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What businesses succeed on online?

(Editor's notes: A lot has changed since this article was written. We'll be updating this information in the near future)

In this article we will consider the most basic question any new Internet business owner will have to answer at one point or another…

"What should I sell online?"

After the dot-com bubble burst and the mess was mopped up, sanity checks have brought realistic expectations to the top of the list of priorities. Initially, a backlash was forecast, predicting the doom of the web as we knew it. But after the initial panic subsided, the logic of what the web has to offer put the power and potential of online business in it's rightful place.

After observing the breakthroughs which proved the promise of e-commerce wasn't all smoke and mirrors, four of the most successful dot-com businesses recently reported their first quarterly profits. The list of some of the web’s publicly held big moneymakers includes eBay Inc., Amazon.com Inc., Yahoo! Inc., Overture Services Inc., Expedia Inc., FindWhat.com Inc. and E-Trade Group Inc.

Several of the privately owned dot-coms, including search engines Google and DealTime, have been making money, too.

In 2001, the last year where the dollars figures for all these businesses were readily available, the Department of Commerce itemized e-commerce sales versus total U.S. retail sales. This revealed that the $3.16 trillion retail industry saw a total of $37.7 billion in sales occur online -- making up 1.2 percent of that total figure.

At the time of this writing, e-commerce is tracking at about the same level. Through the third quarter (the last full quarter where most of these numbers were available), the total retail sales were $856 billion versus $11 billion in e-commerce.

That's about a 1.3 percent share overall.

To be sure, there were big gains made in the 'Home and Garden' category - a 78% increase. 'Furniture and Appliances', another strong area, generated a 75% increase and 'Toys' produced a 61% increase in the year 2002.

It's clear that there is no doubt in how online shopping is growing.

What's more, Nielsen//NetRatings discovered that more than 35.5 million U.S. Internet users made digital shopping trips to virtual department store web sites during the week ending November 3, 2002.

That's a 20% boost from the week ending October 20 and roughly 14 million more money-spending shoppers than nearly the same time period in 2001. This indicates a growing willingness - make that 'eagerness', amongst web surfers to pay for valuable content online.

There are a variety of possible and definite reasons for this. First, only a few web sites (usually owned and operated by big companies) can afford to provide valuable content without being compensated for the service. Even then, the dot-com bombs proved that business model is a weak one.

For the most part the rest of us can't survive being as generous. And trying to recoup operating expenses by selling advertising on our web sites often fails to pay the bills.

For the most part, online advertising and click-through rates are on the decline.

The good news is that many people are now more than willing to pay a one-time fee or monthly membership to receive quality services and products - even if they were offered for free earlier.

Several paid content web sites have already proven this undeniable trend. Yes, this is one of the business models that managed to survive the big bust.

With 'attention' being the most highly valued aspect of online visitors, smart businesses know they have to earn it -- not expect it. Most discerning buyers value and allot their browsing time in direct proportion to the quality of information or services they find.

And for the businesses who can commit to living up to expectations, their site visitors are willing to pay for it.

However, not all products can be sold on the Internet. Some products may be better suited for online sales than others; others simply will not work on this new commercial medium.

But that's not to say that just about anything can't be 'promoted' online with the actual transaction taking place offline.

According to one Ernst and Young study, the most popular online purchases to date are

• Computer-related products at 40%
• Books (20%)
• Travel (16%)
• Clothing (10%)
• Recorded music (6%)
• Memberships and Subscriptions (6%)
• Gifts (5%)
• Investments (4%)

Also, many businesses offering paid services have also did well.

The top 3 service categories were

- Business Content/Investment
- Entertainment/Lifestyles
- Personals/Dating

All in all, they accounted for 62% of paid content revenues in the first three quarters of 2002.

This apparently resulted in growing the total market for online 'paid' content in the U.S. to $361.4 million for the quarter. That's a 14% gain over the previous quarter and a 105.3% gain over third quarter 2001.

