and commerce are no different whether a company does the majority of its business online, at a mall or through mail order.

This idea is especially true when we examine the issue of customer NPRs, discussed earlier in this paper. Customer NPRs provide any business with a method of determining a whole variety of answers to critical business planning questions. They allow a business executive to determine how to market, procure and fulfill.

The last two years have demonstrated that if larger e-tail businesses wish to succeed they must seek customers with high NPRs. If such a fact had been realized earlier, many of the etail ventures would never have gone ahead. In addition, etailers would have focused on the creation of strong customer loyalty, rather than masses of casual customers. Although much has been made in the last twenty years on the value of branding in creating strong customer loyalty, branding alone seemed to have little value in creating successful e-commerce ventures.

However, despite the clear path indicated by information outlined in this paper, many e-commerce business still seem blind to the changes they need to make. In a recent survey of ecommerce executives, only a little over 20% suggested that they would cut marketing costs to increase profitability, and only 18% suggested that they would invest more. Although 35% did seem to understand the importance of dropping marginal lines (Upton, 2000).

These findings demonstrate the crusade mentality which seems to be prevalent in the e-commerce world. One might even call it arrogance. Rather than realizing that much of the mistakes made were spurred by press and stock market euphoria, they seem committed to a direction which seems to head in only one direction.

In addition, lost in all this furor, is a business model yet to be fully examined: Mom & Pop e-tailers. Small web-based companies which provide specialized products or services which appeal to a narrow market segment, but which only require low revenues to be successful. The web-creates new possibilities for small businesses, and some of these may actually create the revenue streams that their larger competitors lack. Imagine the Frisbee, hula hoop or Rubik's Cube starting on the web.

These and other opportunities demonstrate the value in the Internet as a communications and marketing tool. In the next ten years, it may create fewer millionaires, but it may provide good livings for a larger number of small businesses. This it seems, ultimately, is closer to the original idea of the Internet; because if the Internet is truly the realization of Mcluhan's "global village" it will not be a world of top-down management, but of internetworking individuals working together to create a viable environment for commerce and communication.

In conclusion, the story of the first years of the e-com revolution presents a valuable lesson to those of us in accounting fields. It reminds us that some of the basic tenet by which we live our lives, the organizing principles which guide us in financial management of companies, have real value. A new technology alone is not a significant enough change to alter these tenets. Profit remains the central organizing principle by which all decisions are made. Although clever debt management remains a valuable tool in causing companies to grow and adapt, unwise spending of capital resources on excessive marketing is rarely valuable. Hopefully, this lesson, coming in the midst of our eductation, will help us all in our future careers.


  • Business Wire (2000a). "Improved Customer Service Gives Retailers a Leg Up in the Battle for E-Profits." June 28, 2000. www.businesswire.com.
    • (2000b) "Ameritrade Reports New Accounts and Average Per Day Trade for November." December 8, 2000. www.businesswire.com.
  • PRNNewire (2000). "Travelocity Lands Grand Slam of Online Travel." December 13, 2000. www.prnnewswire.com
    • (2001). "Leading Knowledge Resource Distributor Links to Customers on Ariba and Concur." January 2, 2001. www.prnnewswire.com.
  • Upton, M. (2000). "Dot-Coms Feel Cruel Winds." IDC. www.idc.com.
  • Vargas, M. (2000). "New Study Highlights Viable E-tail Business Model." www.about.com/industry/onlineretailing/ 

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