Margins: How Low Can You Go?

How low can you go? This is a defining question for any business, particularly in e-commerce. Sales and top line revenue are always important, but what is clearly understood as highly significant by every successful entrepreneur that I have ever met is a low margin. As the VP of Sales at buySAFE, I have the opportunity to speak with many e-commerce merchants selling in all product categories, and I can see that Internet merchants are constantly under pressure to reduce their margins from every possible direction.

Some of the most attractive characteristics of doing business on the web have been lack of or minimization of “brick and mortar” costs along with low barriers to entry and a nearly unlimited market reach with over 200 million online consumers. All of this should mean great margins regardless of the COGS profile of any business. As e-commerce matures though, these “advantages” are being eroded to the detriment of merchant profitability.

The minimal barriers to entry have resulted in a general lack of confidence in merchants by consumers since it is very difficult to differentiate through a browser. Some merchants have been all too willing to combat this problem with discounting of the product, while others get into e-commerce with discounting as their sole strategy. The net results are lower margins. The good news here is that 200 million consumers might see your site. The bad news is that it costs quite a bit to get them there. I cannot tell you how many near disasters I have heard about as a result of a runaway Pay-Per-Click (PPC) program. Paying for keywords in the hope of driving traffic can be a risky proposition. The result? Lower margins due to high customer acquisition costs.

But wait, there is more. I wouldn’t want to leave out payment processing fees, fraud detection fees, charge-backs and of course shipping. So how low can you go? But perhaps there is a better way.

buySAFE merchants are able to deflect some of these pressures and stem the tide of declining margins through the use of our bonding service, which provides a level of trust and confidence for consumers not normally found on the web. This helps shoppers discriminate between otherwise similar websites. The net effect is margin protection.

And it gets better. We have recently launched our Bonded Shopping Network focused on attracting the very shoppers that seek the trust and confidence gained from bonded merchants. This network provides consumers with multiple avenues to find these merchants. These consumers do not look at price first. Instead, their first priority is a trusted merchant. The best thing about this new program is it stands at the forefront of e-commerce advertising by utilizing a CPA (cost per acquisition) fee structure. This means that merchants pay advertising fees only after a consumer has made a purchase. The result is not only margin protection but cash flow improvement as well.

The best businesses manage their margins, rather than being told by the market what they must accept. eCommerce sellers are no different; those that can offer real differentiation to the shopper will protect their margins AND grow their revenues. So perhaps the question, after all, should be: How low do you have to go?

Today’s blog was written by Jon Aust, our VP of Sales & Marketing. Jon joined buySAFE in August of 2007 and is responsible for all Merchant sales efforts. Jon is an entrepreneur having launched a number of technology companies and enjoys helping e-merchants to grow their businesses through the guarantee of trust that buySAFE provides.

Comments

[Jon Aust]

Hi John. Thanks for your comment! buySAFE has a unique value proposition for merchants and consumers which is based on the concept of bonding transactions and the confidence this promotes among consumers.

In your example, we would perform our regular dispute-resolution process and if in fact the shipment of a brick was not an innocent mistake quickly remedied by the merchant, we will make the consumer the entire payment. You are correct that this seems untenable as a business practice, however, the nature of our service is such that we must underwrite any merchant that we bond. This process includes an evaluation of the ability and willingness of a merchant to perform based on the merchant's own terms and conditions - including factors such as financial stability and customer service.

Most importantly, we carefully monitor all our merchants' transactions and any business that conducts a purposely fraudulent transaction would not continue to be bonded for long. This is the essence of our fundamental values and why we are able to vouch for merchants.

Our consumers value this service and as a result convert to shoppers at a higher than normal rate. On average our bonded merchants experience a 6.8% increase in conversions. By being a trusted third party in the middle of the e-commerce transaction flow we provide value to both merchant and consumer, thereby making shopping online safer for all!

[davidliu]

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[John]

Interesting article. I was curious as to how BuySafe is able to protect against the following scenario. I buy a camera on ebay from a BuySafe bonded seller. The seller ships a brick or some other object that is of the same weight as the camera I purchased. Now the seller has proof of shipping the item, via the tracking number, and I have a brick. How would BuySafe be able to handle situations like this? I assume if BuySafe were to just pay out all claims like this that their loss rate would be too high. Anyway, I was just curious how the situation was handled.(it seems like a limitless liability for BuySafe)