Another interesting stat put forth by Ernst and Young was that roughly 85% of the money spent by U.S. Consumers for purchasing or accessing online content ends up going to the top 50 sites in the most popular categories.

In the graph below (the top 3 most popular content categories) illustrates this further.

In the highly regarded and sought after terms of “stickiness”, different categories such as Business sites - especially those of finance and investment - rank most highly. In other words, users are more likely to spend more time browsing pages at a business web site compared to most other categories.

NOTE: this study was conducted by Nielsen//NetRatings. The table below shows 2002's most addictive and popular web categories.

Source: Nielsen//NetRatings

According to the above time measurements, the average person spends about 22 minutes on a finance web site on average. What do you think the chances are of those visitors being sold to more effectively, the longer they stay on one of those sites?

Should you be selling a product or a service?

So far, the Internet is mainly used for research, communication, entertainment, and education. Because of this it's no wonder that nonperishable, information-intensive products - consumer electronics, computers, books and magazine subscriptions, travel, and software - are the most popular online products at present.

You'd have to be asleep at the mouse not to notice that everything from content-rich sites to subscription-based sites to advertiser-supported sites focusing on a wide range of topics, have been sprouting up all over the web.

Popular services such as hotel reservations, investments, and air travel have successfully transplanted themselves to the web with increasing success.

Even unique niche services like online driving schools have been prospering. Some states have even set up online payment sites for Government services. For example, residents of a state can log on to a site to pay parking tickets to the local/County courts.

Still, many kinds of services cannot yet be run effectively or entirely on the web. The Internet is less effective when face-to-face selling is needed to close a deal.

That said, the web can provide much of the preliminary presentation information that is often very useful in setting the scene for closing a sale. But in most cases, the actual closing takes place offline away from a web site.

With the popularity of media sensationalism, we all now know that a wide variety of products are being marketed and sold successfully on the Internet – from tumbleweeds to grilled cheese sandwiches bearing the image of the Virgin Mary.

For the most part, the kinds of products and services that will continue to sell best online are those that take advantage of the convenience of the web – especially the digitally delivered ones.

As expected, convenience is the number one reason why we flock to the web in the first place. We can shop any hour of the day or night and buy just about anything we want. By doing so we avoid crowded stores and offensive sales clerks - even possible pickpockets (although identity theft is clearly on the rise).

Unusual services or offbeat products often attract a lot of online attention and sell strongly - with word-of-mouth advertising coming into play more than ever before.

In general, you would not try to sell everyday items people can get more readily and cheaply offline (shipping charges alone can make some online purchases unreasonable). Thus, toothbrushes and toilet paper are seldom sold on the web, unless they are uniquely conceptualized as something going beyond the value we normally give them.

The same basic idea applies to most food and beverage purchases. But special cheeses, steaks, rare cigars, seasonings, vintage wines, even diamonds, can and do sell well on the web.

Most offline products sold by catalog and mail order also do well online. However, people still tend to buy mostly those products that can be shipped at a reasonable price.

As mentioned earlier, shipping costs often diminish the price competitiveness of online products. It's clearly a major turn-off for a lot of potential buyers. In fact, shipping costs are usually the primary factor that discourages people from buying online more than any other single reason.

So much so that when tracking your customers during their check-out process, you should always test alternative shipping offers to see which compel your shoppers to continue instead of bail out.

The Ernst and Young report indicates that 53% of online shoppers were definitely concerned with shipping costs that are too high, compared to only 19% who were concerned with credit cards being stolen. It's likely this ratio could reverse as digital thieves become more adept at taking what doesn't belong to them, but for now shipping is an issue that must be confronted by the digital store owner.

As expected, online merchants need to work out the advantages as well as any perceived disadvantages of selling their products or services. So if you chose to sell products you need to rethink your product offering if the total costs of the product and the shipping are higher than what is offered elsewhere.

Be sure to take some time when evaluating your products or services. There is obviously a growing market of potential customers on the web. Your edge is being there to offer the products and services they are looking for when they realize they need and want them.

Warmly,

Vince