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unreal37

This is tough:

* Revenue $1.0MM

* Variable costs $1.5MM

* Fixed costs & admin $300K

* For a net loss of $800K

How can your variable costs exceed your revenue by so much? You might as well not be in business.

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"How can your variable costs exceed your revenue by so much? You might as well not be in business."

I found it in the scribd doc,

"What value, then, was Ecomom providing to our customers? We became simply a middleman, and one that incurred double freight"

Basically they competed with amazon, whole foods, and walmart and lost miserably. either they discounted so heavily they could never dream of profiting, or when they abolished discounts, sales collapsed.

There's a strong cultural demand to not speak ill of the dead... but if the whole story were not tinted with the CEOs death, I think the tone would be astoundingly negative toward the CEO... What was he thinking...

> What was he thinking...

To be fair to the man, he was quite apparently mentally ill towards the end.

It's called selling a product for less than it costs. A variable cost is one that is dependent on the the # of units sold. So, obviously, the more one sells, the more one loses money. Think of it this way: you could make a million dollars right now, really fast, by selling gasoline (in the US) for $1 a gallon. You'd sell a million gallons. And lose $2 million in the process. The more you sell, the more you lose because your costs (which are dependent on your total volume) increase with your revenues. This is why you can't confuse revenue with income.

Amazon had that model for many years of operation. But it went public before it ran out of money. Call it the "cost of acquiring the market". The problem was that Amazon had a much bigger market to work with.

And Amazon is one of the very few success stories of its era. Remember that there were dozens of very well capitalized venture funded retailers working one part of the market or another. Remember pets.com?

This is a big part of the reason why the current startup environment "feels" the same as the dot com crash. Valuations and funding have gotten completely divorced from the business fundamentals. YC startups are being handed blank checks, and no one even remembers "ramen profitable".

At this point, IMHO, it's undeniably unsustainable. Whether it constitutes a "bubble" or not is something we won't know until it pops.

Their's was not the Amazon model. Amazon has always had a gross profit http://www.wikinvest.com/stock/Amazon.com_(AMZN)/Data/Gross_... and http://www.nasdaq.com/markets/ipos/filing.ashx?filingid=4268....

The more product Amazon sold, the more money they'd make (or more accurately, the less money they'd lose).

On the other hand, Ecomom never had a gross profit. The more product they sold, the more money they lost. This is the situation you describe in the gasoline scenario. I suspect the gasoline model was not their strategy by choice, but by accident. The controller's assertion is that it's the runaway discounts that did them in. 50% discounts intended to be for one-time-use-only were used on almost all orders.

Whether it was a long-term strategy or a fundamental mistake, whatever they did is not the Amazon model.

Compare.

  $000's

  Amazon - Quarter ended March, 1996

    Net sales:            $875
    Cost of sales:        $695
                          ----
    Gross profit:         $180
    Gross profit %:      20.6%


  Ecomom November, 2012

    Net sales[1]:          $52
    Cost of sales:        $548
                        ------
    Gross profit/loss:   -$496
    Gross profit %:       -45%





  [1]
  Sales:       $1,089
  Discounts:    $(751)
  Warehousing:  $(152)
  Freight:      $(134)
               -------
  Net sales:      $52

Thanks for digging these up. These numbers may not be fully representative, however: http://www.cfo.com/printable/article.cfm/2987898

Rather famously, Amazon in its early days included the cost of fulfillment (shipping, warehousing, etc.) in Sales and Marketing expense, not COGS. As a result, gross margins were thought to be somewhat inflated.

Apparently they also counted their equity investments in the stock of companies including Webvan and Sotheby's as cash and marketable securities.

At the time, analysts were worried about what all this implied for operating cash flow and gross margin.

The numbers are crazy.

What they were selling was $40 gift certificates for $20. Then they sold a $30 good for a $40 gift certificate.

They recorded this as a $40 sale with a $30 cost and $20 marketing. The implication that you can eventually cut back on the marketing, which is obviously false.

IMO, the $40 should never appear in anything that could be construed as revenues. Sure, you can work it such that you'll end up with the proper ($10) loss, but they never received an actual $40, their only (well, majority) revenue appeared in the form of $20 payments from the group selling the gift certificates.

This is what e-commerce balance sheets look like, though.

Someone must not have told him that anything related to online (or offline) retail loses money for at least 3 years, making any money at all after 5 years is considered amazing, and Amazon.com lost money for 12 years before it made any. The main personal attribute you need as an e-commerce executive is a strong stomach.

But surely most e-commerce websites can't have a net negative margin for three years?

The smaller ones piggybacking off of Ebay and similar generally turn a (small) profit immediately. However, the large ones with innovative storefronts and the Google-like classy looking top notch websites are always making massive losses, often for many years at a time.

The reason for this is that investors hope that the wave of people moving their lives/shopping online will turn these big players into the next Walmart - which is almost exactly what is happening with Amazon now. So the strategy is not a terrible one, just a risky one.

Losses != negative margin.

