Profitability Within Reach for Most Web Sites

More than half of all profit-seeking Web sites are already profitable, according to a study by ActivMedia Research. But profitability and sustained, profitable growth rates are two different things.

ActivMedia’s study, “E-Survivors: Winning E-Commerce Strategies for 2001,” was conducted during spring 2001 among 500 executives and business managers at Web sites around the world. Its findings painted a far rosier picture than many examinations of Web site profitability in the past.

Two out of three (66 percent) e-commerce businesses online today are either entirely (46 percent) or partially (20 percent) intended to be profit centers, the study found. The remaining one-third is divided among those that are not intended to be profit-oriented because they are dedicated to improved business operations and cost reduction (11 percent) or are primarily publicity vehicles (23 percent). Among Web site executives at sites that are wholly or partially profit-seeking, 54 percent of online business state they are already profitable and another 28 percent expect to become profitable by the end of 2001.

The study also found that the typical Web site arrives at profitability after two years online, but this varies greatly by the primary strategy that Web sites choose. For example, Web sites in the strategy segment identified by ActivMedia Research as “Growth Through Positive Cash Flow” insist on maintaining margins, even at the expense of rapid growth, and reach positive cash flow and profitability the quickest. On the other hand, sites in the strategy segment “Aggressive Promotion” have the lowest levels of profitability and take the longest to reach positive cash flow.

Soon-to-be-profitable firms are somewhat larger than the firms on the Internet that are profitable today, averaging 94 total employees, compared to only 23 for those firms that are currently profitable. Furthermore, these firms tend to be more midsized rather than huge; 27 percent have between 11 and 50 employees.

“The Internet is undergoing a vast weeding-out process,” said Harry Wolhandler, vice president of market research at ActivMedia Research. “The e-survivors that remain standing reflect a serious, business-like online community that is not pursuing the ‘get-rich-quick’ strategies that grab Web headlines. Instead, these companies pay serious attention to the Internet as a sales channel and develop their both their Internet capabilities and their backstage business service capacities as much as possible to ensure their success online. The online losers are those who think they can capture online markets through aggressive promotion and pricing alone, while their supporting business abilities suffer through an inability to serve their customers well.”

The online winners, Wolhandler said, are garnering an increasing share of loyal customers, willing to pay reasonable prices for strong service. The losers suffer from a lack of margins that inhibit their ability to compete in the business service dimension, which is where it really counts.

But is the fact that a Web site, or even an entire business, is bringing in more money than it sends out enough to ensure long-term success? Probably not, and this holds true even outside of the Internet arena.

According to a study by Bain & Company, even during the unprecedented economic boom of 1990s, 90 percent of all companies failed to achieve even modest sustained growth rates. In the book Profit From the Core: Growth Strategies in an Era of Turbulence, Chris Zook, Bain & Company’s worldwide strategy director, found that few companies have achieved what he calls “Sustained Value Creator” (SVC) status, defined as maintaining at least a 5.5 percent average annual inflation-adjusted growth rate in both earnings and revenue over 10 years. Eighty-five percent of the SVC companies concentrated on their well-defined, core business — not the “next new thing,” in growing their business.

While dot-com companies may not have a 10-year track record to look back on, an examination of Internet companies found that less than 2 percent of 1,500 “pure” Internet companies funded between 1994 and 2001 achieved sustained, profitable growth over a three-year period. Unlike the successful SVC companies, strong core businesses make up only 10 percent of “pure” publicly funded Internet companies, yet this 10 percent accounts for 80 percent of the total market value of all the companies in this segment.

“The Internet data magnifies the need for companies to prove the existence of a profitable core before getting trapped in a sea of profit-less prosperity,” said Zook. “It is remarkable that so many Internet companies piled layer upon layer of growth initiatives on their core business before it had been stabilized or profitable.”

Zook also said that industry turbulence — such as an economic slowdown, changes in technology, customer shifts, and new business models — can and do have a damaging effect on a company’s core business. In addition, increased turnover among chief executives means 70 percent of company leaders today have never steered their firm through recession. These elements also make sustainable, profitable growth increasingly elusive.

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