Mystery Of the Missing Profits – Part 3
Written by
Rajesh Jain
Rajesh Jain
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Mystery Of the Missing Profits – Part 3

Published : November 30, 2023 | Updated : May 23, 2024

In the second part of this series, I talked about why profits are not keeping pace despite the rapid growth of digital/B2C/D2C/eCommerce companies. I also briefly touched upon the concept of ‘eFollies.’ In this part, I will discuss eFollies and the importance of breakthroughs in human advancement.

Digital follies

In the rush to harness the opportunities of the digital age, industries have inadvertently handed over profit streams to emerging players – most of whom are outsiders to the industry. Some businesses wanted to scale, while others wanted to be early adopters without a clear strategy. Let’s look at some of these follies.

Media and publishing

Media houses and publishers committed one of the most significant missteps in digital transition. The promise of an expansive online audience saw them offer content freely. This pursuit of ad revenues led to two considerable pitfalls. First, the perceived value of quality content eroded. Convincing audiences to pay when they are accustomed to free access becomes difficult.

Secondly, ad dollars went not to the publishers but to platforms like Google and Facebook. These platforms aggregated content and drew audiences, commanding the lion’s share of ad revenue.

Music industry

Before the advent of streaming platforms such as Spotify and Apple Music, the music industry was grappling with piracy. Instead of adopting user-friendly, digital purchasing options, the industry stuck to physical sales and litigious actions. This delay allowed tech players to change the industry’s profit models forever.

Banking

Traditional banks were slow to recognize the pull of digital banking. Fintech startups offered user-friendly apps, instant loans, and fee-free transactions. This drew a significant chunk of customers seeking convenience away from traditional banks.

Digital/B2C/D2C/eCommerce

Digital/B2C/D2C/eCommerce companies have also committed a similar mistake – what I call ‘eFolly.’ Digital brought the promise of infinite scale. Every new company wanted to grow rapidly, with a strategy heavily favoring acquiring new customers. The eFolly these companies committed was ignoring existing customers. This folly has several sub-elements, each of which has been devastating for overall profitability.

  • Obsession with acquisition: The business narrative became about growth figures centered around customer acquisition. Companies allocated massive budgets towards digital ads and the acquisition of new users through heavy discounts. The cost of acquiring a new customer often outstripped that customer’s lifetime value, especially when considering the discount rates.
  • Neglect of retention: With their eyes on the future, many businesses forget about existing customers. If nurtured and engaged, these customers can generate consistent revenue and organic growth through referrals. Surprisingly, however, retention strategies took a backseat.
  • Underestimating word-of-mouth: The digital age has amplified the power of word-of-mouth. However, brands have failed to leverage the power of referrals, especially from their Best Customers.
  • Unsustainable discounting: eCommerce businesses have relied on discounts to attract and retain customers. However, adopting this strategy has eroded the perceived value of products and services, making profitability a mirage.

As I have previously written, “Countless eCommerce companies are struggling with slim or non-existent profit margins. While the hefty price tag associated with customer acquisition may seem the primary reason, a deeper analysis reveals an industry-wide problem. This is the ‘eFolly’ – the decision to ignore existing customers and focus almost exclusively on new customers. This eFolly of ignoring current customers is prevalent in digital companies across the board.

It becomes a costly misstep perpetuated by eCommerce leaders, inadvertently and inevitably gnawing away profits. In the absence of external capital to absorb losses, this can lead to the failure of startups.”

Many businesses overlooked foundational principles in their effort to scale, making profitability a casualty. Ignoring existing customers and focusing exclusively on acquiring new customers for growth has strengthened the ads, arms, and access sellers. However, there is light at the end of the tunnel. An array of new technologies can help businesses pivot, reverse their losses, and win the future profits war.

Breakthroughs

Throughout history, human advancement has been punctuated by moments when innovative ideas, inventions, and technologies have broken barriers and paved the way for exponential progress. These breakthroughs were more than just solutions to an existing problem. They acted as catalysts that helped entire industries to leapfrog into a new era of growth and prosperity.

The steam engine

For example, James Watt’s refinement of the steam engine did more than make a machine more efficient. It became the primary driver of the First Industrial Revolution, turning manual craft into mechanized industries. This revolutionized manufacturing and laid the foundation for modern urbanization, changing the socio-economic and cultural conditions of the time.

The light bulb

Similarly, while the concept of the electric light was hardly new, Thomas Edison’s invention of the light bulb made lighting cheaper, safer, and better. Cities no longer slept, and factories could operate longer. The invention also electrified other sectors, leading to developments in electrical engineering and giving rise to household electrical appliances.

The invention of the radio

Marconi’s creation of the radio led to the era of wireless communication. This innovation also served as the backbone for several other technologies, such as television and mobile phones, forever changing how we communicate, entertain, and inform.

HTML and WWW

Tim Berners-Lee’s HTML and WWW architecture didn’t just allow us to view web pages. It democratized information, removed geographical barriers, and became the bedrock of the digital age. This allowed businesses, services, and social networks to connect to the world in an unprecedented way.

Electric vehicles

Tesla and other carmakers realized that the battery was the key to making electric vehicles (EVs) a viable alternative to gasoline-powered cars. Innovations in lithium-ion batteries, leading to increased efficiency and lower costs, have seen EVs surge in popularity.

DNA

Understanding DNA was a significant leap for humanity. However, the discovery of techniques such as CRISPR-Cas9 has enabled precise editing of genomes. This could revolutionize medicine, allowing tailored treatments and eradicating certain genetic diseases.

Transformers

Google’s ‘Transformers’ has revolutionized AI, especially in Natural Language Processing. The introduction of attention mechanisms allowed Transformers to understand context in sequences better, leading to the creation of advanced models such as GPT. This transformed the capabilities of Generative AI, enabling human-like text generation and broader AI interactions in daily tech.

These breakthroughs highlight the idea that innovation is more than iterative progress. It can shatter what’s deemed possible, propelling industries and societies into new paradigms. Each leap builds upon countless individuals’ work and paves the way for further leaps. This creates a cascade of progress that defines human history.

eCommerce is at a similar threshold, one that will transform the P&Ls of businesses and give them the boost needed to power forever profitable growth, thus creating Profipolies.

If you have not read the earlier parts, you can start with part 1 of this series here.

Continued in Part 4

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Written By: Rajesh Jain
Rajesh Jain
Founder and Group MD, Netcore Cloud