fedgazette

E-commerce: For some businesses, the only way to go

Toby Madden - Regional Economist

Published April 1, 1999  |  April 1999 issue

Like many other people, Paul Buethe of St. Paul has started an electronic business. Unlike other electronic business owners, he does not have a computer. Total cost to start his business? Under $500.

According to Forrester Research Inc., U.S. on-line retail sales grew from $2.4 billion in 1997 to $7.8 billion in 1998. Start-up businesses have captured a share of these sales because electronic business technology has reduced the technical barriers to new entrants. Following are two examples of retail businesses that have benefited from lower barriers to entry due to the emergence of the Internet.

Miniature model kit industry

An example of lower barriers to entry is a relatively new entrant into the niche market of the detailed scale model kit industry-Roll Models Inc.

John and Mary Roll of Golden Valley, Minn., started Roll Models in September 1996. John, who works full time as a computer programmer, and Mary, who quit her CPA job to stay at home with their child, decided to start a home business. John's long-time hobby was building miniature models, and they decided that this was a natural business opportunity.

John attended trade shows to learn about the scale model kit industry, and discovered that there are hundreds of manufacturers that sell to numerous wholesalers, who then sell directly to retailers or by catalog to the model kit enthusiast. John knew that manufacturing miniature models would be capital-intensive and risky, and that the traditional retailing option of opening a brick and mortar store was also expensive. Traditional wholesalers need warehouse space, catalogs and a sales force.

To break into the industry, then, the Rolls decided to use an electronic business strategy to distribute merchandise and compete with the traditional wholesalers and retailers. By using about 500 square feet of their house, their home computer, $10,000 for inventory, $1,300 for credit card hook-up, $1,000 for various other expenses, and about 200 hours of computer set-up and dealing with manufacturers, Roll Models was in business. To attract customers, Roll Models advertised in trade magazines and on Web sites.

Roll Models has over 18,000 products listed on their Web site and sells the products at about 25 percent below traditional retailers and catalog companies. A customer can order from a form on the Web site, call a nontoll free number, fax or use snail mail. After receiving an order, Roll Models will fill the order from inventory or order from the manufacturer or wholesaler and have the model shipped to the Rolls' home. The various items of a customer's order are then consolidated and sent to the customer's home whether in Billings, Mont., or Bintulu, Malaysia. Roll Models currently has over $400,000 in annual sales, four employees and more competition. Before the business began, there were very few Internet sites that dealt with miniature model kits, but now hundreds of Web sites sell some form of these products.

A business for under $500?

Another example of lower barriers to entry is in the comic industry. Paul Buethe, creator of Slow Jacket Cartoon Syndicate, has been drawing comics almost all his life. Buethe is a traditional cartoonist who uses a drafting board and paper to create his offbeat comics under the "Next" and "Exiles" titles. Buethe, who over the past five years has tried to break into the comic industry, has finally succeeded.

The traditional comic industry's value chain contains the artist visionary creator, the "syndicates" and other wholesalers who consolidate the artist's content, the newspapers, magazines and other retailers, and the person who buys and enjoys the creator's vision. Wholesalers receive hundreds of applications from artists but only contract with a few. These few lucky artists might receive up to 50 percent of the revenue that the newspapers, magazines and other retailers pay the wholesalers.

Buethe entered the comic industry after a friend, who was interested in learning about building Web pages, built a basic Web page for Slow Jacket. For a few hundred dollars in fees to obtain copyrights, a Post Office box, a phone service, a Web site address and an Internet service provider, Slow Jacket was in business. Slow Jacket's electronic business strategy is to create an entertaining site that would sell various cartoonist creations. Buethe started to promote the Web site through savvy use of search engine technology and guerilla advertising techniques.

Slow Jacket's plans to advertise its Web site in a national tabloid classified section. "You can reach over 15 million people for under $200," Buethe says. He figures he needs a 0.0004 percent purchase rate to break even. In addition, Slow Jacket wants to add other cartoonists' work. Other cartoonists would promote and sell their creations on Slow Jacket's Web site.

Industries that support electronic business

As described above, several industries support electronic business, and these industries could benefit from the increased use of electronic business in the future. The industries that support electronic business include:

  • the digital network: telephone companies, cable companies, satellite companies and other Internet service providers;
  • the transaction industry: credit card companies, check processors, and emerging payments providers (for example, smart cards);
  • the transportation industry: package delivery companies; and
  • the application development industry: contract programmer companies and people who design and create Web-based applications.

Conclusion

Numerous new businesses have embraced electronic business strategies to expand sales and reduce costs. Electronic businesses have lower start-up costs than their traditional counterparts because many costs are almost entirely avoided. The result of these reduced barriers to entry is increased competition and lower prices for consumers. In addition, the digital network, transportation, Internet software application developers and transaction industries will continue to benefit from the increased use of electronic business.

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