Reality check: digital barriers are higher than many small businesses and start-ups expect
Remember when the internet started bursting into the mainstream? For a while, it seemed as if scale would not necessarily be an advantage for bigger companies and that small businesses could win online by being fast, nimble and innovative. Yet the world has changed dramatically since a little start-up called Amazon brought such massive disruption to booksellers and then to the wider world of retail.
Today, a handful of companies dominate web traffic, from Facebook and Google in media to Amazon in e-commerce, and it’s no easier to compete with them than with a well-funded, large-scale brick-and-mortar incumbent. Yet many business owners still think that it’s quick, cheap and simple to create an online business that can deliver outsized profits, if only the product or idea is a winner.
After all, what could be easier than setting up a WordPress website, linking it to an e-commerce platform like Shopify, signing up for social media accounts, and spending a few hundred bucks on targeted ads with search and other social or programmatic platforms? Isn’t that much cheaper and quicker than securing prime real estate, launching big branding campaigns on traditional media and hiring a large sales force to drive your business?
In reality, the barriers to success in online are higher than many people realise, and they are only getting higher as the web grows up. As in the real world, deep pockets and a powerful brand are major advantages. Having a good idea or a unique product is simply not enough on its own to propel a small online venture into a business success.
Amazon dominates e-commerce in North America and large parts of Europe because of its size and scale — its technology budget, warehousing and logistics infrastructure and control of virtual “real estate” give it an edge over anyone else. In SA, Takealot is in a similar position, put there by the backing of a formidable parent company that has funded years of losses to gain market share.
Size is winning over speed
Here’s a bit of perspective: the Takealot group (Takealot.com, Superbalist and Mr D Food) generated $407m (about R6bn) gross merchandise value, and revenue of $238m (R3.5bn) in the six months to September 2020. For all of 2019, e-commerce accounted for about $1.2bn (R18bn) of SA retail sales in 2019, according to Euromonitor International.
As a digital marketing service provider, we often meet start-up businesses that have passionate founders, a great product and a good website in place. The challenge they face is bringing in the traffic that will enable them to close sales. The founder is usually funding the business from their credit card or savings, with the result that a digital ad budget of R10,000 a month seems like a lot to them.
Given that they’re spending their own money, they often expect miraculous results when they are competing against companies that have millions to pay for access to the best audiences. These expectations are partly fuelled by the fact that if you spread your budget across search, Facebook and display you can set a spending limit from as little as R100 per day per platform, which is bought on auction competing against retailers who spend more in a minute than this budget allows in a day.
This is different to print or radio, where a budget in the tens of thousands is a starting point – let’s not even mention TV or billboards. Yet low barriers to entry don’t guarantee success. One estimate puts the average conversion rate across Google Ads at 4.4% on the search network and 0.57% on the display network – in other words, you need to run quite a few ads to convert meaningful customer numbers – and that means spending money.
One of the biggest advantages of digital media is that you can control your own budget, but this is also a downfall as it creates a perception that digital media is cheap compared to above-the-line advertising. It is indeed true that it is as cheap as you want it to be, but in the end you get what you pay for. In my experience, most start-up entrepreneurs don’t want to pay more than the absolute minimum, despite their large expectations for success.
‘Location, location, location’ is no longer the mantra
The next consideration is how the web has compressed geography. In the past, a small business owner that secured a prime retail location could compete effectively with larger competitors that were far away. In the digital world, distance is less relevant since the large e-commerce players can rapidly ship products to people in most parts of the country.
Unlike a traditional supermarket or department store chain, these companies have also not left much space for niche players either. You can order nearly anything you can imagine from Takealot or Amazon, and it’s hard for a small company to compete on price or to offer something that these giants (or traders on their platforms) do not.
The other consideration is the time it takes to build trust. The large e-commerce players are far from perfect, yet customers believe that their credit card details will be secure, that they can track their orders in real time, and that they will get the goods they order. A small company needs to spend months cultivating this trust – and that can easily be lost through a simple blunder that trends on social media.
With these obstacles, it’s not surprising that many small businesses choose to be sellers on platforms like Amazon, Takealot or Uber Eats rather than setting up their own e-commerce sites. But this approach also has its drawbacks in the form of the fees and commissions these platforms charge, lack of control over customer data, and competition from other sellers.
Understand the costs and barriers
Before putting your life savings into a start-up, it is thus worth spending time with a digital expert who can help you understand the potential costs and barriers. An agency I once worked for offered workshops along these lines as a service. Many people walked away from a business plan once they grasped the real costs, others started their venture better informed about the risks and barriers.
My intent is not to put off start-up founders from going into business – as an entrepreneur I understand the appeal of building and owning something of your own. I also believe that small businesses are key to growing the economy. Yet it’s also important to ground business plans in realism. We have worked with several smaller digital retailers that have carved out viable niches in markets such as contact lenses and authentic African ceramics.
Not only did they have ideas and business models that were genuinely special, but their founders also understood that they would need to spend money to get noticed. My advice to anyone who would like to emulate their success is to commit to funding their online business properly, even if that means finding an investor. That may mean giving up a share of the business, but it will vastly increase the odds of success.
- Grant Lapping is MD of DataCore Media
The big take-out:
SA entrepreneurs often underestimate the barriers to entry and the fierce competition they will face in the digital world.
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