Fascinating Pros and Cons to an Online Business You MUST Know for Success

Watch for these Ecommerce Advantages and Disadvantages

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Running an online business requires an unusual skill set. Though the basics are much the same as they are for operating a traditional brick-and-mortar business, there are distinct advantages and disadvantages. Knowing how to leverage the former and control the latter is crucial to success.

Ecommerce: A Growing Industry

By one count, there are roughly 110,000 ecommerce companies and online firms generating revenue of meaningful scale on the Internet. Retail ecommerce sales in the US alone are expected to amount to more than $461 billion this year … and predicted to rise to $638 billion by 2022.

Ecommerce plays just as big a role in international business and commerce. Total worldwide ecommerce sales are expected to reach $4.5 trillion by 2021, with hundreds of thousands in further online businesses possible.

The sheer tonnage of these numbers makes them easy to gloss over. Billions, trillions … it’s easy to lose the context once values go beyond your familiar frame of reference. You know intuitively that ecommerce plays a massive role in global commerce, but may not see what they suggest for you on a micro scale.

The fact that ecommerce continues to grow should tell you, as an entrepreneur, that online business works. It’s working for hundreds of thousands of other executives around the world — and there are good reasons why. Yet it must also be noted that 90 percent of all Internet business startups end in failure within the first four months.

In other words, there’s a massive gap between failure and success. Though many companies are thriving, nine times as many flop before they have a chance to lift off.

If you study businesses in the latter category — the ones that don’t make it — you’ll recognize that many of these firms tried to fit square pegs into round holes. They didn’t understand their strengths and weaknesses, which put them at a disadvantage on multiple levels.

So much about running and fostering a business — online or off — entails the possession of clarity. If you want your online business to thrive, you have to be a realist. You must understand which advantages you face, as well as which issues and sticking points could hold you back.

Ecommerce Advantages and Disadvantages

The ecommerce industry is definitely growing, but the only way to share a piece of that growth is by leveraging the opportunities and mitigating the risks.

The Advantages of Running an Online Business

There’s a reason thousands of entrepreneurs launch ecommerce companies every year. In fact, there are dozens of reasons. But when you cut straight to the core, there are five distinct advantages to running an online business. Leverage these and you should do just fine.

1. Low Overhead Costs

One of the greatest advantages of operating an online business is that you don’t have to absorb the all-too-often exorbitant overhead costs that brick-and-mortar firms must cover in order to keep their doors open. From expensive storefront real estate and physical signage to customer-facing staff and various insurance policies, physical businesses have a range of overhead costs that erode their profit margins and drive up prices for their customers.

When you’re an online business, lower overhead costs give you the chance to be a low price leader in your niche. Just ask a company like Blindster, which sells window blinds direct to consumer.

“Big box retail stores often can’t compete with us on prices,” Blindster explains. “That’s because we focus specifically on blinds and shades and don’t need large showrooms to house our products. All of our products are available to be browsed online rather than in person in warehouse-like storefronts, and we pass the savings from those key differences on to our customers.”

Many online businesses get greedy with their low overhead and try to pad their profit margins too much for their own good. Successful ones do what Blindster does, and pass on the savings to their customers.

2. Ability to Collect Customer Data

The amount of data you can collect about online shoppers can be incredible. And if the advances in customer intelligence and data analytics tools over the last couple of years are any indication of the innovations yet to come, online business owners are in for some greater opportunities in the future.

Being able to collect customer data enables you to construct a detailed portrait of your target market: who they are, and what makes them tick. In gathering this intelligence, you can create detailed customer profiles to guide your online advertising, landing page optimization, and even product development.

3. Greater Customization

When a customer walks into a store looking for a specific product, the retailer either has the item in stock or doesn’t. If the product isn’t in stock, the customer has to settle for a different option, or wait for the desired item to come in stock. Either way, the customer isn’t readily or fully satisfied.

With an online retailer, customers have the ability to customize their orders, choose the exact products they want, and have them shipped to them. They’ll have to wait a few days to receive it, but that expectation is built into the experience. The result is a more satisfied customer.

Nike is a good case study in this. It has both physical storefronts and an ecommerce website, but the online facet of the business model far exceeds the brick-and-mortar side.

With Nike.com, customers can log on and customize the exact pair of shoes they want: from style and colors to shoelaces and logo placement. This level of personalization makes the customer feel valued. (Compare this to the in-store experience where you’ll typically find only a handful of generic styles, which may or may not be available in the correct size at any given time.)

4. Greater Reach

With an online business, you have the opportunity for virtually unlimited reach. Compare this to a brick-and-mortar outfit that is only going to be visited by customers within a 25-mile radius, typically (and closer to a 10-mile radius in certain industries).

Given today’s supply chains and shipping capabilities, it’s possible for even the smallest online firm to handle international sales. This expands the possible target market from only thousands to millions.

5. Ability to Adapt

Online businesses are in a much better position to adapt to market needs and optimize their approach without much backlash. This is something Aussie entrepreneur Aurelius Tjin has experienced firsthand.

“As my business is not restricted to locality, 70% of my customers are from the U.S., while just 10% are from Australia,” Tjin explains. He’s also discovered that many of his customers find PayPal to be the most comfortable method of payment, so he’s made sure to tweak this part of his business as well.

“Customers simply purchase my products via PayPal, the funds get deposited into my PayPal account instantly and they simply download the product after purchase.”

Some Disadvantages That Online Businesses Face

It’s not all smooth sailing for online operations, though. The fact that 90 percent fail within the first 120 days should tell you that you also face some distinct disadvantages. Knowing how to address and mitigate these challenges will increase your chances of survival.

1. Lack of Credibility

With a brick-and-mortar company, a certain level of trust exists intrinsically between the customer and the business. The fact that a firm has taken the time and invested the money to set up a store and build out an infrastructure says volumes.

Since the barriers to entry are so low in ecommerce, one doesn’t necessarily enjoy the same level of credibility. In fact, many online businesses find it challenging to prove they’re legitimate … especially when they’re small and just beginning to scale up.

2. Customer Service Challenges

Although there are certain online businesses that have a reputation for excelling at customer service — Zappos is a famous example — most find it challenging to overcome the lack of face-to-face interaction with customers.

Some customers simply prefer to shake a hand, speak with a person, and have the ability to set up a personal appointment. Online businesses often don’t have the resources or capabilities for this … resorting to email, chat support, or bogged-down phone lines.

3. Marketplace Saturation

Unlike offline businesses that may have one or two competitors in the area, online companies are pitted against dozens or hundreds of competitors across the world. This level of saturation can make it difficult to win any marketplace penetration.

Make the Most of Your Situation

You live in a world that entrepreneurs from previous generations could have never dreamed of. You have the ability to launch a business from your living room sofa and expand it into a highly successful organization without every stepping foot outside your door.

When you think about it, it’s truly astonishing.

But in order to be successful in the online business arena, you need a realistic perspective. It’s absolutely imperative that you understand the advantages you possess, while acknowledging the disadvantages you face. In doing so, you’ll be able to develop a growth strategy that’s both reasonable and sustainable.

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Larry Alton Larry Alton is an independent business consultant specializing in social media trends, business, and entrepreneurship. Follow him on Twitter and LinkedIn.