Let me rephrase this, e-commerce is dead for companies that don't have a unique product. So if you're not an Amazon or an Overstock, and you're trying to sell a tangible product than anyone can sell, forget it. That game is over.
Roughly seven or eight years ago, you had a chance. Around the fall of 2003, a good friend of mine and I embarked on an effort to get into the e-commerce drop shipping market.
The Plan
Our plan was to launch a series of e-commerce drop-ship websites in repetition. Our goal was not to have one "home run" website (although that would be nice), but to make a few thousand dollars off of each website and build dozens that could be easily managed by a handful of people.
We thought that using search engine optimization (SEO) techniques (basically a method that would place us on page one of search engines) and entering very tight product verticals would be an excellent strategy.
My friend and I both had years of experience developing sophisticated software, primarily for wall street firms, and so we figured that we could build a superb e-commerce engine that would meet our needs.
It took us about three months to complete the initial release of the engine. We chose Java as the language to build both the front-end (using Servlets) and back-end of the system. The choice of Java turned out to be a mistake and we had to make a shift to PHP, but I'll explain this in a later blog post.
The Launch
We launched the first website in early 2004. On this site we sold hundreds of knives for outdoor use; hunting, fishing, tactical and recreational. We found one primary distributor that would ship the product for us under our name. We were totally hands off, except for the sale and customer service. This is exactly what we wanted.
We hired a search engine optimization company in California, and they basically educated us on the process of SEO. We incorporated the website SEO techniques into our e-commerce engine so that we could quickly launch other websites and the on-page optimization techniques would come for free.
To drive traffic to our outdoor knife website, while we waited for the SEO process to kick in, we employed Google AdWords. This was expensive, but it worked in driving sales, albeit at a break-even price point.
A Troubling Vertical
We didn't want to stop with the knife business, so immediately went to work on a new site in the wrist watch business, which we later found out was much more competitive than the outdoor knife business. We again employed Google AdWords to drive traffic, but this time, we didn't see any sales at all.
This was troubling and we later determined that there was heavy price competition in this vertical. Sometimes competitive prices were even lower than what we would pay our drop-ship distributor. After about 6 weeks, we shutdown the watch website.
Perhaps the product vertical was really important. This was puzzling. Remember in 2004, many of the larger players (Amazon, Overstock, etc) were not as prominent as they are today. The nimble vertical players seemed to be doing well.
Growth
Conversely, in our outdoor knife business, we started to see more traffic and more sales. Our organic search engine rankings started to jump to page one and at one point we were actually #1 on Google for the keyword "knives". Sales increased to where we were doing mid five digit numbers per month. This continued through 2005 and 2006. Profitability was also very good.
We started another outdoor knife site, carrying many of the same products but focusing on the niche of "pocket knives". This further increased sales. We did make an SEO related mistake with this website however. I don't want to get into too much technical detail, but we hosted the new website on the same IP sub-domain as the existing outdoor knife site. Google didn't like this and would not rank the new website. Yahoo and MSN didn't care though. Lesson learned.
Amazon Momentum
Then something started to happen in 2007. The economy was doing very well at this time but sales started to decline. Our search engine rankings were pretty much the same and in some cases even better than they were the previous year. The problem was competitive.
There were now a few drop-ship distributors in the outdoor knife space and there were many new websites popping up in our industry. Prices were falling, shopping sites were becoming popular (NexTag, Google Marketplace, etc) and Amazon was starting to dominate a large portion of e-commerce. Competitors were driving profits to a near zero level.
Amazon was gaining momentum with its Amazon Marketplace program. Using Amazon Marketplace, any person or business with an item to sell can offer that item directly to Amazon customers alongside the same item offered by Amazon or other Amazon Marketplace participants.
Amazon Marketplace partner companies now had the ability to create data feeds to Amazon and do a daily push of all of their products to the Amazon website.
This created a problem for small e-commerce companies. Would a customer buy a commodity product, like a knife, from a niche website? Or would they prefer to buy from Amazon, often at a lower cost. I think the latter, except for only the most loyal of customers.
There could have been something else happening here as well. What's to prevent a drop-ship distributor from placing their entire product line on Amazon via the Amazon Marketplace program? All they need to do is work under a different name. The online retailer network would never know and couldn't really do much if they did.
All of this is problematic for the niche e-commerce player. Sure, Amazon won't penetrate every market, but they are making inroads in quite a few, especially products that are largely commodities.
Product Uniqueness
What I take away from this experience is that if you want to sell something online, you have a tremendous advantage if your product is unique. Meaning you are the only provider, you manufacture the product or have it manufactured, and you control distribution.
When this happens, you become much more powerful and not a pawn in the e-commerce system. You can sell product on your own website, upload product to Amazon and control your distribution and your own destiny.
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