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Chapter 2 E-commerce fundamentals 89

Assessing e-businesses

Internet pureplay companies are often perceived as dynamic and successful owing to the
rapid increase in visitors to sites, or sales, or due to initial valuations on stock markets. In
reality, it is difficult to assess the success of these companies since despite positive indications
in terms of sales or audience, the companies have often not been profitable. Consider the
three major socal networks: Bebo, Facebook or MySpace – none of these was profitable at the
time of writing the fourth edition.
Boo.com is an interesting case of the potential and pitfalls of an e-commerce start-up and
criteria for success, or one could say of ‘how not to do it’. The boo.com site was launched in
November 1999 following two significant delays in launching and in January 2000 it was
reported that 100 of its 400 employees had been made redundant due to disappointing initial
Burn rate revenues of about £60,000 in the Christmas period. Boo faced a high ‘burn rate’ because of
The speed at which dot- the imbalance between promotion and site development costs and revenues. As a conse-
coms spent investors’
money. quence, it appeared to change its strategy by offering discounts of up to 40 per cent on
fashions from the previous season. Closure followed in mid-2000 and the boo.com brand was
purchased by an American entrepreneur who still continues to use the brand, as you can see
on www.boo.com. Boo.com features as a case study in Chapter 5.
Boo.com sold upmarket clothing brands such as North Face, Paul Smith and Helly
Hansen. Its founders were all under 30 and included Kajsa Leander, an ex-model. Investors
provided a reported £74 million in capital. This enthusiasm is partly based on the experience
of two of the founders in creating bokus.com, a relatively successful online bookseller.
As with all new companies, it is difficult for investors to assess the long-term sustainability
of start-ups. There are a number of approaches that can be used to assess the success and sus-
tainability of these companies. There have been many examples where it has been suggested
that dot-com companies have been overvalued by investors who are keen to make a fast return
from their investments. There were some clear anomalies if traditional companies are com-
pared to dot-coms. You can read more about the fate of lastminute.com in Case Study 2.2.

Valuing Internet start-ups

Desmet et al. (2000) apply traditional discounted cash flow techniques to assess the potential
value of Internet start-ups or dot-coms. They point out that traditional techniques do not
work well when profitability is negative, but revenues are growing rapidly. They suggest that
for new companies the critical factors to model when considering the future success of a

company are:
1 The cost of acquiring a customer through marketing.
2 The contribution margin per customer (before acquisition cost).
3 The average annual revenues per year from customers and other revenues such as banner
advertising and affiliate revenues.
4 The total number of customers.
Churn rate 5 The customer churn rate.
The proportion of
customers (typically As would be expected intuitively, modelling using these variables indicates that for companies
subscribers) that no with a similar revenue per customer, contribution margin and advertising costs, it is the
longer purchase a
company’s products in a churn rate that will govern their long-term success. To look at this another way, given the
time period. high costs of customer acquisition for a new company, it is the ability to retain customers for
repeat purchases which governs the long-term success of companies. This then forces dot-
com retailers to compete on low prices with low margins to retain customers.
A structured evaluation of the success and sustainability of UK Internet start-ups has
been undertaken by management consultancy Bain and Company in conjunction with
Management Today magazine and was described in Gwyther (1999). Six criteria were used to
assess the companies as follows.