Archivi categoria: E-business

Economies of scale

 

Last time I published my post in “e-business” category, I talked about savings due to the increasing amount of products manufactured.

My friend Gabriele works as sales representative in a hi-tech shop and, after having read my post, he asked me: “why doesn’t my 80Gb hard disk cost as much as the double of a 40Gb one?”.

The answer can be found in economies of scale, because fixed costs are “absorbed”.

For example, if you had to manage a warehouse where little merchandise is stored, and you had to pay a fixed amount of money for renting, every product would absorb a portion of the fixed expenses. Differently, if you had to pay the same amount of money for renting but had to manage a lot of products in the warehouse, every product would be allocated a very little percentage of the total cost!

That’s all: every company would like to increase its production in order to make the costs less heavy, but a clever manager has to make sure his colleagues the demand will raise! Otherwise, the increasing  production would mean the opposite than savings ……

E-commerce businesses have generally to face similar problems because fixed expenses (server and data transmission, direct labour costs and salaries for administrative personnel, rent, design and development of the web site, depreciation, insurance premiums etc.) are very important, and we’ve already talked about the uniqueness of the product.

If an internet based firm produces only a product, or few copies of its product after having hired a number of technicians (perhaps the most important expense), there are two keys for profitability: fixed costs could be transformed in variable costs (look at http://www.questidenari.com/?p=218), or management should add high mark-up on to each product’s price in order to get high incremental revenues.

Anyway, you’ll see the great importance related to structural costs: break-even-point is very far, and e-businesses must be managed with a strong strategic vision in the long run. A technician can create a start-up, but only a business administrator is able to run the shop successfully.

New ways of thinking

 

The main difference between an old economy business and a new economy one can be found in savings.

Top level managers, high school teachers or famous financial advisors have been talking about all the cost-effective activities for many years, so we know there are several manners helpful for keeping costs down: lower times for manufacturing due to higher workers’ experience with the passing of the time, economies of scale due to increasing total quantity of products, degree of control in negotiations with suppliers due to increasing purchases, everything focused on the internal aspects of the business, according to the traditional theory of manufacturing industry.

In the 2000s, the traditional vision must be renovated because of the uniqueness of the product created, so e-commerce or e-community firms have to take care of marketing aspects related to financial entries (outside perspective), and also have to approach new accounting procedures for controlling overheads (inside perspective) such as rent, personnel, software licenses, hardware, etc.

First of all, a click & click industry must assess what is demanded in terms of work: if it couldn’t keep up with demand, it would lose a lot of faithful clients (and other potential clients), and everybody knows that’s extremely difficult to make customers come back as long as they’ve no physical presence and their geographic location is all over the world! Budgeting activity is getting very important!

Ford’s T-model times are finished: we have to be aware businesses are being managed in a more and more virtual global village where every client likes a particular and tailored merchandise or service, and management efforts to reduce standard costs typical of the massive production aren’t so frequent.

A clever web manager needs to use human resources and financial capital in order to achieve goals in terms of users and clients who push up profits through a great amount of revenues. But more creativeness doesn’t mean less rationality!

Controlling for beginner learners /2

  

Are you ready to know the second indicator for your e-businnes?

Let’s take a look at the e-commerce model and focus on another leading indicator such as CRR.

Do not mistake with “user”: we’re talking about customers now, visitors who decide to buy something after having appreciate many exclusive end interesting contents in your web site. In other words

1) you should be so clever to have many visitors (look at http://www.questidenari.com/?p=287)

2) your visitors should be logged

3) your logged visitors should buy your goods or services

4) your clients should be so satisfied to return.

The “Customer Retention Rate” gives information about the percentage of faithful clients who repeatedly buy a product or a service during a particular period:

CRR = repeated purchases / orders base.

The upward or downward trend of CRR must be compared with your investments in ancillary services and expenses for digitization of customer’s process of choice in the long run.

Controlling your costs doesn’t always mean save money: the successful strategy might be expensive, so you’ll stop affording increasing investments when you’re aware that too many clients are going away.

Controlling for beginner learners

 

Power is nothing without control!

That’s not only an old successful TV spot, it refers to one of the most important activities when you have to manage your business on line.

Why affording overall expenses or spending a lot of time in marketing research, if you aren’t able to check the figures produced?

First of all, you have to establish what kind of business: e-commerce, concerning material products sold or services rendered, or e-community, focusing on the amount of relationships.

I’m sure you’ll be able to find a very wide literature about the first kind of business, while you need some help to create a number of leading indicators for the e-community model. So, that’s the first.

Next step involves the creation of the “User Churn Rate

UCR = new visitors / total visitors

where visitors are the so called “unique user” in a particular period.

The upward or downward trend of UCR must be compared with your investments in every kind of utility developed to guarantee your tracing on line: the ideal situation doesn’t exist, but you’ll have to change something if your expenses increase and your UCR goes wrong!

Make variable your highest costs

 

Are you a business blogger?

Are you interested in business plan models?

Do you like micro-finance?

Many friends of mine, working as IT technicians, have asked me about one of the most expensive accounting voice in e-commerce business budget: personnel.

A start-up has probably a limited amount of capital for investing in productive structure; and its financial requests are usually being ignored when a bank looks into the accounts.

So you have to take care of the fixed expenses concerning your employees, first of all.

Outsourcing activity offers a possible solution to streamline your processes: as long as a specific product or software package has been required, your business will entrust one or more workers to create what is demanded.

In this manner, when your demand falls, you’ll be given the chance to eliminate personnel costs linked to unproductive activities.


L’autore, Gianluca Libbi, nega ogni autorizzazione a copiare e ripubblicare, per intero ed in qualsiasi altro luogo, i testi presenti sul sito web “www.questidenari.com”. Leggere le informazioni di copyright per ulteriori dettagli.