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E-Commerce: Why Online Businesses Lose Money

Hailey Cady by Hailey Cady
3 years ago
in Business
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E-Commerce: Why Online Businesses Lose Money
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Fact: Most online stores fail within one or two years of opening. 

E-commerce is the future of retail. Platforms like Amazon are killing brick and mortar stores everywhere in the United States. Malls, a huge drawer of consumers decades ago, are dying because consumers are shopping on the internet.

However, being on the internet is not the secret to success. While setting up a digital storefront does not cost much and, in some cases, free, there is a lot of work that goes into making it a successful venture.

Sellers end up losing money rather than earn a profit. The online store, as a result, closes.

To prevent making the same mistakes, here are the most common reasons why online stores lose money and fail.

Products that Get Returned 

Buyers do not have the opportunity to test a product before making the purchase final. Often, they place an order for a product, pay for it, try it at home, and then return it to the store if they are not satisfied with it. Sometimes, because of delivery or the way it was stored in the warehouse, the product arrives at the customer’s door with damages and will be sent back to the seller.

It is customary for any business to have a returns and warranty management system in place. 

If the online store is still in its early days, the owner can manually monitor the process. They can assess the condition of the product, figure out if the problem was caused before/during/after transit, and then track if the customer has received the refund. However, as the number of customers increases, they will have to expand. They will need to add more members to the team, move to a bigger warehouse space, and implement an efficient solution to manage returns and warranties.

Product returns are inevitable. Consumers have gotten used to the habit of placing an order and then returning the product immediately. Things are unlikely to change.

About 89% of online shoppers have returned a product at least once in the past couple of years. 

Freebies

Giving away products as a sample is an old strategy that businesses use in order to get consumers to try out a product and, hopefully, gain them as a customer. It can be very effective, but it is also very expensive.

Not everyone who receives a sample is going to want to make a purchase. At most, there will only be a quarter of people who would place an order. In some cases, a handful or none at all will buy the product.

Freebies make sense if the product is consumable i.e. food or skincare. It may not, however, work if it is a non-perishable item.

Overstocking

It is always a challenge to estimate the demand for a certain product. Stores often end up with either too little merchandise or too much of it. When there are not enough products to sell to consumers, the store loses its business. They may end up buying from somewhere else.

It is a bigger problem, however, if the seller acquired too many of one merchandise that they cannot sell. They would waste money on storage, and they end up selling their products at a reduced price in order to clear their inventory.

It happens most often during the holiday seasons. Brands, anticipating the crowd who will need seasonal items, would obtain more in stock. However, they end up still having products to sell weeks and months later.

Striking a balance is the key. 

Not Having a Solid Marketing Plan

Once the online store starts gaining attention, the owner will need to do something to keep it. Consumers have a very limited attention span. Moreover, most of them have no brand loyalty. So, once a new business crops up, they shift their focus as well as their money.

Online stores should be able to maintain the attention of their consumers by employing different marketing strategies. It has to be consistent so that the business remains in the public consciousness, not slip down back to oblivion.

Running a contest, for example, may increase engagement on social media but that alone would not guarantee success. If a store fails to offer good content and enticing products, the customers will click the unfollow button without hesitation.

In the age of e-commerce, anyone can start a business and succeed. While not necessary, having experience and knowledge about running a business, especially in the online marketplace, would help. It can reduce the money wasted on mistakes and help the business be profitable.

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