Mystery Of the Missing Profits – Part 2
Written by
Rajesh Jain
Rajesh Jain
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Mystery Of the Missing Profits – Part 2

Published : November 30, 2023

In the first part of this series, I talked about the promise of the digital landscape, the potential it holds for eCommerce businesses, and its sobering reality. I also discussed the ‘zero consumer’ and the different challenges retail and eCommerce businesses face. In this part, we will discuss why profits are not keeping pace despite the rapid growth of digital/B2C/D2C/eCommerce companies and introduce the concept of ‘eFollies.’

Where are the profits?

Digital/B2C/D2C/eCommerce companies are growing rapidly. However, their profits have failed to keep pace. B2C/D2C CEOs have wondered why profits aren’t pouring in despite integrating an optimized website and app to a seamless omnichannel experience and prompt delivery. Traditional retailers investing in digital initiatives also ask the same question: “Where are the returns on my investment?”

The short answer: Elsewhere. The profits can be found on the balance sheets of ads sellers, arms sellers, and access sellers, and not with the actual sellers.

Ads sellers

Visibility is everything, especially in a world dominated by algorithms and screen scrolls. Ads sellers like Google and Meta have capitalized on this, transforming the digital space into a highly competitive auction arena, with brands paying escalating amounts for visibility. Even with large ad budgets, there is no guarantee of conversion. This means companies often spend exorbitant amounts on customer acquisition and reacquisition, with no assured return on their investment.

As a result, ad revenue for ad sellers soars, while businesses striving for customer attention find their profit margins squeezed.

Arms sellers

Cloud services have transformed how businesses operate, offering greater scalability, flexibility, and efficiency. However, these cloud services come at a cost. As businesses scale, their reliance on these services increases. Data must be captured, stored, and analyzed, while AI algorithms must search for patterns. All of this comes at a cost. As a result, companies such as Amazon, Google, and Microsoft, fueled by profits, continue to grow. In an ideal situation, these profits could have remained with eCommerce and digital enterprises using their platforms.

Access sellers

Last but not least are marketplaces – platforms that offer brands unprecedented access to customers. However, these gateways come at a steep price. Brands must pay hefty compensation while adhering to strict platform-specific guidelines and competing in a red ocean of endless vendors. While the marketing platforms ensure their cut from every transaction, individual sellers find their profit margins thinning. This scenario is further exacerbated when marketplaces introduce in-house brands.

The digital and eCommerce landscape was hailed as a democratizing force for businesses. However, the evolving landscape paints a complex picture. The mystery of the missing profits isn’t a mystery once you understand the intricate web of cost and dependencies in the digital ecosystem. For businesses to thrive and regain their profitability, there must be a fundamental shift in strategy that prioritizes sustainable growth over volume and balances out the power held by digital giants.

So, what can brands do? The answer lies in understanding the eFolly of every digital business.

Follies

The word ‘folly’ signifies a lack of sound judgment leading to unwise actions and decisions. It denotes a foolish act or object representing such behavior. The word originates from the French word ‘folie,’ meaning ‘madness’ or ‘foolishness.’ History is full of examples of follies that have significantly impacted societies, nations, and individuals.

As Alan Axelroad has written in his book ‘Profiles in Folly: History’s Worst Decisions and Why They Went Wrong.’

“Most of what you find here are decisions by smart, savvy people that went miserably, abominably, and irreversibly wrong. Why pick at history’s scabs? The easy answer lies in another question: Inching along a freeway, who can turn away from a flaming car crash? The more meaningful answer is that probing our vulnerability is a project poignant and compelling for what it reveals about how high-stakes decisions that must be taken could produce disastrous results. There but for the grace–the grace of what precisely?– lie us, in flames.”

Here are some examples of follies listed by ChatGPT.

  • The Trojan Horse (Ancient Greece): Troy accepted the wooden horse, thinking it was a gift. However, it was filled with Greek soldiers, leading to the city’s downfall. This is where the term ‘Trojan Horse,’ widely used in cybersecurity, comes from.
  • The sinking of the Titanic (1912): The Titanic was considered unsinkable. However, it collided with an iceberg on its maiden voyage thanks to several errors in judgment, such as ignoring iceberg warnings and not having enough lifeboats.
  • The sale of Alaska (1867): Russia considered Alaska a useless territory and sold it to the United States for $7.2 million in 1867. Today, Alaska is known for its vast resources, including oil.
  • Maginot Line (1930s): France built the Maginot Line, which consists of concrete fortifications, obstacles, and weapon installations along its border to deter a German invasion. However, the Germans simply went around it, rendering it ineffective.
  • Bay of Pigs invasion (1961): The US-backed attempt to overthrow Fidel Castro ended in failure, instead strengthening Castro’s position and embarrassing the Kennedy administration.
  • Chernobyl nuclear disaster (1986): Flawed reactor technology and inadequately trained personnel led to the failure of a routine safety test, resulting in the world’s worst nuclear disaster.
  • The South Sea Bubble (1720): A speculative bubble involving the shares of the South Sea Company. Many people invested in the company and lost significant money when the bubble burst.
  • The decision to invade Russia (Napoleon in 1812, Hitler in 1941): Both leaders attempted to invade Russia but failed miserably, with their armies decimated by the harsh winter and determined resistance.
  • Dot-com bubble (Late 90s – 2000s): The dot-com bubble was a period of extreme speculation during which stock prices of internet-related companies skyrocketed. Most of these companies were not profitable, and when the bubble burst, investors faced significant losses.

These examples highlight human decision-making, from strategic blunders to overconfidence and the sometimes-catastrophic consequences that follow. The digital world of the past quarter century has been no stranger to follies, or what I call ‘eFollies.’

Continued in Part 3

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