Amazon was not profitable for 10 years, because revenue did not exceed variable+fixed costs. But revenue exceeded variable costs. They had losses for 10 years, but had positive margine.

This is just plain not true. There are many e-commerce companies who are profitable and healthy immediately.

Start a store with Shopify or Miva Merchant for a low monthly cost, work of of your house and sell your goods for more than they cost you. Ton's of folks do this and are very quickly profitable on a small scale.

If you are trying to be Amazon or Walmart and sell non differentiated products for rock bottom prices, then you are correct. But there are plenty of companies content to run $2 Million - $20 Million dollar businesses without having to go through the pain of losing money for 3 years.

I'd be interested in seeing some examples. E-commerce is brutal and it's rare that anyone makes money out of the gate.

As socalnate1 mentions above this is very possible to scale up a small e-commerce operation and be profitable immediately - especially in niche products. There are several case studies for this.

For example I sell cases for mobile bluetooth speakers. Our Jambox case was profitable instantly and I paid for the first batch of inventory with revenue from a pre-launch sales discount. The first batch of inventory was paid for with sales before I had the product on hand. I packaged and shipped them out of my home office until it was a pain in the ass and now we use Amazon FBA. We use profits to purchase additional inventory at greater quantities to increase the profit margin. Rinse & repeat.

Granted this isn't Amazon scale but it's working. See Dodocase for another example (they are doing way better than us). http://mixergy.com/dodocase-patrick-buckley-interview/

One of the keys is to start small to prove the market so you don't end up with a shit load of inventory in your garage. Or better yet do what I did and sell them before you even have them made. We started with 50 units which I was fortunate to sell almost all of using pre-launch tactics before we ordered the inventory from our manufacturer.

Since I can't reply to the comment below me--Now that we understand ecommerce we're profitable from day one with our new brand launches. It usually takes about 2-3 months before we're doing 20k/mo revenue online with 100% margins.

100% margins? scratches head

Was Amazon running at a loss at the gross margin level or the profit level?

Losing money at the profit level is fine, since that includes things like buying warehouses or developing technology.

Losing money at the gross margin level means you aren't even being paid for the goods you ship out, let alone the money you spend in infrastructure.

Good point Guvante. Amazon has always had a gross profit. Almost no comments here recognize the vast difference between Ecomom's and Amazon's income statements.

Ecomom: never had a gross profit. Amazon: has always had a gross profit.

http://www.wikinvest.com/stock/Amazon.com_(AMZN)/Data/Gross_... and http://www.nasdaq.com/markets/ipos/filing.ashx?filingid=4268...

Because, to investors, any revenue is better than no revenue. The latter implies the worst possible scenario: making something nobody wants.

And this is why venture capital, as an asset class, performs so poorly and provides such a poor ROI.

The only reason your comment is sort of true (not sure it actually is) is the inclusion of "as an asset class". The easily identifiable top tier firms are killing it.

Exactly. That's an application of the Pareto Principle where 80%+ of the returns are realized by 20% or fewer of the participants. Without those high-performance outliers, this whole category of investment asset class would simply no longer exist. Once those high-performance outliers regress to the mean (if they do end up doing so), the VC asset class is sunk. If the outliers remain as outliers, then either the asset class will shrink (on that note, read this interesting article on Zombie VCs: [1]) as the outliers will become the mean (the marginal and underperformers will be culled out of the market), or whatever edge they have over the mean will no longer exist. I have a feeling VC will never disappear as an asset class, which implies the former more than the latter.

[1] http://www.daniellemorrill.com/2013/04/zombie-vcs/

and... more recently "New data suggests the decline has been more severe than previously thought, finding fewer than 100 active U.S. VC firms in the technology sector.":

[2] http://www.daniellemorrill.com/2013/04/zombie-vc-shakeout-co...

1) There will always be high performance outliers in venture capital, it's the nature of the business, and as such the VC asset class will never actually sink. It'll continue to perpetually boom and bust. It's a 70 year old industry that serves a valuable function, it's not going anywhere.

2) Whether the VC market is crawling along or zooming is dependent on both the economy and the Fed's monetary policy. When money is cheap and easy to come by, it chases higher risk investments. If you can't earn 1% on your dollars, you're more likely to push that capital into riskier investments seeking yield.

I doubt they'd do much better if the negative revenue companies all turned into zero revenue companies.

I think you confuse revenue and income. You can have positive / non-zero revenue with massive negative income. Indeed, that's the problem here - $1M in revenue with huge losses (negative income).

SO... the problem is not the revenue. It's the income.

The referenced analysis is including a ton of marketing & advertising expenses into variable costs which is probably not appropriate. If you're like Khol's where 75-90% of items are on sale at any given time, then it makes sense. But something like Plum District is more of an acquisition, marketing cost, not part of COGS.

My understanding is that was exactly the major misunderstanding. Plum District and similar were being used on most sales, so pretty much everything was always 50% off.

It wasn't just first time customers who were getting those deals, so it's not really an acquisition cost.

Look again. I think he did include marketing and advertising as fixed costs, not variable. Top of page 4:

Fixed Costs ... Advertising

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